The 4 main ways I save more to retire early

When I think about the financial habits I’ve stuck to over the past ~15 years of my working life that have helped me save more and build wealth aggressively, there are really only four main things, two of which you can start doing today.

(Underlying all of these is my budgeting system, which makes everything else here much easier to do.)

1. Do most of your eating and drinking at home. Eating and going out to drink is a big expense for a lot of people, especially younger professionals. Cooking your own meals and, say, hosting a party at home vs going to a bar for drinks, are two key skills that will save you a lot of money.

Start with dining in, since all but the booziest of sots will likely spend more on food than alcohol. Even if you’re too tired to cook, picking up takeout vs going out will save you ~15-20% on tip, and even more if you normally would have ordered drinks. Make yourself a fancy cocktail or open a bottle of wine, beer, cider, or bourbon at retail price at home.

Beyond saving money, cooking is a core life skill, and being comfortable in the kitchen will pay off whether you’re trying to impress a potential mate, show your love to family & friends, or even just hanging out in the backcountry.

Find a parent, friend, or coworker who likes to cook and ask them to share a simple dish they make with you. Or, just go online and find a simple-looking recipe with ingredients you like and follow the instructions. For cookbooks, I highly recommend this America’s Test Kitchen book. My wife uses it a ton, and every recipe comes out great, and they tend to be fairly uncomplicated with detailed steps.

Anything you do that results in you feeding yourself counts, even if it’s as simple and making a sandwich, a bowl of cereal, or boiling pasta and pouring canned spaghetti sauce over it. Baby steps!

2. Stuff as much money as possible into tax-advantaged investment accounts, and put the long-term money to work in diversified stock index funds with low expense ratios. Because I follow a budget that keeps my expenses fixed, I can invest a large percentage of my income every year, which I aggressively funnel into stocks in tax-advantaged accounts. I max out my 401k and have always at least contributed the minimum to get all employer matching, even in my younger years when I couldn’t afford to max it out.

I’ve also maxed out my Roth IRA whenever I could. If my company offered a Health Savings Account (HSA), I switched my health insurance to use it (saving on premiums) and maxed that out too (as well as getting employer contributions: more free money!)

As my wife and I look forward to our first child, we’ll use the tax-advantaged 529 plan to save for his college.

When I run out of tax-advantaged savings to fill up, I put the money into a plain ol’ taxable investment accounts, investing in the same long-term investments that I use in my retirement accounts.

Saving on taxes is such an important part of building wealth because they can take a huge bite out of your savings. This is even more true as you move up the income ladder into higher tax brackets. Let’s pretend you’re in the 24% Federal tax bracket. Every dollar you invest in a 401k nets you an instant, risk-free 31.5% return on your money (even more if your employer offers matching.) That’s because the $1 you get to invest in your 401k (or traditional IRA, or HSA) would only be $0.76 in your pocket if you stuck it in your bank account, or spent it ($1 / $0.76 = 1.315.)

For the Roth IRA, the math is similar: you pay the taxes now, but save when you pull the money out. If you retire in the 24% tax bracket also, you’re getting the same 31.5% “bonus” on your money, just in reverse.

3. Pay cash for your car (and everything else, except your education and your home), and drive it into the ground. One of the biggest expenses many people have is a car payment. I’ve never had a car payment, because the only car I’ve ever purchased is the 2002 Toyota Corolla I bought used in 2006 for $5,000, and that I still drive (to the chagrin of my wife.) I’ve driven it about 120,000 miles to date, and it’s still going strong. Estimate the total cost of ownership for your next car. Make sure to optimize your auto insurance too.

Buying a car you can pay cash for encourages you to 1) drive your current vehicle into the ground, 2) buy an affordable vehicle, and 3) save for it using a budgeting scheme like the one I recommend.

4. When you change rentals or buy a home, comparison shop hard and make it an affordable one. For most people, rent/mortgage is easily their biggest expense, and often 1/3 or more of their total spending. It really pays to shop around both for rentals and your permanent home. Don’t just pay what your friends are paying, or pick the first nice place that comes along. Pick a monthly rental/mortgage amount that can get you a nice place but still allows you to save a large portion of your income. Make sure to include utilities in your calculations, and any extras like paid parking or storage, and also insurance, taxes, and maintenance if buying a house.

No one wants to live in a dump or commute 3 hours both ways to work, so of course you need to balance comfort and convenience into your decision, but housing is something you really need to comparison shop for.

My wife and I lived in uber-expensive Palo Alto for a year and a half, and rented a 2-bedroom that was well-managed and in a great location, but in an older building with zero amenities (which we didn’t really care about; you never use them anyway…) I talked to another co-worker who was paying the same amount as us for a 1-bedroom for just herself just down the road. She had a pool and a fitness center, but she would have preferred to save a few hundred bucks a month instead.

When we bought our home in Seattle (we didn’t want to commute far or live in the suburbs), we tried to keep our budget to something close to rental costs for a 2-bedroom apartment. That meant living outside of the most desirable neighborhoods, but still close enough to the city to commute easily. We looked on and off for 3 years while the market was red hot, and finally found an opportunity to buy last spring. Patience pays off when you’re making the biggest financial decision of your life!

So what about you? 

So there you have it: the four biggest things I do, and have been doing, to save aggressively. They’re not complicated, and anyone can do them, but it does take some thought and habit-building. Pick one or two and see how it works for you.

Take action now

Make yourself a meal tonight, log into your employer’s investing website and increase your 401k contribution by a measly, but meaningful, 2% (you won’t even notice.) Consider signing up for future increases too, since most 401k providers let you program in these automatic increases. The next time you go car or apartment/house shopping, re-read the tips above.

Author: Ward Williams

Ward is an independent financial advisor at Better Tomorrow Financial. He started working as an independent investment advisor in 2009.

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