Here are a set of practical things you can do today that will save you some real cash without putting a damper on your lifestyle. I’m estimating everyone can start saving at least $50 per month with these tips, and some of you could be saving hundreds.
1. Turn down the thermostat by 3 degrees.
Yep, that simple. Walk over to the thermostat and do it now.
(I’ll wait.)
Hand out sweaters to the family (shop for merino wool ones at a thrift store), and throw an extra blanket on the bed.
The key thing here is making this change stick: if you use a programmable thermostat, program in the new temperature schedule by simply lowering each set temp by 3 degrees in your existing schedule. (We turn the heat way down– below 60 F– overnight, but your call there…) Smart thermostats have features to turn the heat off/down to 50 F when you’re gone.
If you have air conditioning, turn your thermostat up 3 degrees in summer and take some clothes off. Your significant other will appreciate it.
Savings: $10 – $20 per month.
2. Lower your insurance premiums
Increase your insurance deductibles for both Auto and Home/Renter’s. Log into your insurance carrier’s website and find where your coverage details are at. GEICO has them here:
If you have Collision/Comprehensive on your car, increase your deductible to an amount you’re comfortable with and see the premium savings. If your car is old & low value like mine (say, less than $5,000 – $10,000), consider dropping Collision/Comprehensive altogether, knowing that the risk to replace your vehicle is on you.
I also decline ‘optional’ coverages like Personal Injury Protection, underinsured motorist (again, I’m taking the risk to replace my car), and rental reimbursement. (Worse-case, I’ll take the bus, Uber, or borrow my wife’s car!)
While you’re at it, get an insurance quote from Geico or esurance (owned by AllState) to see if you can save a few bucks. Direct-to-consumer insurers like GEICO often have much better rates.
For your Homeowner’s or Renter’s insurance, do the same thing. I always set my deductibles as high as allowed both to save money, and to avoid the hassle of a small-ish claim since I’d have to cover it myself anyway under the deductible. (But I also keep enough cash or bonds on hand to pay any of those deductibles if they came due suddenly. You should too.)
Savings: $100s – $1,000+ per year
3. Cut subscriptions you don’t use or can substitute for
Maybe you’re a frequent Netflix binger, but you signed up for Hulu a while back and don’t watch it much. If you have cable, consider ‘cutting the cord‘ and using cheaper subscription services, or free apps for individual channels on your smart TV instead. Maybe you even still have a landline that you haven’t been able to bring yourself to cancel until now. Take a minute to write down all your subscriptions, and then mercilessly evaluate which ones you still want. Include music (Spotify, Pandora, Apple/Google/Amazon Music), Amazon Prime, video like Hulu, YouTube TV, Netflix, Disney+, video game and news subscriptions, and anything else you subscribe to.
Also include your gym membership and any other recurring payments you make for services, like meal prep sites. Maybe you can build a home gym with some free weights and a bench for a couple hundred bucks. Take up running outside, or just do some pushups/situps and get a pull up bar. Maybe groceries would be cheaper than meal prep subscriptions, and you’d learn to cook.
Substitution
Maybe your library has all the electronic media you need and you can stop buying Kindle books and start checking them out for free, or use your library’s streamingvideo and audio instead of paying for a subscription. Libraries also let you access paid online services like magazines or news for free. Ours even offers free museum passes. Check yours out and see what they offer.
Free-riding or sharing services
Perhaps a generous friend or family member has a subscription that they’re willing to let you use under your own name. (I see you out there still using your mom’s Netflix account. So am I…) Netflix, Spotify, Hulu, Disney+ and many other services are pretty lenient on allowing up to 5 different people use their service. If you want, offer to go half with your friend on something, or you pay for one service and they pay for another.
Savings: $10s – $100+ per month
4. Negotiate your bills down
Use Ramit Sethi’s scripts to negotiate your cable, phone, and internet bills down. Maybe you can’t live without a certain service (cable internet, I’m looking at you), but you could pay a lot less for it. Companies pay a lot to attract and retain customers, and they don’t want to lose you. Call your internet or cell phone provider and ask how you can lower your monthly bill. Explain that times are hard/your income has been lowered/or it’s just “too expensive” for you. If you don’t get anywhere, tell them you want to cancel your service and they’ll usually route you to customer retention where you’ll get a better offer.
