How to save more money with less effort

Flickr / Hector Alejandro

In a recent post, I outlined how your savings rate is the single biggest factor that determines whether or not you will build wealth to achieve early retirement. In our household, we currently save well over 60% of our take-home income. The average American saves only about 5% of their income.

For most people, the knee-jerk reaction is that saving over half of their income is impossible. The perception is that saving that much money every year would require a massive income and/or a lifestyle of suffering and sacrifice. I can tell you from our experience that both of those preconceptions are completely false.

Very few people will ever approach this high savings rate. However, I don’t believe it’s because people can’t do it or don’t want to try. Most people simply aren’t focused on the right things.

There are tons of tips about how to earn more or spend less. But the reality is that most of these tips require significant effort and produce small results.

Today I will share the three things my wife and I have found most effective in developing a high savings rate with the least effort or perceived sacrifice. We aren’t successful because we regularly spend time or energy working on our savings rate. We are successful because we apply some thought and effort up front so we can spend little to no effort on saving day to day.

1. Invest in increasing your income

There’s an assumption, especially in the U.S, that getting more education will allow you to make a higher income. There is also an assumption that you can never have too much education. There’s some truth in both of these statements, but they overlook a key point: you can never have too much knowledge or too many skills, but you can pay to much to obtain them.

We viewed developing our skills and obtaining an education as an investment which would allow us to make more money. However, as any good investor knows, you make your money when you buy an investment. Nearly anything can be a good investment if bought at the right price. And nearly anything can be a bad investment if you pay too much for it in the first place.

The college class of 2015 graduated with an average debt of $35,051. Compare this to my wife and I who, despite coming from humble backgrounds, have managed to collect 3 degrees each with minimal debt. The debt was all from my wife’s first degree and was paid off within one year of her obtaining it.

Our degrees have paid off with higher incomes. We each make approximately double the income of an average American. However, within our respective fields, we have average jobs with average incomes. Still, we save far more than average among our peers. This is in large part because of the advantage of paying so much less for our education and being debt free.

Whether obtaining any particular degree, certification, or body of knowledge is a good investment is specific to each individual. However, the universal principal to follow is this: pay close attention to how much you’re paying to obtain the skills and education that allow you to make more money.

2. Control the biggest expenses

According to the U.S. Bureau of Labor statistics, the three largest expenditures for most households are housing, transportation and food. Therefore, to have the biggest impact on savings rate, it would be wise to focus on your spending in these key areas. But how exactly do you do that most effectively?

When we were starting our professional lives, we followed conventional wisdom. We bought a house we could afford with a conventional 30-year mortgage, thinking it was a good investment. We drove the same inexpensive used cars we bought while in college, avoiding car loans.

So what did our financial situation look like? I suppose it looked a good bit better than most people starting out, but it still was not pretty.

We realized our home was much more of an expense than an investment. After a year of mortgage payments, we still owed nearly 99% of the original amount of the loan. Nearly all of our mortgage payments went towards interest. At the same time, we spent even more money as well as using our time to upkeep this home we rarely had time to enjoy.

Transportation was still a major expense, too. We saved on our vehicle purchases, but were still paying out the ears in other areas. We were each wasting time commuting about 45 minutes each way in opposite directions every day. Our commutes produced big expenses every month in the form of gas, car depreciation and upkeep, and a bus pass.

Our food expenses were astronomical. With all of the time we spent working and commuting, neither of us felt like cooking. We ate take-out or restaurant meals four to six nights every week. I grabbed fast food lunches most days each week.

This lifestyle was not only expensive in the short term, but we quickly saw we were paying with our health and relationship. We were burning out quickly.

We decided to make some major changes. We sold our home only two years after buying it, moved to a different area, and started over. We made a few big decisions based on our prior mistakes:

1. We would rent a cheap place and save money until we developed a long-term plan.
2. When buying our next house, we would buy one we could afford with a 15-year mortgage and a plan to pay it off in less than 10 years.
3. We would try to optimize our work commute times.

