If you want to get serious about increasing your savings rate and decreasing the amount of years you’re required to work, you have to focus on cutting down the big three expenses that typically take up the majority of a person’s budget: housing, transportation, and food.
Reducing these three costs in your life will have the biggest impact on your financial future because unlike the occasional splurge, these are ongoing costs that you pay for every month. When you are able to cut these costs, you’re not just saving on a one-time purchase — you’re designing a life that costs less every month. Those savings add up month after month and year after year.
By targeting these three categories alone, you can increase your savings rate significantly.
If you make $3,000 per month after tax, every $100 you’re able to reduce your monthly expenses by is a 3% increase in your savings rate. If you can cut $100 off each category that’s nearly 10% right there.
You might feel that your housing and transportation costs are pretty fixed at the moment, but we’ll discuss ways to save on the big three down below.
The average person in the United States spends 37% of their pre-tax income on housing, and the standard financial advice recommends you spend no more than 30%. I would recommend trying not to spend over 25% of your after-tax income on housing (if possible). Here are a few ways that could help you reduce those housing costs.
Opt for a smaller home
It’s pretty common for folks to buy or rent more house than they really need. In fact, since the 1980s, the average square footage of a home has increased by about 1,000 square feet. That increase alone is 250 square feet more than the last house I rented was.
By opting for a smaller place you’re likely to spend less on not just your monthly mortgage or rent, but also on cooling and heating costs, furnishings, insurance, property taxes, etc.
Get a roommate
If you’re living in a home that has more space than you really need, you might consider renting out a room and living with a housemate. Splitting the cost of housing and utilities can have a big impact on your ability to save. Some folks are great friends with their roommates and others work on opposite schedules and barely see each other, so regardless, there are lots of ways to make it work for you.
Buy a multifamily home
If you’re looking to buy a house, this is sort of like getting a roommate on a larger scale — but it’s one that you don’t have to share a kitchen with.
I liked the idea of lowering our housing costs by splitting it among more people, but since we had just gotten married, Cassie works from home, and we have animals, the idea of roommates didn’t sound great to us. So, when it came time for us to buy a house I was really interested in buying a duplex, so that’s what we did!
Owning a duplex allowed us to have our own space, while also sharing the cost of housing with more people.
I also am just a big proponent of multifamily housing in general, as they’re more efficient uses of land and building materials. Plus, they support the overall psychological and financial health of a community. You should read Happy City (one of my favorite books I’ve read in the past few years) if you want to learn more!
Move to an area with a lower cost of living
I get it – many places are dealing with affordable housing crises right now (including the city I live in). But there are also plenty of cool areas around the country that are still fairly affordable, even if they don’t have the same level of amenities as living in New York, San Francisco, Los Angeles, or whatever high-cost city you’re living in.
Just ask me about my friend who lives in a cute college town in an apartment walking distance to downtown. There are beautiful nature trails nearby, she doesn’t have any roommates, and her rent is $300 per month…including her water bill.
By moving to an area with a lower cost of living, you’re able to find actually affordable housing, plus you’re reducing the demand in the higher cost of living area. It’s a win-win.
Moving to a lower cost of living area might look like moving to a different neighborhood, a different city, or an entirely different state (or even country). How dramatic of a shift you want will be up to you and your situation. If you’re willing to make a major change, you could save thousands of dollars a year and take on a new adventure.
Buy a used car
Rule number one: Never buy a new car. It loses a significant amount of value the second you drive it off the lot.
Rule number two: Don’t ever lease a car. Just don’t.
I try not to be too prescriptive in my advice, but these are two rules I will fight you on.
Auto loan debt is at an all-time high. The average monthly payment for a new vehicle is $554. The average monthly payment for a used vehicle is $391. So, by buying used, you can already expect to save $163 a month. But you can also do so much better than that.
You can always buy a reliable, fuel-efficient, used car for less than $10,000. And it’s not a stretch to do so for under $7 or $8K. I bought my car for around $9,000 and my monthly car payment was $184. That’s more than $200 less than the average used monthly car payment. I paid it off 2 years early to avoid paying more interest and I don’t plan on ever having another car loan again.
My car is from 2012 and has been great in the almost 4 years I’ve owned it. It hasn’t needed more than its regular oil changes and a new set of wiper blades.
Buy with purpose in mind
The second way to save money on transportation is to buy a car for what you use it for. You don’t need a pickup truck if you only transport things that require an open bed just a few times a year. You’re wasting money and gas every time you drive it to the grocery store or use it to commute to work. Buy a sedan and use the money you save to rent a truck on the few occasions you need it (or borrow from a friend).
If you live in a city where it’s easy for you to use public transportation to get around and you own a car for the occassional trip out of town every other month, ditch the car altogether. Use the savings from your car payment, insurance, registration, and parking to rent a car for those out of town trips and the occasional lyft.
For most of us our vehicles main purpose is to get us from point A to point B. Try to find a car that will get you there the most efficiently, both in fuel consumption and dollar consumption (those tend to go hand in hand).
Live close to where you work
Another way to reduce your transportation costs is by reducing your commute. The closer you live to where you work, the less gas is needed to transport you there and back each day and the less wear and tear on your vehicle.
If you live close enough to work, you may even be able to walk, bike, or use public transportation instead of a personal car.
This is one that I’ve always been a strong advocate for. I value my free time too much to extend my workday 45 minutes each way and not get paid for it. I’ve always lived within 15 minutes of where I work — often times a lot less. When we were buying a house, we had about a 5-mile radius that we were willing to look at houses in, and anything further out wasn’t going to be considered.
Because the houses in this area were more expensive than other areas around our city, we decided to buy a multifamily home in order to live where we wanted to. Now we get the transportation savings and housing savings.
I’ve already talked about this elsewhere on the blog, so I’ll keep it simple here and link to some of those other articles, but food is the expense that you can see the most immediate large-scale savings on, without having to make any major life changes.
Saving money on food doesn’t require you to eat nothing but rice and beans and packets of ramen. You can eat delicious and varied meals, enjoy quality coffee and adult beverages, and even splurge on high quality ingredients and local craft beer. It just means you have to do most of your cooking at home, plan ahead, and shop smart.
There are lots of other ways to save money in these three categories and the examples I gave are on a larger scale.
The thought of moving cities or selling your car and getting a different one might seem a little intense. You don’t have to make all of these changes in a week, but it’s worth thinking about these things in terms of the big picture. These three categories have a massive impact on your ability to save and the length of your working career.
The point is, you don’t have to make perfect money decisions every day if you get the big decisions right. By lowering these three expenses, you’ll naturally be building in more buffer in your financial life each month.
Just as your past financial decisions have impacted your financial situation today, your decisions today and in the near future will impact your financial situation in the months and years to come.
Don’t get stuck in the habit of the first financial decisions you made. Take in new information, consider things from a few different perspectives, and really think about the life that you want — not just the path so many other folks are on.
When you make smart financial decisions about these three big categories, you can pretty easily spend at least $1,000 less a month than the average U.S. consumer.