These 3 simple steps can help you save 50% more each month!

There are tons of personal finance books out there that will preach the idea of the “latte factor”. The premise of the idea is that the average cost of a Starbucks latte is around $4. Therefore, if you stop going to Starbucks each morning and make coffee at home instead, you will save around $120 per month and $1440 per year. Although I do agree that making this change will improve your saving rate, it’s not the most significant factor in how much you save each month. If you want to drastically increase your savings rate so that you can build wealth faster, you must focus your efforts on reducing your most impactful expenses. This can be done by utilizing “Pareto’s Principle”.

First defined by Vilfredo Pareto around the turn of the 1800th century, he observed that 80% of the land in Italy was owned by 20% of the Italian population. As an avid gardener, he also observed that 20% of the pea pods produced 80% of the peas. Since then, “Pareto’s Principle” has been applied in various business applications to illustrate the phenomena that a small percentage of a particular focus area accounts for an overwhelming majority of the results. In the case of expenses, only a few of them account for a significant amount of your spending each month. Below we’ve highlighted them and discuss ways to cut costs in each category. These expenses account for more than 60% of your monthly expenditures!

Rent/Mortgage

This is the single largest expense most people have each and every month. According to a recent survey administered by the Bureau of Labor Statistics (BLS), American’s spend more than 35% of their salary on housing expenses! With such a significant expense weighing you down, its no wonder why so many people have trouble increasing their savings rate. Although you won’t be able to completely eliminate this expense, there are a few things you can do to mitigate its impact on your savings rate. In his best-selling book “Set for Life”, Scott Trench, the CEO of www.BiggerPockets.com, shares a story of two friends who live in Denver making around $50,000 per year.

The first individual, let’s call him Brent, decides to rent a trendy apartment downtown with all the bells and whistles. The apartment complex has its own private lounge, gym and entertainment room and he regularly entertains his friends there. Brent also loves the fact that he’s close to downtown and is a regular at many of the most exclusive restaurants and bars. However, his rent is $1,500 per month and after paying that along with all his other expenses, he’s left with almost nothing to save at the end of the month.

At the other end of the spectrum, his friend Mark decides to rent a smaller apartment about a 15-minute drive away from downtown. Although he lives in the suburbs in a less trendy neighborhood, he only pays $750 per month in rent. This means he can set aside an extra $750 per month ($9,000 per year) in savings. Along with that, he also lives closer to work and saves on transportation costs by riding his bike instead of driving. Mark still hangs out at Brent’s place on the weekends but is definitely glad he doesn’t have to pay for that luxury. If you’re currently having trouble saving money, I challenge you to look at how much you spend each month on housing. Are you renting a luxury apartment downtown? Do you currently own a large house that’s much bigger than what you need?

If so, consider flipping the script and find a way to reduce this expense. Maybe find a cheaper apartment in a location that’s still commutable to work or consider selling your house and trading down to something smaller that better fits your needs. You can also consider buying a multifamily property, living in one of the units and renting out the others. In November 2018, I purchased a 4-plex (multi-family home with 4 apartments) and I started living in one of the units while renting out the other 3.

The rent collected from these units is enough to cover my mortgage, insurance and taxes on the property. As a result, I essentially get to live in my property for a total cost of less than $200 per month. Although this may be difficult to do, making this one simple change will not only increase your savings rate, it will expedite the process of achieving financial freedom.

Transportation

The second most significant expense people have is that of transportation. Although there are many ways to get to and from work, the most common of these methods is by car. As of 2017, there are approximately 272 million cars on the road in the US and Americans average about 16 miles each way commuting to and from work. This unfortunate reality is exacerbated by the fact that your transportation expenses make such a huge dent on your finances.

Whenever I tell people that transportation is the second most costly expenditure for most Americans (17%), I’m often met with disbelief. Sometimes I’m told, “Raphael, I have a fuel-efficient car and I only spend $40 per month on gas. Therefore, my transportation costs are not that significant.” However, what most people fail to realize is that the true cost of transportation includes more than just your monthly gas expenditures. To determine your monthly transportation cost, you must consider the following factors:

• Maintenance — Oil changes, tire rotations, steering fluid flushing etc.
• Gasoline — the cost of filling up your car with gas.
• Depreciation — the decrease in value of your car over time.
• Insurance — the cost of insuring your car.
• Time — the time you spend commuting to and from work

If you just account for the first four factors (regular maintenance, gasoline, depreciation and insurance) the average transportation cost is around $0.61 per mile. Since the average American drives approximately 13,474 miles per year, this equates to a total cost of $8,219.14 per year or $684.93 per month! I don’t know about you but I think that’s a decent amount of money to spend each month to drive a car.

Some of the best ways to reduce your transportation costs include utilizing public transit, riding your bike, walking to work or working from home. Depending on where you live, some of these options may not be feasible. However, as mentioned in the previous section, what if you were able to find cheaper housing that was also close to work? If your new home was close to a bus line or within a few miles of work, you could take advantage of public transportation or elect to bike or walk to work. This would significantly reduce your transportation expenses and free up cash you could use to begin growing your wealth.

Along with the cash you would save directly, you could also significantly reduce your commuting time. The average American commutes about 46 minutes per day. Over the course of a month, this equates to around 15 hours! Instead of accepting this reality, what if you challenged yourself to cut your commuting time in half? If you’re like the average American, you would get back 7.5 hours of your life! What would you do with this extra time? Would you work on developing a new skill that could earn you more money? Would you spend more time with your loved ones? Regardless of what you choose to do, the freedom to choose is what we’re searching for and is the main reason why financial independence is so appealing.

