Massive list posts you’ll find online such as, “134 ways to save money” are like modern art.
You look at them, and they’re pretty, but there’s not much utility there because they’re hard to truly act on.
So let’s cut to the heart of the most impactful ways you can save money. According to the Bureau of Labor Statistics, this is how Americans spend:
I made the chart from their latest data.
- Housing includes the cost of residence, utilities, and furnishings.
- Transportation includes vehicles, fuel, and insurance.
- Food includes at-home meals and eating out.
- Healthcare includes health insurance and direct costs.
- Everything else includes education, clothes, entertainment, etc.
Most of the money you can save is with a few big changes. The rest is the “long tail” of tiny incremental improvements that don’t equal as much as just the top few improvements.
For this article, let’s cut out the remaining 100+ tips and just focus deeply on five serious tactics to dramatically increase your savings rate.
How to Save Money for Real
The way human psychology works, having to make little sacrifices every day is unsustainable. We have a limited allotment of willpower daily, and the more you use it up to deprive yourself of little things, the quicker you’ll run out.
Unless you’re utterly broke, cutting 5 minutes off your shower time to save hot water or bagging your work lunch while all your co-workers eat out and network with each other are rarely the best types of money-saving tips.
Instead, if you want to truly accelerate your saving habits and become financially free, you might need to re-arrange some of your core values.
The things we think will make us happy often don’t, and the things we neglect are usually what actually does.
With that in mind, out of all the tips I’ve ever used to save money over the years, these are the filtered, curated, and most impactful money-saving tactics to boost your savings rate without sacrificing any happiness.
1) Make Your Luxuries Temporary
The amount of money that the median working-age American family has saved for retirement is just $5,000.
And yet, over the last four decades, the average house size has increased from about 1,600 square feet to over 2,600 square feet, even as the typical number of people per household has decreased:
Source: Star Tribune
Maintaining that much house means higher bills, more money spent on energy and furnishings, and way more time spent on upkeep. You have to clean and landscape and repair all that stuff, or pay a ton of money for people to do it for you.
And people still can’t fit all their stuff at home! There are over 54,000 self-storage locations in the United States, and we spend $32 billion per year renting them out so we can stash our extra stuff in’em.
New cars depreciate by about $10,000 within the first five years of buying them, yet we collectively have over $1.1 trillion in auto loans to pay for cars:
And we have another trillion in credit card debt:
Source: Federal Reserve Bank of St. Louis
Yet, despite pampering ourselves with all this fancy stuff we’re collectively more depressed than hunter-gatherers.
This is due to hedonic adaptation. When you get a bigger house, and a nicer car, and a promotion at work, and a bunch of new shoes, it feels good at first, but then you quickly adapt and return to your baseline level of happiness.
In fact, it has to work like that. If it didn’t, then we’d become so ecstatic with our situation once we achieve certain things that we’d stop being motivated to do anything. Instead, our baseline happiness has to go back down to normal, so that we feel the need to keep seeking out more resources.
But in the modern world, that harms us, because we keep accumulating stuff to fill the ever-present hole. Our baseline level of expenses keeps increasing, which leaves us very little money to save and invest.
So what am I saying? Should we live like paupers? Eat ramen?
The way to simultaneously save money and get around the problem of hedonic adaptation is to live in a simple utilitarian way, and then experience luxuries from time to time. Keep your baseline level of costs low, but be willing to enjoy a brief expensive spike every now and then.
In other words, don’t buy stuff, buy experiences.
And it’s not a new concept:
- Forbes: The Secret to Happiness? Spend Money on Experiences
- Fast Company: Why You Should Spend Money on Experiences
The reason this works is that you’ll spend most of your time in uncluttered, simple living conditions that require little time or money to maintain. You get to save all that extra money from not buying extravagant homes, cars, clothes, shoes, excess jewelry, and random stuff, and you get to save all that extra time from not shopping for and maintaining all that stuff.
In return, you can put all that extra money in your retirement accounts to achieve financial freedom at a much earlier age. It feels amazing to have 10+ years of expenses stashed away and constantly growing. All the money-related stress or worries about your job just melt away.
But then, go on a nice vacation. Splurge a bit!
Travel to that foreign country you’ve always wanted to see. Stay in the hotel you want, rather than the cheapest one. Enjoy the luxury.
