I hate budgets. Like, seriously. I think budgets are the biggest reason most people do a crappy job managing their money—they hate budgeting, too. Most personal finance books and financial literacy courses are built around budgeting, but maintaining a budget is too much of a burden and puts too granular a focus on small purchases which, in the grand scheme of things, don’t have that great an impact on how much money you have.
Another reason I don’t like budgets is because they reinforce the idea of scarcity. They are designed to make you track every penny you spend to the point that you end up feeling guilty if you overspend or spend money on something you don’t absolutely need.
Budgeting is a lot like dieting: the more guilt you feel, the less likely you are to stick with it. You think, Well, I’ve blown it or This isn’t working, and give up. Or eventually you start to feel deprived, like you have to cut back on every little indulgence in order to stick to your blasted budget, and you become frustrated or bitter. Instead of becoming a tool for empowerment by encouraging you to be smart about your money, the budget becomes a source of anxiety and stress. Ugh. Budgets are the worst.
While budgets definitely work for some people and small purchases definitely add up, you’re not going to save the most money by cutting back on your small expenses. You save the most money by controlling your biggest expenses—namely housing, transportation, and food—and you can do that without the aid of a formal budget. In fact, just by optimizing your housing, transportation, and food expenses, you can realistically increase your savings rate by 25 percent or more, significantly reducing the number of years it takes to hit your number.
Remember Travis, my parents’ old friend who bragged about saving 5 percent a year for retirement? Travis will drive forty minutes each way in traffic to save $20 on a case of wine and prides himself on being able to track down deals like this. And yet both he and his wife recently bought new cars for at least $40,000 each. According to various car-buying websites, if they had chosen a two-year-old version of the same cars with less than 30,000 miles on them, they could have saved at least $10,000 on each car. If they bought five-year-old models with less than 60,000 miles on them, they could have saved more than $20,000 on each car, or $40,000 total. That’s like getting one car for free! You have to buy a lot of slightly less expensive cases of wine to save $20,000 to $40,000.
If Travis and his wife had invested that $40,000, it would be worth $161,549 in twenty years. If he’d forgone that $150,000 addition on his house and invested that money instead, he’d have $605,810 after twenty years. That’s a lot of money.
Again, I don’t want to pick on Travis. The new addition to his home looks great, and I have no way of knowing how much joy he and his wife get from it. I just want to make the point that we often spend so much time and energy worrying about how to save a few bucks here and there when we could save so much more with relatively little effort by considering a few key purchases. If you figure out how to save the most money possible on your biggest expenses, you won’t have to worry so much about the smaller expenses because you’ll have saved so much already. And if you invest this money and let it grow over time, you’ll end up with even more than what you had to begin with. This is the only budget you ever need, and it will help you dramatically cut expenses while increasing your savings rate so you can reach financial independence earlier.
The average American family spent $57,311 in 2016. This includes $7,203 on food, $9,049 on transportation, and $18,886 on housing. Those three categories alone add up to $35,138, or about 61.3 percent of the total expenditure. That’s a huge ratio, but when you subtract Social Security contributions ($6,509 on average in 2016), which Americans are legally required to make, from total average expenditure, the figure comes closer to 70 percent of their total spendable income. The table below shows the average American household annual expenses across categories.
|
2016 |
|||
|
Average annual expenditures |
Avg. American Household |
% of Expenses |
Savings Opportuniy |
|
Housing |
$18,886 |
32.95% |
HIGH |
|
Transportation |
$9,049 |
15.79% |
HIGH |
|
Food |
$7,203 |
12.57% |
HIGH |
|
Personal insurance and pensions |
$6,831 |
11.92% |
LOW |
|
Healthcare |
$4,612 |
8.05% |
LOW |
|
All other expenditures |
$3,933 |
6.86% |
MEDIUM |
|
Entertainment |
$2,913 |
5.08% |
MEDIUM |
|
Cash contributions (gifts, etc.) |
$2,081 |
3.63% |
MEDIUM |
|
Apparel and services |
$1,803 |
3.15% |
MEDIUM |
|
Total |
$57,311 |
100% |
|
SOURCE: United States Bureau of Labor Statistics
Looking at these numbers, you can see how reducing your top three expenses of housing, transportation, and food will allow you to save a lot more money. It’s unrealistic to think you can save much on personal insurance and pensions (which include Social Security) and healthcare, since those are relatively fixed costs. The rest are the smaller expenses like entertainment, apparel, and other expenditures that you can manage easily if you are mindful about your spending, but because they constitute only a small portion of your total expenditures, they’re unlikely to make a huge difference on your overall savings. Your small entertainment expenses are also probably the things that make you happiest.