Savings: $10 – $50 per month
5. Optimize your cellphone bill
Most people are paying too much for cell plans. See if you can investigate how to change your plan online to save, or just call up your provider and negotiate. Maybe you have way more data or minutes than you need, or you’ve been paying for some other feature that can be eliminated.
Consider switching to Consumer Cellular
I’ve been using Consumer Cellular for many years, and really like them. Ting or Google Fi might also work for you. I only pay about $30 per month for 250 talk minutes + data, which seems pretty good. (I set my phone to ‘data saver’ mode and make extensive use of Wi-fi to avoid needing massive amounts of data.) You can add lines for $15/month to get the whole family on there. They have high-quality human customer service, great, transparent rates, and the cell service seems as good as other carriers. (They use the AT&T and T-mobile networks.)
Pro tip: get an AARP membership and save 5% on your Consumer Cellular bill. I saved more than the cost of my membership even on my cheapo plan. Anyone can join AARP, not just retired folks anymore.
You can instantly change your bill online, and they’ll automatically ‘upgrade’ you to the next higher tier if you, say, use up all your data, which I actually like. (Just make sure to change your plan back down the next month.) Since you can port your current number over (do NOT cancel your old plan until you’ve made sure this is done), the only real hassle besides the paperwork is testing to see if your current phone can work. Consumer Cellular should be able to tell you, and perhaps send you a SIM card so that you can test it out.
Credit: These tips are inspired by my favorite financial blogger, Ramit Sethi, who has his own version of money-saving tips here. The same PDF is also here. (Sethi no longer seems to have it up on his own website.)
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 America’s Test Kitchen. My wife uses this one a ton, and every recipe comes out great and is easy to follow.
Anything 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 into 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 max out my Roth IRAwhenever I could, switching to the backdoor Roth IRA when my income was too large to contribute the ‘normal’ way. 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!)
When I run out of tax-advantaged savings to fill up for the year, I put the money into a plain ol’ taxable investment account, investing in the same long-term investments.
Saving on taxes is key because they take a huge bite out of your savings. 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. Our family has never had a car payment, because we pay cash for used cars. I still drive my 2002 Toyota Corolla that I bought in 2006 (to the chagrin of my wife.) It has over 200,000 miles on it, and is 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.
Beware HOA dues
For condos or anything that’s part of an HOA, make sure to factor in HOA dues, and assume they’ll go up at least with inflation every year.
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!
Edit: now that we have two kids, I regret not buying a larger house when interest rates were a ridiculously low 3%. John T. Reed points out that a personal residence in a good neighborhood at reasonable mortgage rates can be a very good investment, so long as you can afford it in the first place.
What about you?
Anyone can mimic these behaviors, but it does take some thought and habit-building. Pick one or two you can commit to today.
Take action now
Make yourself a meal tonight. Log into your employer’s investing website and increase your 401k contribution by 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.
Set up a spending plan. Never budget again. Build wealth automatically.
I’ve been using a personal finance system for years now that allows me to know exactly how much I spend (and on what), pay all of my bills on time with zero effort, and save and invest a large portion of my income. All of this takes me less than 15 minutes a week to manage, which I do entirely from my smartphone. It’s simple and powerful, and can be set up in less than an hour or two.
On the back of a napkin, or if you’re so inclined, on a spreadsheet, add up how much you spend each month on fixed expenses, things that are predictable and must be paid, and discretionary expenses, things that can vary a lot and can be delayed or changed when needed. Ignore expenses that come straight out of your paycheck like income taxes and health insurance, and don’t count any investing like 401k or IRA contributions.
Exact numbers aren’t needed. Overestimate your expenses since you’ll probably forget a few things, and it’s better to guess too high than too low. Take a maximum of 15 minutes to do this right now for yourself or your family. You can go back later and make it more accurate.
Look at your online bank and credit card statements, especially year-end summaries, to quickly get an accurate estimate of your spending over the past year (including seasonal spending like winter holiday shopping and summer vacations.)
You should also include short-term savings goals such as a future Wedding, New Car, or House Downpayment, for things you expect to purchase within the next 1 – 2 years. Jot down amounts you need to budget per month for those too. (Longer-term savings goals like Retirement will be handled separately.)
