Oct
12

A new saving mentality: Some big financial moves to consider

Did you know that the average American household only saves $6,000 per year. That's alarming when you think about people’s ability to retire but even worse, millions of people are one financial disaster away from bankruptcy.

And that makes for the type of worry that travels with you all day. From your first bite of breakfast in the morning to your last episode of Netflix at night, there’s always a nagging feeling to save more.

So today we will lay out a few methods that can have a large effect on your situation without hours spent hunting for deals.

When it comes to saving money, most people simply ask themselves “Where else can I cut back?” Then they start by:

• Creating such a strict budget that limits nights out.
• Couponing to nickel and dime their grocery bills down.
• Skipping a morning coffee to save a little bit every day.

Those are all good things but trust me, I've never seen someone save a lot of money with coupons. Taking conscious effort to do all these absorbs not only your time but also distracts you from the bigger choices which can have a bigger impact.

The benefits of focusing on the big saving opportunities

The biggest benefit to focusing on the high value items is that you have fewer decisions to make and fewer places to make compromises. This can:

• Improve your quality of life by not constantly needing to look for a deal.
• Create large changes to your savings quickly.
• Save some time by skipping weekly tasks (like couponing).

Once you start focusing on the large savings factors it can change your entire mindset towards saving. Here are our recommended places to start:

Save money on your living space

After working fulltime and meeting up with friends, you will spend most of your home time in bed.

If you own a large space and consider how much is not used to its full potential, you will likely realize that getting a roommate is an attractive proposition. The financial equation is certainly quite compelling.

In Los Angeles, the average rent for a two-bedroom apartment is $3,144. And if you split this with your roommate, you save $18,864 per year on rent. It’s hard to ignore that.

Likely you would need to move any excess furniture into storage to make your place more attractive but that won’t cut into your savings very much. A small storage space around $1,200 per year which still leaves $17,664 per year.

What holds people back?

Having a roommate is not everyone’s cup of tea once you pass your early twenties. But you can use the same principles and still save money more comfortably by:

• Having a temporary tenant (like your friend’s cousin who needs somewhere to stay while they look for a house).
• Short-term rentals when you travel.
• Convert your house into a duplex if you have the space.

The key is to first remove the simple hurdle of emptying out the space then you can really plan your rental out.

Save money on your mortgage

I just refinanced my mortgage. There were a lot of papers to sign but in the end the efforts have been well worth it and you should look into yours as well.

The interesting fact about mortgages is that the values are so large that even small effects can have large long-term savings. My five-year term was up, and my interest rate was going to increase. So, I started looking for a lender that could give me a better deal. In the end, I found one that only offered me a 0.55% reduction on my $480,000 of mortgage principle.

While it sounds quite small that 0.55% difference saved me $31,500 over the remaining 20-year loan term.

The best part was that getting a quote to see what savings were available to me only took a few minutes. Finalizing all the paperwork took many hours but I knew what was available immediately.

What holds people back?

Most people don’t get how much those little numbers add up. Maybe they may think that the small difference in rates is not worth their time, maybe they have a strange sense of loyalty to their bank, or maybe they’re afraid of opening a can of worms by trying to switch.

“If it ain’t broke, don’t fix it” is the general mentality.

The monthly savings in my example is around $130. Doesn’t seem like much, does it? But it’s $130 every month for 20 years. Use that money to make other smart money moves like some simple investing, tax-sheltered savings or savings for your child’s education to make this even more valuable over that 20 year term.

Save money on your student loans

If you don't have a large mortgage, it is likely because you have excessive student loans and can't qualify for one. However, you can apply the same principles on refinancing a mortgage to your student debt… only the interest rates are even higher.

If you went to med school, you have likely accumulated around $200,000 in debt at federal interest rates of 6.25% over 10 years. Paying this off would eat away a considerable part of your monthly income: $2,238 per month with $68,504 in total interest! Just like with a mortgage refinancing can have some big effects. Currently rates are at 2.3% which means you can save $44,551 over that 10-year period.

So why do most people not do it?

For those of us with student loans, the monthly payments are such an integral part of our expenses that most people forget they have other options.

Well, it is possible to have that amount halved. It would certainly make it a little easier to balance your budget. Just start by doing a little research and just get a quote. You’d be surprised at what’s out there!

Here’s the real key to saving:

Don’t look at saving money as just a cost-cutting measure and don’t chase every saving method that is out there. You only have so much time in a day and even when it comes to saving and budgeting you need to prioritize.

Look over your monthly expenses and see what the big-ticket items are. If your groceries are your biggest expense every month, start there. If it’s car payments, consider downgrading. Without a plan of where to focus you will likely fixate on the wrong items. The above items are probably at the top of your list.

Unless your lifestyle is already over-inflated, cutting back on random items won’t take you very far. Do, however, ask yourself what actions you can take right now that will reduce those large monthly expenses.

Finally, once you have improved your monthly savings rate, be sure to do something with that extra money. Don’t spend it. Pay down some debt, invest or create a nest egg but don’t view it as ‘available.’

If you focus and follow through, then in no-time that nagging feeling that has always been telling you to “save more” will start saying “good job.”

By Leif Kristjansen
Leif is the co-founder of FiveYearFIREescape.com where he and his wife write about finances and early retirement for busy people.