And when you consider the future value of any money you save on your biggest expenses, the growth opportunity for savings becomes even greater. Reducing your monthly rent by $400 might not seem like much, but $400 over a year is $4,800. If you live in that apartment for three years, you will have saved $14,400. If you invest that $400 monthly savings over the course of those three years, it would be worth $16,558 at the end of that period. After twenty years of compounding at 7 percent, it will be worth $66,873 even if you don’t add a penny to it.
If the average American household could cut the $35,138 they spend per year on housing, transportation, and food in half, they could save an additional $17,500 per year. If they invested that $17,500 every year for the next twenty years (approximately $1,458 per month), they would have $835,143 after twenty years. That’s a massive savings toward your number.
Where can you save in each of these categories? If you move to a smaller apartment, walk to work, and cook at home, you could potentially increase your savings rate to 50 percent or even higher, cutting decades off the amount of time it will take you to reach financial independence. Below are some suggestions for saving money in these categories. If you want to get really creative, you can even figure out how to live for free. Yes, you read that right: free.
The cost of housing accounts for about 33 percent of the average American’s budget. Common wisdom is that you can spend between 30 and 40 percent of your pretax income on housing. I have no idea where this advice came from, but everyone says it and it’s what I was told when I started looking for my first place. But just because most people spend within this range doesn’t mean you have to. In fact, with a little ingenuity, you can spend a lot less, or even nothing, on housing.
Between early 2011 and late 2012, I saved $25,000 by moving from a $1,500-per-month apartment to a smaller $700 apartment. Sure, I had to move a little closer to a busy street, into an apartment half the size, and in a completely different neighborhood, but it still had two bedrooms, and it was more than sufficient for me. The money I saved from that one move is now worth more than $100,000 in investment growth. That was almost 10 percent of my entire number. And the money will continue to grow into the future. In thirty years if it keeps growing at 7 percent per year, the rental savings on that one apartment will be worth $761,225!
But my savings pale in comparison to those of Anita, who, in an effort to retire within five years, lived with roommates so she had to spend only $750 per month on rent even though she was making $175,000 a year at the time as a lawyer. Following the traditional advice of spending up to 40 percent of your annual income on rent, Anita could have technically afforded to spend $6,600 a month on rent, but instead she invested the $5,850 difference and was able to retire at thirty-three.
There are tons of ways you can save money on rent, some more obvious than others. You can move to a smaller apartment, a less desirable neighborhood, or an older building, or get a roommate, which has the added benefit of helping you save money on some of your other expenses. If you do decide to get roommates, you could actually rent out an entire house and charge your roommates a larger portion of the rent for being the one on the lease or for managing the house. Or you can move in with a family member or your parents, who might cut you a sweet deal on rent. Sure, no one wants to live with their parents forever (I sure didn’t), but if you are able to save money and invest the difference, it might be worth it to you. The more creative you get, the less money you can spend on your housing expenses.
Anita and I saved a ton of money by choosing to pay much less in rent than we could technically afford, but each of us still had to pay $700–750 a month. We all assume that rent is a necessary evil, but there are tons of ways to live rent-free. In fact, it’s never been easier and you don’t even have to live in a tent in your friend’s backyard.
The three easiest ways to live rent-free are by house-sitting, house-hacking, and bartering. Here’s how each one works.
House-sitting is really simple and requires no money. At any given time in the United States, tons of people are looking for someone to look after their house and their pets while they travel. And in exchange for being an awesome house sitter, you get to live for free. In the past, you could really do this only if you knew someone—a neighbor, coworker, or family friend—who was looking for a house sitter. But today there are dozens of websites where you can set up a profile and search for hundreds of house-sitting gigs near you. This means if you’re proactive, you can find a house to sit anytime or anyplace, even when you travel, or even house-sit full-time in the city where you live. Sure, you might have to jump from place to place, but hey, it’s free! In many cases, you might even get paid to house-sit, which is even better.
Some of the best house-sitting websites are TrustedHousesitters USA, House Sitters America, HouseCarers, Nomador, and MindMyHouse. All of them are super easy to use. Some charge a small membership fee that’s worth it to find free housing opportunities. Just set up a profile, get your background checked (most websites provide this service for free), and start searching for opportunities. Once you’ve done it a few times and have received good reviews, it will become even easier for you to find opportunities. In many cases, you’ll be able to stay in places you could never afford on your own, like huge houses in Colorado or million-dollar brownstones in Brooklyn. While it’s usually easier to house-sit as you travel, you can also find a long-term stay for a year or two if you are looking to stay in the same place. Yes, if you’re single, house-sitting in this way will be less complicated because you don’t have to worry about accommodating anyone else, but if you have a family, sometimes you can bring them with you.
