Each of these tactics are simple little moves you can make to improve your financial situation. Some of them take just a few minutes, others might take an hour or two, some of them require a bit of regular effort, but they’re all incredibly simple – anyone can do them. Each of them also save significant money, especially over the long haul, and when combined together these tips can save you a lot of money now.
Paying yourself first
The single best way to begin saving money is to use a technique called pay yourself first. It has been proven time and time again to cause people to change their behavior, and is probably the single most important money saving tip that’s ever been developed.
When you set down to pay your bills, the first check you write should be to yourself. Decide on an amount you can commit to for at least six months and immediately pay that “bill” by depositing the money into your brokerage, mutual fund, or retirement accounts. You must do this even if you cannot afford it! Then, pay your other bills as usual. If you find that you do not have enough money to cover all the expenses, write down the amount you are short and then find a way to raise the money. If this means you have to recycle cans, switch to an off-brand cereal, work a few extra hours, or cancel your magazine subscriptions, do it.
Think it sounds too hard? If so, you must answer this question for yourself: is the pain of giving up your “perks” greater than the pain of being in financial bondage? If it is, you need to resign yourself to remaining in the same financial situation for the rest of your life. In fact, if you are prone to using debt as a means of upgrading your lifestyle, the problem will probably grow worse with time.
Does saving a few dollars really matter?
One of the fundamental principles of finance is the concept that $1 today is more valuable than $1 a year from now. The reason for this is two-fold. First, a dollar will probably buy less goods and services in the future due to the destructive force of inflation. Second, if I have the dollar in my hand today, I can invest it and earn a a return in the form of dividends, interest or capital gains.
The best money advice anyone can ever give you is to firmly establish this time value of money concept in your head. The key to financial prosperity is realizing the potential value of every dollar that comes into your hands. In fact, I think of cash as a seed – you can either eat it (spend it) or invest it (sow it).
To help illustrate this point, let’s assume you find a $20 bill on the side of the road. You are faced with two potential uses: you can stick the money in your tax-free retirement account or take yourself out to dinner. “It’s only twenty bucks!” you say to yourself and opt for the dinner. In reality, you are spending far more. Using one of the time value of money formulas, we can calculate the real economic cost of not investing the cash.
FV = pmt (1+i)n
FV = Future Value
Pmt = Payment
I = Rate of return you expect to earn
N = Number of years
To perform the calculation, we have to make a few assumptions. First, let’s assume you are 30 years old (and hence 35 years away from retiring at 65). That means that the $20 can compound for 35 years. We will substitute 35 for “n” in the equation.
Next, we must establish your expected rate of return. Historically, the stock market has returned 12%. If you want to invest in bonds, your return will be lower. Assume that you invest in a combination of both and expect to earn a 10% rate of return. This will be substituted for the “i” variable in our equation.
The “pmt”, or payment, is the value of the single amount you want to invest (in this case $20). Now that we’ve figured out the variables, the formula looks like this: FV = $20 (1+.10)35
Enter 1.10 into your calculator (this is the sum of 1 + 0.10). Raise this to the 35th power. The result is 28.1024. Multiply the 28.1024 by the pmt of $20. The result ($562 and change) is the true cost of spending the $20 today (if you adjusted the $562 for inflation, it would probably work out to about $140 in today’s dollars. That means your real purchasing power would increase approximately 7-fold).
Clearly, this is enough to buy an entrée at a five-star restaurant! Armed with this knowledge, you are free to make an economic decision; namely, would you prefer to eat a $20 meal today or a $140 meal in the future. The answer is entirely personal. Once you understand this concept, however, it becomes painfully obvious that the small luxury items you think nothing of are really costing you millions and millions of dollars in future wealth.
Set your goal to save $100,000 first
Billionaire investor Charlie Munger has always said that the most difficult hurdle to becoming financially independent is saving the first $100,000. Once you cross that threshold, you have the money necessary to get bank loans to build a business or acquire real estate, or make investments in the stock market that can have a real tangible change in your net worth if things work out well.