Food

The third most significant expense is food. We all need food to survive and perform at a high level. However, our desire for immediate gratification often results in us spending much more in this category than is warranted. On average, Americans spend $3,008 per year on dining out at restaurants. True to form, Millennials spend about 10% more than the average in this category. One of the most common habits I see people engage in is choosing to eat out often rather than cooking at home. I’ve had many coworkers in the past who bought lunch at local restaurants every weekday.

Although I’m all for supporting small businesses, the cost of purchasing lunch every weekday can add up quickly. Let’s just say that the average lunch special at a local restaurant costs around $12 (food + tax + tip). This adds up to $60 per week if you each lunch out each weekday. Along with that, if you eat out for dinner 2–3 dinners per week for an average cost of $25 per person (food + drinks + tax + tip), my single co-workers were spending anywhere between $110–135 per week eating out.

At the other end of the spectrum, I would almost exclusively bring my lunch to work. Although I was often teased for bringing my lunch each day, I had a reason for doing it. I wanted to save money so that I could use my earned income to purchase investments that would move me closer to financial independence. Not only that, I was also able to use higher quality ingredients and still pay less than someone who bought their food from a restaurant. For example, an average meal for me may include cooked Atlantic salmon from Costco coupled with broccoli and seasoned basmati rice. In total, I would spend less than $5.00 for this healthy home cooked meal. If I substituted salmon for chicken, my total meal cost drops to under $2.50.

One of my bad habits when I started at my first job after college was spending a lot of money on drinks at bars. When I was working in Washington D.C., it wouldn’t be uncommon for me to spend more than $100 each weekend on drinks and food at various bars we frequented. In order to tame this terrible spending habit, my roommate and I started coordinating pre-games at our house where we’d invite coworkers over to drink and hang out prior to going to the bars. Not only were we able to enjoy each other’s company in a safe and engaging environment, we were also able to limit how much we spent at the bars once we did go out.

Another strategy you can use to save money in this category is to bulk cook your meals at home. Each Sunday, I make sure to prepare a large batch of food that I eat throughout the week. I don’t just cook one type of food either. Some of my favorite foods include chicken breasts/thighs, fresh caught Atlantic salmon, broccoli, spinach, red/green peppers and brown rice. This gives me a range of foods that I can mix and match during the week. As a result, I hardly ever get bored with the food! Along with saving me money each month, it also saves time. This is because I don’t have to cook and clean the dishes every single day which makes me much less stressed! Try these strategies out for yourself and see if it doesn’t reduce your spending in this category.

Creating a plan of attack

Now that we’ve discussed your top three expense categories, it’s time to create a plan of attack to reduce your spending in each one. First, determine if you need to reduce your housing expense. If you currently have a lease or mortgage payment that you feel is reasonable, you need not address this category. However, if you feel that you can significantly improve your spending in this category (i.e. save 30–40% or more on your housing costs) and still live an area that meets your needs, I’d strongly encourage you to consider moving to a new location. If you decide to take this approach, consider the action items listed below:

• Determine what it would cost to break your lease or sell your current property.
• Research available properties in your desired area.
• Determine the prospective properties proximity to public transportation and/or if it’s close enough to walk or bike to work.
• Narrow down your list to your top three properties.
• Break your lease or sell your property.
• Sign your new lease or purchase your new property!

As it pertains to transportation, you want to consider your true cost of transportation. If you currently own a new car, consider selling or trading it in. Although maximizing the resale value of your car is beyond the scope of this book, there are many resources available online that can help you accomplish this goal. Once you’ve done that, look for a 5–7-year-old vehicle and model that is reliable, well-maintained and has low to average total mileage. As we’ll discuss in the next section, this kind of car will allow you to significantly reduce your depreciation expense over time while still maximizing the utility of the car. Next, consider moving closer to the office so that you can either use public transportation or walk/bike to work. This will help reduce your gas, maintenance, insurance and time expenses.

Finally, you’ll want to address your current food expenditures. As discussed in the previous section, if you consistently eat out for lunch each weekday, consider packing your own lunch instead. This simple change can help you save hundreds of dollars per month in dining expenses. Along with that, evaluate how often you dine out throughout the week. If you do so regularly, consider bulk cooking a variety of foods on the weekend so that you have healthy low-priced dinners to eat at home.

If you like to go to the bars on Friday and/or Saturday nights, consider inviting your friends over once per week for a home cooked meal and pre-game. Ask them to bring something to contribute and encourage them to help you cook. Not only will this give you the opportunity to have fun at home with your friends, you’ll also save a ton of money on high priced food and drinks.

Now that we’ve highlighted each of these steps, WRITE THEM DOWN and hang them up somewhere you can see them regularly. Having a list of steps you can reference on a daily basis helps put your goals at the front of your mind. In one of my previous books, “The Millennial Playbook: 9 Secrets to Living a Rich Life” I go over the concept of goal setting in detail and provide you with a blueprint for how to write effective goals of your own. If you haven’t already, I highly encourage you to read it. It has a TON of great information that you can immediately apply to your life. To secure your copy, I’ve provided a link to the Kindle book here https://www.amazon.com/gp/product/B07HB3B8K8.

P.S.

My book recommendation for this article is “Set for Life” by Scott Trench. It’s easily one of my favorite personal finance books and it provides actionable content you can use to lower your expenses, increase your wage, maximize your investments and continue to improve over time. I highly recommend it and have provided a link to the book below:

https://www.amazon.com/Set-Life-Dominate-American-Dream/dp/0997584718