Why saving strategies don’t work
Saving money is the most powerful way to get to Financial Independence (FI). However, spending money is fun and saving is not. So it is important to have saving strategies that are easy to follow and can be sustained.
I learned this the hard way when I started saving. I used to focus on saving every single last penny on every single item. While this did maximize my savings, it took up a lot of time and energy. Not to mention it was also boring!
I spent several hours each week trying to find grocery coupons, compare prices of items, determine which gas (petrol) station had low prices, etc. Saving money became a chore.
But then I changed my saving strategies to focus on five key elements:
Saving strategy 1: Focus where it matters
When I looked at my yearly budget, there were hundreds of items that I spent money on. It was getting tiring to focus on saving money on all these items. So like any good consultant, I started bucketing my spending into three broad categories:
- Costly: These are things that are one-off expenses and cost a lot of money. Examples include buying a car, booking a vacation, buying a new TV, etc. I spend a lot of time making sure I save as much as I can on these items. These are also “one-way door” decisions, meaning they are very hard to reverse. These decisions deserve a lot of time and effort to make sure the decision is right and that you are not paying more than you should.
- Recurring: These things may not cost a lot individually, but we buy many of these things – hence the overall spend is high. Each of our grocery bills is small, but it adds up to a big amount over the year. Recurring expenses like cell phone bills, insurance premiums, electric bills, etc., fall under this category. The beauty of these items is that if you make a change once, you benefit from that change every month – forever! For example, it took me some effort to switch my cell phone coverage to a cheper plan. But once I did, I now save money every month.
- Everything Else: I do not worry about anything else that does not fall into the above two categories. Typically that would mean not focusing on one-off expenses that are small. There are a lot of these expenses. There is no point spending an hour trying to figure out how to save money on a small purchase that will likely not recur in the future. Also, I have come up with a different strategy for this category:
Saving strategy 2: Manage demand
I noticed that I had a lot of expenses in the ‘Everything Else’ category. For example, I had an Amazon box outside our door almost every other day. Looking back, I am not sure what I used to buy – clearly, no one needs to buy something every other day. Most of the things I need are in the ‘Costly’ or ‘Recurring’ categories.
So why was I spending so much on the ‘Everything Else’ category?
I am afraid to look back at my Amazon shopping history because I will find a lot of wasteful consumption there. Since I do not even remember what I used to buy, these things were not that important, to begin with. I either used them for a while and then discarded them, or worse still, some of them I never even used!
After coming to this painful realization, I have changed my approach to the ‘Everything Else’ category. I do not buy anything in this category until I have waited a week. Whenever I want to buy anything, I add it to my Amazon cart and wait a week. After a week, if I still want that item, then I will buy it. But most of the time, after a week, I no longer wish to purchase that item.
Also, I realized that the real cost of buying something is more than just the price you pay for it.
Waiting a week is not that difficult since our daily needs are in the other two categories. Doing this simple thing has removed most of the wasteful spending from the ‘Everything Else’ category. More importantly, I do not have to stress about this category since the expenditure now is so tiny.
Saving strategy 3: Keep it simple
Another thing I noticed is that whenever my saving strategies were complicated, I ended up not sticking to them. Over time, I learned that simplifying things made the saving process more manageable (and less boring).
As an example, the Finer household spends more than 10% of its monthly budget on groceries. Since this is such a high-spend item, I tried hard to save money on groceries. I tried coupon clipping, price comparisons, buying different items from different shops to save money, etc. But all these things take up a lot of time and effort.
The result was that grocery shopping became a time-consuming chore. Yes, I was saving money, but I then started avoiding doing groceries.
Eventually, we got rid of all these things and decided to simplify the process. We started shopping at Costco for groceries. This simple change enabled many things – Costco has low prices, bulk items, store brands, and a host of other benefits. Plus, Costco also helps us save money on gas (petrol), travel, and other items.
Do we save the most money using this approach? No. But we save enough, and more importantly, it is a more sustainable approach.
Saving strategy 4: Be different
Getting to FI requires a high savings rate. The savings rate is the percentage of your income that you can save. Americans’ average historical savings rate is around 6%, which is not enough to retire early. The graph below shows that it will take more than 60 years for someone with a 6% savings rate to retire.
I had a savings rate of about 10% when I started my FI journey. That would have taken me more than 50 years to retire. When I started my FI journey, I was already in my 30s, so that meant I would be able to retire in my 80s!?
Traditional ways of saving money may have resulted in my savings rate going from 10% to 15% or 20%. But even with a 20% savings rate, I would have to work for more than 35 years.
This is where being different helped. Being different enables you to increase your savings rate to levels that traditional methods will not.
I am the only one in my friend circle that did not lease or finance a car. This meant I had to wait a while to save money to buy a car with cash. But being different than all my friends ends up saving me a lot of money vs. leasing a new car every three years.
Another example, we drastically reduced our meat consumption. Not only is it good for the planet, but it also reduces our grocery bill. Not just that, it has made us healthier, which means we could switch our insurance plan to a high-deductible plan – saving more money. Making a small change in one area can lead to several cost savings (and benefits) in other areas.
Saving strategy 5: Use your FI superpower
The great thing about FI is that you don’t have to wait until you achieve FI to experience all its benefits. Once you are on the FI journey, you can start enjoying some of the FI Superpowers.
As you get closer to FI, you have more money saved, and hence your superpowers will also increase. However, even at the start of FI, you can enjoy some benefits, as you can see from the example below.
Before I started on my FI journey, I used to have a low deductible on my car insurance. A deductible is what you pay “out of pocket” on a claim. For instance, if you have a $500 deductible and $2,000 in damage from an accident, your insurer would pay $1,500 to repair your car. You’re responsible for paying the $500 (which is the deductible amount).
I did not have a lot of savings before I started on my FI journey, so I had a low deductible. I did not want to lose a lot of money in case of an accident.
After a few months on the FI journey, I had saved up some money. I felt confident that I could go with a higher deductible, and I increased my deductible from $500 initially to $1,000. This resulted in a saving of about 5% on the monthly insurance premium I was paying.
After a few years, when I had more money saved (and my car was a bit older), I increased the deductible to $2,000. This resulted in further lowering of premiums.
In conclusion
I have used the above five saving strategies extensively on my FI journey. These strategies have helped me save money and get to FI. But more importantly, these saving strategies have helped me make the saving process easier and more sustainable.
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