This is free money
If your employer offers 401k matching, take advantage of it. In the above example, if you were to get dollar-for-dollar matching on the first, say, 5% of your contributions and you made $30,000 per year, you would get $1,500 in a bonus match deposited into your account. You already know that you saved $1,250 in taxes, so now, by simply putting $5,000 in your 401k, you have a total of $6,250 capital working for you – or $2,750 more than you would have had if you just took your regular paycheck, paid the taxes, and tried to money into a brokerage account! That’s nearly 79% more money at work for you!
Grow your income pie
One way to add more money is grow your income pie, not just try to cut more expenses from your existing lifestyle. If you have a talent or skill, maybe you could freelance on the side to pick up a couple hundred dollars per month, all of which can get dollar cost averaged into blue chip stocks. Perhaps you work in a factory; can you pick up extra hours? By bringing in more money, you’re funding your investments without touching your ordinary life. That’s very important because it’s more likely you’ll be willing to stay the course as you won’t feel deprived.
This may not seem like much, but if you can manage to put away an extra $10 per day from new business activities or projects, at 10% over 40 years, you’re talking about having $1.6+ million! People aren’t trained to think like that, and our education system certainly doesn’t seem to be giving them these tools. You cannot attempt to put aside huge sums – fortunes are built $1 or $3 at a time. That money compounds, grows, and builds. It’s just the nature of things. An acorn doesn’t become a mighty oak overnight, or even in a few years. It takes time.
Organize your expenses
This may not seem intuitive, but trust me on this one. For most people, clutter is not only messy, but it has a financial cost. You spend time looking for things, space storing it, lose tax deductions because you don’t have your receipts cataloged or you can’t find the paperwork to mail-in a rebate, require more time for accountants and lawyers to sort out your affairs when something goes wrong, or miss your car warranty, making you pay for repairs costs out of pocket. There is an enormous financial cost to being disorganized.
Clipping coupons and reducing household expenditures does not mean you have to live the life of a miser. Set financial goals and reward yourself when you reach those goals. Positive economic incentives can do marvels for productivity, and you may not find it nearly as difficult forgoing current consumption if you know a new pair of Allen Edmonds is in your future. Besides, when you associate a luxury good with an accomplishment, it has much more meaning and value.
Buy non-perishable items in bulk
Many goods are cheaper when purchased in large quantities. Obviously, you want to stay away from things that will spoil (In other words, don’t buy milk in bulk). Some bulk purchases go wrong for reasons you couldn’t possibly predict: That pack of 500 blank DVDs seemed like a good idea at the time — until they started collecting dust when everyone switched to flash drives. Win some, lose some.
How can you make sure you win more than you lose? Make an organized space in your house to store your bulk goods. Sturdy basement shelves work well, as long as things stay dry. It can be difficult if you live in a small apartment or a house without a storage area. You might have to repurpose a closet or even buy (or build) a free-standing cabinet.
The best items to buy in bulk are paper goods. Toilet paper, paper towels and printer paper never go bad and store easily. It’s also sensible to stock up on cleaning supplies, garbage bags, soap, shampoo, and laundry detergent [source: U.S. News and World Report]. These are things you’ll always need and will certainly use — and won’t go bad.
Bulk purchases can account for a wide range of savings, depending on the products. Buying large packs at the grocery store can save you five to 10 percent. You can buy even larger quantities at club stores like Sam’s Club or BJ’s, but the cost of the membership eats into your savings. Don’t forget that you’ll save some money and time by making fewer trips to the store, too.
Get off the consumption treadmill
You will never experience financial freedom until you have stepped off the consumption treadmill. Once you slip into the habit of borrowing tomorrow’s income to pay for today’s expenditures, you will begin to loathe money and possibly even your job or occupation. Instead of viewing it as an outlet for your talents, gifts and ambitions, it becomes a series of endless tasks you must complete if you hope to break even at the end of each month.
Ride a bike
We don’t think enough about that but if you can rely on a bicycle for most of your day to day traveling, you’ll save money in all sorts of unexpected ways. Most obvious: the gas you’d have needed to drive to work or to the store. If your daily driving uses up 10 gallons (38 liters) of gas each week, you’ll save $30 to $40 every week by riding your bike. You can cut out the costs of car insurance and car repairs, not to mention the price of a car itself, if you can rely solely on your bicycle for transport. That’s a difficult step to imagine, but you’d save thousands of dollars each year.