A frugal single person who rents in a big city might have a budget like this:
Do this even if you’re not ready to start the system yet. It’s free, you don’t have to deposit anything until you’re ready, and will only take a few minutes. Doing this now will make you more likely to complete the system later.
Create a Checking account first where you’ll pay ALL your bills from.
Next, create one Savings account or ‘bucket’ (Ally bank term) for each of the ‘Discretionary’ categories sketched out in your budget that. If there are some categories that you don’t care about tracking individually, lump them back in with your Fixed list. I keep a separate Travel account, one for Household/Hobby items, and a few others. Limit yourself to 3 – 5 categories for simplicity. Make sure to give a nickname to each account to describe it (e.g.: ‘Travel’.)
Finally, create one more Savings account and label it ‘Short term Savings’. This will be where all of your income above your monthly spending (Fixed + Discretionary) will go when we’re all done. For example, if your take-home pay is $4,000 per month, and your expenses are $3,000, that extra $1,000 will be put into ‘Short term Savings’ for you to invest later.
To protect yourself from accidentally overdrafting your Checking account, click your Checking account, then click ‘Account Services & Settings’ and ‘Overdraft Settings’. Choose ‘Free Savings Transfer’ and choose your ‘Short term Savings’ account. This will allow Capital One to automatically pull any money in your Short-term Savings account into your Checking if don’t have enough in there to pay your bills. If this should happen, you need to ‘refund’ yourself by moving money back into your Short-term Savings account from either your Checking or discretionary Savings account to replace the overdraft.
Make sure to choose ‘Free Savings Transfer’:
Step Three – Redirect your direct deposit from work to your new Checking and Short-term Savings accounts
You’re doing great! Keep going and don’t get bogged down by the one-time annoyance of these last, crucial steps. If your employer offers direct deposit of your paycheck into your bank account (most do), set it up/change it so that your monthly Fixed + Discretionary amount is going straight into your 360 Checking account. See the FAQ below if you aren’t able to do this.
In our $3,000/month example, if you get paid monthly, then set your direct deposit to put $3,000 per paycheck into your Checking, with the remaining balance going into your Short term Savings. If you get paid twice per month (semi-monthly), divide by two and deposit $1,500/paycheck into Checking. For biweekly/once every two weeks, multiply your monthly amount by 12/26 (ex: $3,000 * 12/26 = $1,385 per paycheck.)
(If you haven’t already, make sure to set up pre-tax contributions to your company’s 401k with at least 10%-20% of your paycheck up to an IRS-maximum of $18,500/year (for 2018), or at a bare minimum, enough to collect any employer matching that you might be eligible for. If you use an HSA, you should also schedule automatic contributions to come straight out of your paycheck via your employer.)
Alternate approach: If you’re not ready yet to switch all your bills and your whole paycheck to your Capital One Checking, you can just transfer enough to divvy up into your Capital One Savings accounts, and keep using your old bank’s checking for bill pay + fixed expenses. Some people do this indefinitely, and just use Capital One for the sub-savings accounts, but I think it’s worth ‘ripping the band-aid off’ and switching everything to Capital One. If you go this route, you’ll obviously skip Step 5, which is redirecting your bills to pull from Capital One.
Step Four – Set up automated transfers from your Checking into your Discretionary Savings accounts
From Capital One 360 (edit: I use and recommend Ally Bank now, but the idea is the same!), click any account, then click ‘Transfer Money’ (top-right), and set up your ‘Monthly’ budgeted amount for the 5th of each month to go into one of your Discretionary category accounts (ex: $300 for Travel.) Do this for each of the accounts you created earlier. Make sure to first fund the account with a months’ worth of money, or schedule the transfer far enough out to give time for your direct deposit to occur.
The idea behind this is that from now on you’ll first check to make sure you have enough money in that discretionary account before you spend it. After you spend the money, you’ll transfer the amount spent into your Checking account (or wherever the bill will get paid from.) Let’s say I want to buy a new couch that will cost $400. I first make sure that I have at least that much in my Household saving account, then I buy the couch with a credit card that auto-pays from my Checking account. Immediately afterward, I transfer the $400 from my Household account into my Checking, so that when my credit card bill comes due my Checking has enough in there to pay the added couch expense.