If you want to get even more adventurous, you can live for free internationally by setting up free housing using websites like Workaway and Help Exchange, both of which allow you to connect with people globally who are looking for help in exchange for free housing and even food in some cases. You can find opportunities on organic farms or houseboats, for example, and there are other amazing opportunities to live somewhere else for free. It might take you a little time to find the best situation, but if you are mobile you can live for free almost anywhere in the world.
House-hacking requires a little more effort than house-sitting, as well as some money to get started, but if you do it right, you can save and even make a lot of money. All it comes down to is buying a piece (or multiple pieces) of real estate and renting any rooms or units you don’t live in to other people. By doing this, you get someone else to cover your mortgage so you end up living rent-free or even making money. Plus because real estate typically appreciates in value over time, the investment itself will increase your net worth and make it easier to reach financial independence.
And if you can manage to pay off (or have someone else pay off) your mortgage by the time you hit your number, you won’t have to worry about rent at all because you’ll own the property outright. How cool is that?!
The easiest way to start house-hacking is to buy a two- or three-bedroom apartment or house and rent the additional rooms out to your friends or other tenants; you should charge them enough to cover your monthly mortgage payment. If you prefer not to live with roommates full time, you can rent out additional rooms on sites like Airbnb. If your monthly mortgage is $1,000, you could rent out one room for $100 a night for ten nights to cover the cost and live by yourself for free for the rest of the month. Another benefit of starting this way is that two- and three-bedroom apartments tend to appreciate faster than studios and one-bedrooms, so if you want to buy real estate anyway, this ends up being a better long-term investment.
You can also buy multiple apartments or even entire buildings; it’s actually a lot easier than it sounds. Adam, a Millennial Money reader, bought an entire eight-unit apartment building in Chicago at the age of twenty-four and was not only able to cover the mortgage by renting to other people but also made an additional $2,500 a month in income. In chapter 11, I will go into more detail about the ins and outs of house-hacking and investing in real estate.
Bartering is as simple as it sounds. Become a nanny or summer groundskeeper or pet sitter in exchange for free rent. I know one guy who lived in the basement apartment of an elderly woman’s home for free in exchange for maintaining the property and running errands for the owner.
House-sitting, house-hacking, and bartering are all viable options if you want to live for free. Also, you don’t have to do it forever. A great strategy would be to house-sit for a year so you can save up enough money for a down payment on a house that you can then turn around and house-hack. By going from house-sitting to house-hacking, you can save money, acquire an appreciating asset, and eventually start getting cash flow from your rental income. Or, if you’re flexible, you can house-sit your way around the world forever.
Transportation accounts for about 19 percent of the average American’s budget. There are three types of transportation included in this expense category: commuting to work, commuting for day-to-day errands and responsibilities, and traveling for vacation. As I’ve already mentioned, the average American commutes 53 minutes a day, often in a car. If this is the only way you can get to work, then, well, that’s what you have to do. But a lot of what we spend on commuting is wrapped up in owning a car. Americans spend more money on car loans than student loans, taking out over $96 billion in car loans in the first quarter of 2017 alone.
The easiest way to save on transportation costs if you have to buy a car is to always buy used and to always buy the cheapest car you can. And if you can manage it, pay for it in cash so you don’t have to pay interest on a loan. The average monthly new car loan payment is $517, and the average length of the loan is over six years. Just imagine the impact of buying a used car for less than $2,000 cash and investing that $517 a month you save on a loan payment. You’d have $46,365 saved after six years and then $187,256 after twenty more years without adding another cent to the principal. That’s an exceptional ROI for buying a used car instead of a new one.
Of course, having a car costs money even after you buy it. As of this writing, the average cost of owning a car if you drive about 15,000 miles per year is $8,469 per year. That includes the cost of insurance, gas, taxes, maintenance, parking fees, and other expenses you might incur as a car owner.
If you factor all this in, the best way to save money on transportation is to not own a car at all. I myself am a huge moped and scooter fan. Not only do they cost a fraction of what a car does, but mopeds get almost 100 miles to the gallon. Plus they look cool and are fun to ride. The least expensive forms of transportation are walking, followed by biking. In late 2012, I moved closer to my office so I could walk to work and estimate that over the past five years I’ve saved more than $40,000 by not driving.