Making just these few key decisions allowed us to magnify everything we were already doing right. It also corrected many of our other problems.

We paid our next home off in less than 8 years. We saved 22 years of interest payments compared to most people. At the same time, we automatically saved on all corollary expenses such as taxes and home maintenance costs that tend to be more with a more expensive home “we could have afforded.”

I cut my commute time to 20 minutes, while my wife cut her commute to less than 5 minutes. This saved us a tremendous amount on all of our transportation costs. At the same time, it freed up about an hour a day for each of us.

With this increase in time, we have both become good cooks and enjoy making most of our own meals. We typically eat at restaurants only a few times a month for social reasons. We now eat far healthier than we did before. We also spend far less on food without making any conscious effort to change our habits.

The key to all of this is that we never felt like we were sacrificing. While we drastically increased our savings rate, we also drastically improved our quality of life. We made a few key decisions with housing and transportation that led to dramatic savings. This made it much easier to save on food as well.

3. Be a DIY investor and tax planner

For a decade, we used a financial adviser because we thought being a DIY investor was difficult and extremely confusing. We felt taxes were an inevitability and never had a tax plan. In reality, this third principle was probably the easiest thing to actually implement.

Learning to manage your own money definitely does require some effort up front. However, once you master a few basic concepts, it’s really very simple to have massive impacts that increase an already high savings rate. We spend only a few hours in an entire year on our finances.

Our investment plan focuses on maximizing our return by limiting fees and taxes. We do this by choosing simple, transparent investments that we fully understand. We accomplish this by utilizing Vanguard index funds whenever possible. When not available in work sponsored retirement plans, we utilize the closest comparable investments that meet our objectives.

Tool Tip: Use the free financial dashboard from Personal Capital to track and analyze your investments (both retirement and taxable accounts).

Prior to learning to manage our own investments, we had all in investment expenses of 2% investing with an adviser. We paid over 1% on the investments in our retirement plans. Our all in investment costs are now .13% of our investments annually. We decreased our expenses by over 90%. These savings easily cut our expenses, many of which we never realized we had, by at least $10,000 every year. At the same time, the changes we made virtually guarantee improved investment returns by eliminating the conflicts of interest that come with professional advice.

Our tax plan is equally simple and effective. We first max out all tax-advantaged investing before investing in taxable accounts. We then utilize asset location to place the most tax-friendly investments in taxable accounts and the least tax-friendly investments in tax-advantaged accounts. We avoid selling any investments in our taxable accounts unless it is to our advantage for tax loss harvesting.

Maximizing tax deferral alone will cut our tax bill by $9,000 this year. We will also easily save thousands more by limiting capital gains taxes with these simple strategies.

Nearly all of this is done by automating our investing. We check for changes in tax laws once at the end of each year. We then set up automatic investments for the appropriate amounts into appropriate accounts and never have to think about it for another year. This takes less than an hour. We rebalance our accounts to our target asset allocation once a year. This takes about 2 hours. I check our taxable accounts quarterly for tax loss harvesting opportunities. This generally takes minutes.

The Common Thread

Are you trying to increase your savings rate? Are you working really hard to build wealth? Are you frustrated by lack of success? Step back and look at the common threads among our three principles.

We put in nearly all of our effort up front to work hard and make really good decisions. We focus on principles that have massive impacts on either increasing our income, decreasing our spending, or doing both simultaneously with minimal ongoing effort.

We focus on getting huge wins without giving up things we value. This allows us to never feel that we’re sacrificing to save money. When was the last time you found yourself longing to pay more taxes?  Do you ever dream of paying more interest payments to the banks for school, car, and home loans? Have you ever wished you could pay more fees to your financial adviser for advice unlikely to be in your best interest so he could retire earlier or send his kids to a better college? Do you ever get bummed that you can’t spend more time sitting in traffic on the way to work idling away your gas? If you answered each of these questions “never,” I agree!

I can guarantee you we are not successful because we work harder than others on saving money every month. Our success with saving is easy because a few key actions up front mean we don’t work on it much at all.