Step Five – Redirect your credit cards, payment accounts, and other bills to all get paid automatically out of your checking account
Now that you’ve set up all your accounts and recurring transfers and deposits, set up autopay on any credit cards or other bills that you have to come from your new 360 Checking account, preferably on the 3rd of the month, if you have a choice. Make sure to also make your 360 Checking account the default choice for any payment services you use like Paypal/Ebay, Venmo and Apple or Android Pay.
I try to pay all my fixed expenses with one credit card for simplicity, or I use automated bank transfers for public utilities and online rent payments. (You can also get cash from your 360 Checking with no fees from any Allpoint ATM, and can request physical checks too from Capital One.) Go through every utility and service provider that you get a bill from and set up autopay, opting in to paperless emailed statements as well, including your landlord or mortgage company.
Even rent payments to old-fashioned landlords that require checks can be automated since good online banks allow you to schedule mailing a physical check using their bill pay.
You can also use a special credit card to pay for one specific discretionary category, and then set up that card to autopay straight from that Savings account. I use a ‘No Foreign Transaction Fee’ credit card specifically for travel, but use a different no-fee cash rewards card for all my other expenses.
Congratulations, you’ve finished the one-time setup and are ready to use your new financial system!
Step Six – Ongoing maintenance: transferring discretionary payments
Anytime you want to spend money that falls into one of your discretionary categories, 1) check to make sure you have that much in your corresponding Savings account, then 2) once you make the purchase, immediately transfer the spent amount from the corresponding Savings account into your Checking account where the bill will get paid from. I use the Capital One 360 mobile app.
This is the one manual step that you must do to stay on budget. Get in the habit, and it becomes second nature. You can also juggle money between discretionary accounts as needed. The only Iron Rule is to stick to your total spending goal of Fixed + Discretionary.
For frequent discretionary expenses like going out & eating out, use another checking account that you fund monthly just like a sub-savings account, and use only cash and a separate debit card to pay for those expenses. That way there’s no annoyingly frequent money transfers that you have to make every time you go out for a bite or to drink.
If you find that your estimates weren’t quite right, and you want to adjust how much you spend in different categories, or need more or less to be deposited into your 360 Checking each month, just tweak the steps above. The goal here isn’t to deprive yourself of spending money on things you love, or to meet someone else’s standards of what you “should” spend money on. Instead, you set your own spending priorities in a way that will keep you ‘honest’ on them, while allowing you to spend every dime that you’ve allocated for yourself guilt-free.
Step Seven – Ongoing maintenance: investing the Short-term savings for the long-term
Periodically invest all of that money that will be piling up in your Short-term Savings account now that you effortlessly spend exactly how much you want to each month. Log into your investment account (or open one) and link you Short-term Savings account to it.
Whenever I notice that a few thousand bucks have accumulated into my 360 Short-term saving account, I log into my Vanguard investment account and transfer it into my Target Retirement Fund. Choose a Target fund with a year that is 15 years after your planned retirement date. E.g.: if you’re 30 and plan to retire at age 62 in 2050, choose the 2065 option. Fidelity and other money managers also have these funds, but make sure you’re paying low fees (less than 0.2% is ideal.)
Your system with investing will now look like this:
There you have it. In just a couple of hours you’ve completely changed your financial life so that you know exactly how much you’re spending each month (without any ongoing budgeting), and have put yourself on the path to saving for financial independence.
Closing Thoughts
Each year, or whenever you have big money changes (have kids, buy a house, get married, change jobs), you can review your plan and adjust as needed, but try to set something that you’ll stick with for a long time. For me, sticking to my original budget that I set for myself 6 years ago has become a nerdy financial challenge that’s allowed me save more and more as my income has increased because my spending remains constant. (But I’m definitely not depriving myself; nor should you! There’s still plenty of room in my personal budget for my hobbies, trips overseas, whiskey, and nights out with the lady or friends. Instead, the budget forces me to build DIY skills and prioritize what’s most important in my life.)
