Finish the following sentence:
“My dream is _____.”
Maybe you want to buy a house, or backpack Europe, or retire early.
No matter what you want, having a Big Ol’ Heap of Savings makes each these goals a million times easier.
“Gee, thanks Captain Obvious,” you’re probably thinking. “Easier said than done.”
Do you think saving money is hard? You might be listening to the wrong advice.
If you’re trying to nickel-and-dime your way into savings, then sure, you’ve got a grueling slog ahead.
Imagine all the mental bandwidth that it takes to stack 50-cent orange juice coupons on top of 75-cent manufacturer coupons, tracking the expiration dates and appropriate stores for each item on your grocery list.
“Okay, we’ll get bread and milk from Store X, but yogurt and meat from Store Y. We have to go to Store X sometime between Sunday through Wednesday, and we can hit Store Y anytime between Tuesday and Friday.”
“Oh yeah, and let’s stand in the snow at 3 a.m. on Black Friday to save $80 off a plasma TV.”
That’s as appealing as running a marathon in flip-flops.
If this is “saving money,” count me out.
Fortunately, there’s a better choice.
What happens when you toss out conventional wisdom and focus on the actions that pack the most powerful punch?
Quit Trying to Budget
What’s the single most overplayed nugget of financial advice?
“Make a budget.”
You should also floss, wear sunscreen daily, and drive exactly the speed limit. And avoid that extra slice of cheesecake at the holiday party.
Yeah, right. (She says with a mouthful of cheesecake.)
We all know what we should do. Lack of knowledge isn’t our problem.
But that doesn’t mean we’re going to act on this great advice. Humans are busy/lazy, and when we’re presented with two options, we’re prone to taking the easy route.
Some people suggest that willpower – “just do it!” – is the most effective solution. “Force yourself to budget! Don’t eat cookies! ”
But decades of data show that willpower sucks at changing our lives.
If you want to moralize, you can admonish people for lack of willpower.
But if you want actual results, you should work with human nature, rather than fight against it.
In other words, embrace your inner sloth.
So – back to budgeting.
If you’re already in the habit of sticking to a written budget, awesome.
If you’re struggling to maintain a budget, though, here’s an easier path: Just shave your savings off the top. Spend the rest.
I call this the 80/20 Budget, since I recommend that people save at least 20 percent of their take-home pay. That’s enough to protect you against succumbing to credit card debt the next time your car’s engine explodes.
If you want ditch-the-cubicle, become-a-millionaire, party-in-France money, morph this into the 50/50 Budget. Shoot for a 50 percent or greater savings rate.
Don’t bother tracking every cent. Just trim your savings off the top. Stick it in your Escape Fund. Go wild with the rest.
Left Jab: Earn More
I can hear your objections already.
“But I only make $40,000 a year!” you might be thinking. “There’s no way that I could save 50 percent of my income on that type of salary!”
I agree. You should earn more.
Pick up extra “gigs” during the evenings and weekends: freelancing, consulting, babysitting, home renovating, tutoring, lawn-mowing, snow-shoveling, dog-walking, pizza delivery.
Earning extra money, and saving every dime of that excess income, is the single fastest and best way to super-charge your savings rate.
Why? In one word: Habit.
It’s hard to break habits. And you’ve adjusted to your current standard of living.
But you’re not used to earning extra money. It’s easy to pour every dime of this into savings. You’ll never miss it, because you’ve never experienced having it in the first place.
How massive of a punch can this make?
Let’s assume that during your 9-to-5 job, you earn:
Take-Home Income: $35,000/year
Savings Rate: 20 Percent
Total Savings: $7,000 per year
Next, let’s imagine that you pick up gigs as a web designer or babysitter or French tutor.
You earn $20/hr and work an extra 20 hours per week: from 7 p.m. to 9 p.m. every Monday-Friday, plus 10 a.m. to 4 p.m. every Saturday and Sunday.
Gross Income = $20,800
Taxes (28 Percent) = $5,824
Extra Net Income = $14,976
You save every dime.
Total Savings: $21,976
Boom. You’ve more than tripled your savings. That’s the epic power of earning more.
Right Punch: Find Earth-Shattering Savings
Wait, can you take this a step further?
Let’s see if you can cut back on your biggest-ticket expenses.
Take the cost of your housing, for example. Can you stick a roommate in there?
“No way! I hate living with roommates. They leave dirty dishes in the sink. And they never vacuum. And besides, I need a guest room for when Aunt Millie comes to visit, which happens twice a year.”
Riiight. Okay, let me rephrase this:
Do you $500 per month hate living with roommates? [Insert cost-of-renting-a-room-in-your-home into that sentence.]
Do you $6,000 per year hate living with roommates? [If you're buried in credit card debt, multiply $6,000 by the interest rate on your loan. At 14 percent APR, you're paying $6,840 per year for that vacant guest room.]
Sounds different now, doesn’t it?
Let’s try again: Can you and your spouse consolidate into a one-car household? Can you carpool to work?
“No way! What about the weekends? I want to be able to go out with my friends while he’s at the gym.”
Okay, let me rephrase: Do you $300 per month want that flexibility? Would you be willing to get paid $3,600 per year to coordinate your schedules?
Let me be clear: There’s nothing wrong with keeping a vacant guest bedroom or maintaining multiple cars – if you’re willing to pay the price.
The pricetag may be higher than you expect.
Willing to fork over those funds? Great. But if you’re trying to save a Big Ol’ Heap of Cash, remember: You must ruthlessly slash everything that doesn’t matter. Especially the big-ticket stuff.
Let’s imagine that you get a roommate. You also make some small-scale changes: you grow some veggies in your backyard, replace your halogen lightbulbs with LEDs, negotiate your insurance rates, and wear the same few outfits again and again.
How strong of a punch does this pack?
Total Savings: $610/mo, which is $7,320/year
The vast majority of that — $6,000 per year out of that $7,320 – came from the big-ticket item.
Add this to your $21,976 savings rate, made possible by extra income.
Your New Total Savings: $36,784
You’re saving more money than your base take-home salary, thanks to the one-two punch of earning more and cutting back on the big-ticket items.
With those type of turbo-charged savings, you can escape the cubicle / buy a house / backpack Europe sooner than you might expect.
Thanks to Flickr / Carol Schaffer for today’s photo of a sloth.