By spending most of your time living a minimalist lifestyle, your hedonic adaptation will continually be reset back down to that low baseline. You’ll be just as happy (and probably happier) with less.
So, when you do experience luxuries during nice vacations or fancy restaurants a number of times per year, it feels totally fresh each time.
2) Get a Passionate Side Hustle
One of the best ways to save money is to spend so much time creating that you forget to consume.
In addition to working full time at a research facility in a blended engineering/finance role, I love writing about finance topics and and building websites on the side. It’s fun and rewarding, and keeps me in a state of flow.
Flow, in psychology, means being absorbed in a state of energetic focus with what you’re working on, and it’s one of the most rewarding feelings we can experience. The brain rewards us with dopamine prior to receiving a reward, when we’re working for it rather than when we already achieved it.
My main reason for not buying things is not to save money. Instead, it’s to avoid wasting time, so I can get back to flow. Time for me is a more valuable resource than money.
Living a fairly minimalist lifestyle isn’t about cutting down and missing out on things. It’s about creating so much space that you can sit back, relax, and do what science shows actually makes us happy.
Suppose you make $50,000 per year after taxes, and have about $30,000 in annual expenses. You’re saving about $20,000 per year.
Now if you bring in another $10,000 per year net of taxes with a side hustle, and push your expenses down by $5,000 per year by consuming less, then you can save $35,000 per year. Although in this example you only increased your income by 20%, you increased your savings rate by 75%.
That small tweak means being able to retire in about 12 years instead of 19 years, according to my wealth calculator. Or you can continue to work but be financially free while you do.
The key is you have to find something you enjoy. Otherwise it just lengthens your daily grind, and that’s mentally and physically unhealthy.
- Making and selling artisanal soap on Etsy
- Doing random carpentry projects for folks in your spare time
- Cooking awesome dinners for private clients when they entertain guests
- Writing novellas and selling them on Amazon
- Teaching as an adjunct professor at a community college
Here’s a massive list of side hustle ideas.
If you don’t regularly look forward to and get excited by your side hustle, then it’s just a second job. That might be necessary to pay the bills, but if possible, try to find one you’re passionate about for the long-term.
According to the Bureau of Labor Statistics, the average person spends 2-4 hours watching tv per day. And the only reason that’s lower than it used to be is because the internet has replaced TV, so we watch cat videos on Youtube and post selfies on Instagram instead.
I’d wager that most people reading this are ahead of the curve, and more productive than average. But by cutting some of the TV, social media, and web-surfing out and using it to do some work you enjoy, your finances could dramatically improve in addition to making you happier with a frequent state of flow.
3) Use Money Mostly to Eliminate Pains
Science sheds some light on how we can optimize our finances for happiness.
A recent study published in the Proceedings of the National Academy of Sciences found that spending money to save time makes us happier than spending money on material goods.
It’s also been known for a long time that long commutes are one of the biggest killers of life satisfaction:
- Time Magazine: Your Life is Terrible Because You’re a Commuter
- Psychology Today: Commuting- the Stress that Doesn’t Pay
- Lifehacker: Ditching Your Commute is Worth $40k in Happiness
- Science Daily: Commuting Linked to Lower Life Satisfaction
Pete Adeney took an engineering approach to the topic of commutes, and calculated that if both partners in a couple commute 40 minutes each way to work with fairly new cars, it costs $125,000 every 10 years and is almost like working six days a week instead of five in terms of time spent.
And that’s… horrifying.
When you do decide to spend money to increase your happiness, it’s pretty clear that saving time and eliminating the worst aspects of your day give you the best bang for your buck.
Is your mattress old, leaving you to wake up with back pains? Get a new one.
J.D. Power has found that 81% of people who replace old mattresses report high satisfaction with that choice. You’ll spend nearly 30,000 hours per decade on a mattress. It’s not a place to pinch pennies on.
Do you utterly hate cleaning your home? Not a fan of getting down on your knees to scrub the toilet? Paying for a cleaning service will probably make you happier than a new car. If you have a high income, spending money to save time might even result in more income overall.
Is your commute horrible? Well, it’s probably worth paying up for a home that’s closer to your work, or finding a new job.
If we’re not optimizing for happiness, then what are we doing?
4) Pay Yourself First
This one is simple.