Recommended optimizations – Get cash with no ATM fees anywhere in the world
Whew… We’ve covered a lot of ground, but there’s one more item I recommend doing. As I mentioned in Step 6, if you use cash or have a frequently-occurring discretionary category like eating out, set up a Charles Schwab Investor Checking account. You can then use that checking account to withdraw money from anywhere in the world and Schwab will refund your ATM fees at the end of each month. You’ll get a Schwab brokerage account created for you too, but there’s no obligation to fund or use it. (I don’t use mine, and I’ve had the account open for years with no problems.)
I like to use cash as my going out/eating out/fun money so that I don’t have to worry about transferring money to my Checking every time. There’s also something about physically seeing the ‘pocket money’ I have for the month that helps me mentally plan out what I can spend. To make this easy, I add one more direct deposit that sends cash to my Schwab checking account. For our $3,000 example, let’s say our Single Person wants to use $250/month in cash to pay for Going/Eating Out. Instead of creating a Capital One 360 Savings account for that, their direct deposit will send $250 straight to Schwab from the paycheck, and only $2,750 to their 360 Checking, with the balance still going to Short-term Saving as before.
Now, they just use their Schwab ATM card whenever they need cash (and will get a ‘hard-decline’ by default if they run out, which is free, but could be embarrassing if you’re using the card as a debit in a public setting :). Just use your credit card as a fall-back and transfer money later if this happens!)
FAQ
Q: What if my employer doesn’t offer direct deposit / they don’t allow me to specify a fixed amount to go to one account and the balance to go to another / I’m self-employed?
A: Just deposit your whole paycheck into your 360 Short-term Savings account. Then, within Capital One, click any account, click ‘Transfer Money’, and schedule a monthly transfer of your monthly budget amount (ex: $3,000) at the beginning of the month from your Short-term Savings to your 360 Checking account:
Q: Do I have to use Capital One 360 for this system to work?
A: Ally Bank will work for this system too. Whichever bank you choose must let you create multiple savings accounts for free with no minimums, AND schedule recurring automated transfers between accounts. Feel free to suggest other banks that meet these requirements and that you have personally used in the comments.
Q: Why schedule the transfer for the 5th of the month?
A: Scheduling for the 5th of the month will help group all your monthly bills together, ensure that any end/1st of the month paychecks have time to hit your account beforehand, and that 1st of the month bills like rent get paid first. You should also set up your credit card(s) and, if possible, other bills to be paid around the 3rd or 4th, just prior to these transfers.
The idea is to prioritize your spending in case you ever fall short: rent 1st, then utilities (if not paid by your credit card), then your credit card(s), then your discretionary transfers.
Ramit Sethi is my favorite financial blogger and advice-giver for the ‘basics’ (which can still be complicated) of personal finance: spending, saving and earning income. He recently railed against those who worry about things that they can’t control, yet fail to do the simple steps that will really matter.
His quoted question below to these people (and everyone else who needs to take control of their money) have 4 excellent starting points (links) for personal financial freedom. Check out each of these and apply them to your financial life.
Ramit stresses the importance of negotiating all things financial, from credit card interest rates, getting out of bank fees, to your next salary raise.
Automation
The best way to save is to automate the process so that no active effort is required on your part. This can be anything from setting up direct deposits on your paycheck (most employers allow you to split the check into multiple accounts, the better to target your savings goals), having 401k deductions come out of your check, or using Vanguard (or whoever your mutual fund provider is) to invest money from your bank account on a regular schedule. (If you already have a Vanguard account, go here. If you need to set up a Roth IRA or other financial account, go here.)
Earn More
Expenses are only half of the financial coin of savings. Earning a healthy salary is also a big help along the road to wealth. Here’s a few ideas on how to make more money:
Get an education (academic or vocational, formal or informal) that increases the worth of what you know, and your ability to apply that knowledge and make money (or other benefits) from it.
Start your own business on the side, or find a part-time or freelance job that you can do in your spare time. (Make it something you enjoy and that energizes you, otherwise it’ll be hard to force yourself to do it given your other work/life commitments.)
Save Money – Enter Ramit’s ’30 day challenge’
Ramit put together a fantastically useful list of 30 tips (described in each of the links below) to save money. These aren’t the typical ‘stop buying lattes’ ideas generated on so many financial blogs. Instead, they’re likely to save you big bucks without taking away the things that you really enjoy in life.
While I’ve copied Ramit’s entire list below (with his links for the details of each tip), his original post can be found here.