Public transportation is also a great option if you live in a city that has it. Trains, buses, and even ferries cost no more than a few hundred dollars a month and don’t require insurance or maintenance costs. Plus you don’t have to do the work of driving! You can use that 53 minutes each day to read a book or take a nap, listen to a podcast, or even earn some extra cash by selling something online or working on one of your side gigs.
If you have a couple of friends or neighbors who drive the same direction as you, then carpooling is a simple way to cut costs, one that might be even more affordable than public transportation. Another option is ride-sharing using a service like Uber, Lyft, or Waze. In some locations, ride-sharing might even be cheaper than owning a car. I know people in Los Angeles, one of the most car-dependent cities on the planet, who use ride-sharing services to get everywhere because they’re so inexpensive.
Get out and explore the world. It’s never been easier to travel for less. While travel-hacking takes some work, with a little effort you can travel for a lot less. The more you travel-hack, the better you’ll get. I have paid for only a handful of flights in the past seven years and have traveled to over twenty countries, often in business class, for free. Here’s how you can travel both domestically and internationally for less money, and in some cases, even free. Travel-hacking is all about finding the loopholes and using timing, strategic searching, airline reward points, credit card bonuses, and other promotions to reduce or eliminate the cost of travel.
Let me make a disclaimer here—travel-hacking is both an art and a science. It’s also always evolving, so the specific offers and loopholes will change frequently, but this will give you a good primer. The best way to get updated information is to check out travel-hacking forums online. Here are some of my favorite travel-hacking tips.
First, before you search for any flight, you need to make yourself untraceable by the airlines and travel websites so they don’t show you a higher price when you search again. Airlines use variable pricing and adjust it based on your browsing history. Simply turn off cookies in your browser and open an incognito browsing window.
Travel when no one else wants to travel. You can often save at 50-plus percent on flights, hotels, and everything else if you travel during the off-season. It’s easy to Google when the peak travel season is for any location. I always try to travel to the destination one to two weeks before or after peak season so I can still get the good weather, but with fewer tourists and for less money. Try to fly in on a Wednesday or out on a Tuesday for the cheapest flights.
Buy one-way tickets, which can often be cheaper than round-trip tickets. Look for a one-way deal and book it immediately when you find it (any deal will likely disappear immediately when you close the window). It’s often worth spending the extra time to look for the cheapest one-way ticket and not restricting your tickets to one airline. I frequently fly out on one airline and back on another, or into one airport and out of another.
Buy tickets one at a time if you are family, because airlines often have only one or two tickets at a certain price, so if you try to buy four tickets, you will immediately get bumped to a higher pricing tier. While it takes more time to buy one ticket at a time, it can save you a lot of money and is often worth the time. Be sure to make note of the seat you have chosen so you can pick seats for the members of your party together. You can also go back afterward and link your tickets together so one of your party doesn’t get bumped while the others are boarded.
Try to fly out of the biggest airport that you can, since the bigger the airport, the cheaper the prices are. It’s often worth taking a bus or train or driving to a bigger city to get a better flight deal. New York City, for example, is one of the cheapest cities to fly out of in the world. Get creative by looking at one-way flights into and out of different cities, airports, and airlines.
Set up a fare monitor using services like AirfareWatchdog, Skyscanner, and Hopper to get alerted when the fare for your ideal trip drops. Also track all of your miles and credit card reward points using a free service like AwardWallet.
Sign up for travel email newsletters from publications and travel search engines like Expedia and Travelocity. There are some crazy deals you can find if you are flexible and ready to act quickly when you get the email. There are also premium emails that you can sign up for that do the hunting and deal-finding for you. If you travel a lot or want to travel a lot, these premium flight deal- and travel-hacking newsletters are worth checking out.
If you want to travel-hack at the highest level, you’ll want to use credit card rewards and perks to maximize your free travel opportunities. You should do this only if you are responsible with credit cards and if you can pay off your balance each month. This is how I’ve gotten many of my free flights. Here’s how travel-hacking with credit cards works:
First you need to find your base credit card(s) (one for personal use and one for your business if you have one). Sign up for a really good travel miles/points credit card and use it to buy everything so you accumulate miles/points whenever you make a purchase. Since you will use your base card most often and will likely keep it for multiple years, you should find one that gives the best rewards and will give you multiple points for specific categories like three times points for travel expenses or five times for grocery expenses. If you travel a lot, get one that maximizes the benefit of travel spending. Most credit cards waive their fees for the first year and then charge between $99 and $500 for each subsequent year, but they often come with additional benefits that mitigate the fee. For example, my base credit card has a $350 annual fee, but I get a $300 travel credit against it and I can use it to get into airport lounges for free, so I end up getting a lot more value than the $350 I spend. Using my base personal and business cards, I accumulate at least 400,000 points/miles per year, which is good for over $5,000 in free domestic or international travel.