If you have a 401(k) or TSP or some other employer-based retirement plan, crank up that savings number.
At the absolute minimum, save a large enough of a percentage of your income to get full employer matching. Because it’s tax-deferred, protected from bankruptcy, and hard to access early, 401(k)s and other employer retirement accounts are the ultimate place to put long-term money.
So, try to crank it higher. If you’re putting in 5% now, change it to 10%. If you’re already putting in 10%, then just go ahead and max out your savings to $18k/year.
Push that number higher than your comfort zone and then figure out how to cut your expenses if need be.
If you are saving too much and can’t buy all the stuff you want, then get a side hustle. Your future self will be unbelievably thankful to you, and your resume will turn into an absolute beast.
Do not save what is left after spending, but spend what is left after saving.
The reason this is such a powerful method is that the money goes into your retirement accounts and gets “locked in” before you ever get the chance to spend it.
Rather than making daily hard choices about whether you buy premium coffees or go out to lunch with co-workers or buy those new pair of sandals, this is just one hard choice. Just go in to your account, and push that number up.
Now, you have to actively make a bad choice to undo it. So it’ll probably just stay how it is at the higher level.
Rather than making numerous hard decisions each month about whether to buy something or not, an easier method is to just really push yourself with your initial savings rate, and then be more liberal with any spending you have left over.
If you don’t have an employer plan, then focus on optimizing a Roth IRA. If you get a tax return or a corporate bonus, put all that windfall money in your retirement account. And in general, try to max out your Roth with the full $5,500 with automatic payments to your brokerage account. Just push yourself to put it all in there and cross of this year from your list.
Once you’re automatically saving 20% or more of your income (depending on how quickly you want to become financially independent), you can take a deep breath and spend without worrying about it.
5) Do An Expense Audit
Not everyone is a budgeter.
For me personally to save money, minimalism works a lot better than being a constant budgeter and tracking every expense. I just spend what I want.
But at the very least, perform an audit of your expenses once in a while and see where your money truly goes.
Whether you use Mint or Personal Capital or manually track all your expenses in a spreadsheet, it’s worth checking once per year or more.
With Personal Capital, which is free, you can see a complete picture of your financial situation:
- A graph of your net worth over time, to see where you stand.
- A detailed breakdown of where all your expenses go each month.
- A fee-scanner, to find hidden fees you might not be aware you’re paying.
- A retirement planner, that helps you figure out if you’re on track.
Doing a breakdown of all your expenses helps you focus in on areas that you’re spending more money on than you thought.
Here are my expenses for this month, according to Personal Capital:
I can click on those segments and it gives me a breakdown of each of those areas.
For example, it tells me I spend over $500/month on groceries, which is a lot, especially for a 120 pound woman! And it’s the second biggest area of my spending after rent.
I wouldn’t have known that if I had not done an expense audit like this.
You can access the free tool here.
Final Words- You’ve Got to Be an Owner
Despite the massive eight-year economic expansion we’ve had, money is still tight these days for most folks.
Productivity of the American worker keeps increasing:
Source: Federal Reserve Bank of St. Louis
But real wage growth has been lackluster:
Source: Federal Reserve Bank of St. Louis
What these charts show is that since 1987, productivity per worker has increased by 76%, but inflation-adjusted average full-time earnings have only increased by 8%.
Most of that difference went to shareholders. Labor is becoming a commodity, while the investors and owners of companies and real estate are the ones getting all the growth.
In 1987, the stock market capitalization of the United States was about $2.5 trillion, and the population was about 242 million, according to The World Bank. That’s about $10,330 in public stock value per person.
Now, we have over $27 trillion in stock value, and about 323 million people, which translates into over $83,000 in public stock value per person.
In other words, the per-capita stock value of the United States increased eightfold over this three-decade period. When adjusting for inflation, it’s still almost a fourfold increase. That’s compared to only an 8% increase for workers’ salary and wages.
But you don’t have to accept that.
- Keep your baseline level of expenses low, but splurge once in a while.
- Increase your income by doing something extra you enjoy.
- Spend money to save time and eliminate negative experiences.
- Pay yourself first and crank your savings rate up.
- Audit your expenses from time to time to look for cost creep.
By cutting your expenses down, saving money, and using the surplus to invest your money into equities and other assets, you can be part of where the real growth is.