Public transportation is another alternative mode of travel, but riding a bike has advantages over that, too. A monthly bus pass costs between $30 and $105, depending on the city. Wouldn’t it be nice to cut that expense out of the budget?
There’s one more potential savings factor if you ride your bike everywhere. You might be able to skip the gym membership, since you’ll be getting plenty of exercise just getting around town.
Rethink Auto Insurance
Every year, reexamine your auto insurance policy for savings opportunities. For example, consider raising your deductible, which lowers premiums. For older vehicles, evaluate whether you really need collision coverage, which covers damage to your car when your car hits or is hit by another vehicle or object. And make it a habit to compare auto insurance quotes annually, which can be done online in minutes.
Many retailers offer special discounts to online shoppers. And virtually every company that sells products or services online offers promo codes, discounts or coupons. Particularly if you have a big purchase planned, make sure to search the Internet for deals before buying.
Also one should never shop without a strong idea of what one will be buying while in there. Make a careful plan of what you’ll buy before, then stick strictly to that list when you shop. Don’t put anything in the cart that’s not on the list, no matter how tempting, and you’ll come out saving a bundle.
Turn off the television
One big way to save money is to watch less television. There are a lot of financial benefits to this: less exposure to guilt-inducing ads, more time to focus on other things in life, less electrical use, and so on. It’s great to unwind in the evening, but seek another hobby to do that.
Rethink your collections
Most people collect something – what do you collect? Is it something that consistently brings you joy? Or is it something that you just do out of habit at this point? Does the collection itself have value? Could you perhaps “trim the fat” from this collection by getting rid of duplicates or getting rid of the items you no longer use? Also, could you perhaps cut down on your spending on that hobby? Focus on trimming the things you don’t feel strongly about – if you dig into things that bother you, you’re going to eventually relapse.
Make your own gifts instead of buying from the store
You can make food mixes, candles, bread, cookies, soap, and all kinds of other things at home quite easily and inexpensively. These make spectacular gifts for others because they involve your homemade touch, plus quite often they’re consumable, meaning they don’t wind up filling someone’s closet with junk. Even better – include a personal handwritten note with the gift. This will make it even more special than anything you could possibly buy down at the mall, plus it saves you money.
30 days and 10 seconds rules to avoid unnecessary things
Whenever you’re considering making an unnecessary purchase, wait thirty days and then ask yourself if you still want that item. Quite often, you’ll find that the urge to buy has passed and you’ll have saved yourself some money by simply waiting. If you want, you can even keep a “thirty day list” where you write down the item and the day you’ll reconsider it, but I prefer just to keep this one in my head – that way, I often just forget about the unimportant things.
Whenever you pick up an item in order to add it to your cart or to take it to the checkout, stop for ten seconds and ask yourself why you’re buying it and whether you actually need it or not. If you can’t find a good answer, put the item back. This keeps me from making impulse buys on a regular basis.
Eat less meat
For the nutritional value, meat is very expensive, especially as compared to vegetables and fruits. Simply change around your regular meal proportions to include more fruits and vegetables and less meats – eat a smaller steak and a bigger helping of green beans, for example. Not only is this a healthier way to eat (saving on health costs), it’s also less expensive.
Invite friends at home instead of going out.
Almost every activity at home is less expensive than going out. Invite some friends over and have a cookout or a potluck meal, then play some cards and have a few drinks. Everyone will have fun, the cost will be low, and the others will likely reciprocate not long afterwards.
Also drinking more water is less expensive than drinking alcohol.
Instead of throwing out some damaged clothing, repair it instead.
Don’t toss out a shirt because of a broken button – sew a new one on with some closely-matched thread. Don’t toss out pants because of a hole in them – put in a patch of some sort and save them for times when you’re working around the house. Simple sewing can be done by anyone – it just takes a few minutes and it saves a lot of money by keeping you from buying new clothes when you don’t really need to.
Pack food before you go on a road trip
Have everyone pack a sack lunch for the trip. That way, instead of stopping in the middle of the trip, driving around looking for a place to eat, spending a bunch of time there, and then paying a hefty bill, you can just eat on the road or, better yet, stop at a nice park and stretch for a bit. Plus, you’ll save a lot of money and a fair amount of time this way.