Next, start looking for promo mile cards, which you will sign up for to get the promotional onetime sign-up bonus (typically 40,000 to 100,000 miles/points) and then cancel afterward. You get the bonus when you spend a minimum amount, usually about $2,000 to $4,000 over the first three months of having the card. I hit this threshold by moving all of my expenses over to the new card and using it exclusively until I get the bonus. Most of these cards waive the fee for the first year, so you can cancel after you get the bonus and never pay a fee. Be careful with your credit score, since opening and closing multiple credit card accounts can lower it temporarily. Don’t do this right before applying for a mortgage or a loan. There are also certain restrictions on how many credit cards from one bank you can typically apply for. I apply for only three to five new cards per year, with a mixture of personal credit cards and business credit cards. Most years I get about 300,000 to 400,000 bonus miles doing this, which is another $4,000 to $5,000 in free travel per year.
Once you get the bonus, most credit card companies let you transfer the points/miles to your favorite airline. Some airlines give you better exchange value for your miles than others—1:1 is typically the best you can get, meaning you can transfer 1 credit card point for 1 mile. Once the miles have been transferred, you can start looking for super-saver deals, which allow you to get a ticket for the least number of miles. Sometimes there are promos in which miles are worth more or certain trips are discounted—like a flight from New York to London that’s normally 50,000 miles round-trip might be 30,000 miles, or a first-class ticket that’s usually 300,000 miles might be discounted to 120,000. The deals are always changing, and while it’s a pain to keep looking and reading forums for an alert, the savings can be massive. While I’m not nearly as hard-core as some travel hackers, I’ve routinely gotten first-class round-trip tickets to Europe, which normally cost $5,000 each, for around 100,000 miles. When I’m interested in going somewhere I start looking for travel awards five months before the trip. Sometimes they won’t be there one day but will be the next.
While this might sound crazy at first, it’s actually pretty easy to do. It takes a bit of time to learn and then do, but the time/money value can be insanely high and you get to explore the world. No matter what you do, make sure you spend only as much on your credit card as you can pay off every month. The value isn’t there if you have to pay interest on any carry-over balance.
You can probably cut your food budget by a lot, but you need to consider whether the savings are worth your time. If you’re making a ton of money at your full-time job or with your side hustle, it might not be worth it to go too far out of your way to save on food. You might not want to spend an extra hour shopping to save $10 if your real hourly rate is $50, unless of course you really like shopping or you have specific dietary restrictions. The same goes for using coupons, cooking, or eating out. This is also where the convenience and other calculations from the last chapter can be really helpful. And of course, not everything needs to be a cost decision—if you just really love cooking or shopping or cutting coupons, then do it!
Some simple ways to save money on food include buying collectively with your roommates or neighbors or growing your own food (yum!). While it takes more time to do the latter, you’ll get the added benefit of spending time outside and eating healthy, and if you grow more than you need, you can sell it or trade it for other food. When I was a vegan, I actually grew lettuce in my kitchen for an entire year and saved at least $30 a week. It also tasted amazing.
Another way to save money on food is to buy in bulk. But make sure you do your own calculations. I recently found items that, on a per-unit basis, were cheaper at Whole Foods than at Costco! Always look at that little number on the price tag that states how much an item costs per unit (typically per ounce) to do a one-to-one comparison. Buying in bulk will also insulate you from inflation, since prices on many staples go up over time. Another option for products you use often is to check out Amazon’s subscribe-and-save service, which allows you to save 10 percent by ordering regular deliveries of your favorite foods and staples.
Obviously food prepared at home tends to be cheaper and healthier than food you get eating out, but not always. If you do decide to eat out, there are lots of ways to save money with just a little effort. Join the restaurant’s meal club, search for sign-up promos for food delivery apps, hunt for “buy one, get one free” promos, split an entrée and an appetizer, always order water (restaurants make a ton of money on sodas and drinks), and so forth. Another easy way to save money at your favorite restaurant is to buy gift cards for those restaurants online through a discount reseller. This can add up to an immediate 5 to 25 percent savings.
Where can you save or completely eliminate your biggest expenses? Save as much as you can and invest the savings. Then save as much as you can on the smaller expenses without taking away the things you love. Boom. This is the only budget you’ll ever need.