I have shown in my investing guide that adding a small monthly amount to our portfolio every month can make up to a $500,000 difference or more over the long haul. But for most of us coming up with the extra $50, $100, or $200 may seem impossible. Why? We spend every penny we have as we build a life around spending every penny we have. We effectively build a financial bubble. And we don’t realize it because we are so used to it.
The Three Step Process
In order to break this cycle, we have to find those things we think we need but we can really do without. So I have created a three step process to getting that extra $50 or hopefully $200 out of our daily lives and into our pockets.
Step 1: From the list below, add up the savings that you are able to live without. Again, you may find others not listed in this. But don’t go overboard by sacrificing something that would cause a crisis, health or safety issue (be realistic).
Step 2: Once you finished, add up the items with your own true costs, as my estimates of savings may differ from person to person or place to place, and use this amount as the figure you can save each month.
Step 3: Have your broker take the savings and automatically deduct this from your paycheck each month. You may have to skip the first month so you can build that extra savings gap to make this happen.
The Savings List
1 – Call you credit card companies and negotiate a lower amount. Many are willing to help especially if they know that you will take you business elsewhere. Just a 5% savings on $10,000 of debt should save you: $41/month.
2 – Lower you car insurance. I went from one popular car insurance company to Geico. Shop around and find out what you can save, but I would not recommend sacrificing you current coverage to get more savings: Savings $40/month
3 – Downsize your cable. If you have digital cable with movies go to basic cable with no movies. In fact, I actually don’t have cable TV and just watch DVDs when I am in the mood to do something different (ps. Not having TV still hasn’t killed me yet): Savings $50/month.
4 – Decide on using solely cell phone and get rid on your landline. The cell phone is portable and comes in handy in emergencies. But if you are a “talker,” weigh the options. You can either negotiate with your cell phone company for a better rate if you telling them you are considering switching or take a look at Skype. Total Savings: $60/month
5 – Internet is a staple for me as it is where I get my news and do my work. As of January 2008, AT+T must offer stand alone DSL to all customer, so I don’t have to pay for local service to get DSL. My stand alone DSL is $20/month. I not only save on not having a land line, and then I save on not having internet cable as well: $20/month.
6 – Drink tap water instead of bottled water or sodas. The latest research is showing that diet sodas cause you to crave more sweets and thereby adding unwanted pounds. As for bottled water, the popular brands, including Dasani and Aquafina do not come from natural springs, but municipal water, same as your tap water. Why pay for something you get for free? Savings: $4/day * 30 days = $120 of savings a month.
7- Choosing you next car. Realize that getting a more expensive car that may make you look good in today will actually hurt you future. Give up that higher car payment for a more economical and fuel efficient vehicle. Sites like www.edmunds.com and www.consumerreports.com list cars that gives you more bang for your buck, as well as shows you how and when to negotiate. Savings: $150-$200/month
8 – Saving on gas is only good if you make it a habit to saving on everything else. Make sure you tires are properly inflated, you maintain the speed limit as a “heavy foot” burns more gas, and check out www.gaspricewatch.com or www.gasbuddy.com to see where you can get extra savings on gas.
Also, batching you activities is another way to cut down on gas. Instead of going out for every little thing, batch your errands together into one trip. Savings: $5/week or $20/month depending on your driving habits and distance
9 – Ask your employer to work from home if possible. Thousands of dollars are spend each year and up to 80% of your gas and car maintenance costs are related to driving to and from work. I recommend Tim Ferris’ book, the 4 Hour Work Week
10 – Buy generic versus branded items. Do those Prada’s or Calvin Klein’s make you more important? No! It just shows you that you can spend more, and anyone can do that. It takes more wisdom to spend wisely: ???/month
11 – Stop making impulse purchases. The majority of overpaying for an item happens when we make an impulse purchase. The easiest way to stop this habit is to think about the price of the object in relation to how much you will have to work to earn it. If you earn $20/hour after taxes and the ultra cool gadget costs $100, this means you need to work 5 more hours for the “man” to pay for that. Do you really want to do that? Skip the items you can do without and use popular sites like www.pricegrabber.com, www.nexttag.com and www.pricewatch.com to find cheaper deals on items that you need.
12 – Perform an energy audit with you electric company. Many electric companies will do this for free. Follow their suggestions and you could save $500 annually in your home energy costs: $42/month
13 – Use coupons. As goofy and “grandma” as it sounds, clipping coupons still works. Newspapers or popular coupon sites are still great sources for coupons.
14 – Change you supermarket. As recent Wall Street Journal article compared several well known supermarkets chains to a Wal-Mart Supercenter on the exact same food items, and found Wal-Mart to be significantly cheaper. Savings: $15 or more on full grocery shop.
15 – Other ongoing expenses. I have done this already with auto insurance, cable, phone and our utilities. Let’s try shopping around for other ongoing expenses such as lower homeowner’s insurance with the same coverage. Sometimes doing a monthly budget with last month’s bank statement in front of you is easiest way to find ongoing expense to renegotiate or eliminate.
16 – Use www.eBay.com, www.Craigslist.org, www.freecycle.org or have a garage sale to get rid of anything you don’t need or use. I have been able to eliminate a garage full of crap by selling stuff on eBay or Craigslist. If you choose to use Craigslist, sell your stuff for cash in hand (no checks or promises) and sell only in high traffic, public places, otherwise find another buyer. I made $800 doing this: that is equivalent to putting in $67/month for the year.
17 – Stop consuming alcohol and lattes. While I like a drink as much as the next person, spending $5 for every drink can quickly get you to $20 in no time flat. Lattes are the same thing but at a different time of day. Both suck a lot more money than you expect to pay because they have become habit for you, and can even sometimes be caused by peer pressure. I can assure you that your peers may not be there when you “have to work” at Wendy’s when your 75.
This may seem overwhelming, even stringent for some, but life comes down to the choices we make. Start with a few of the above ideas, and the gradually adopt more until you are able to save $50, $100, $200 or more a month.
The 50% Rule
If you still have trouble balancing today’s “wants” with tomorrow’s “needs,” the 50% rule should keep you straight. Once you core expenses (food, shelter, necessary clothing and bills) have been paid, you probably have enough monthly savings to put into retirement. I would take 50% and use it for investing and use the balance on whatever you like.
If you goal is to invest $200 a month, you need to save $400 in expenses. “That’s impossible!” you say. Well, if we added up just the savings from just these 17 ideas, we would have $783 extra a month. Now, I don’t expect everyone to save that much, but you have to make an effort somewhere to make this happen.
Ø Start with a simple budget and list every single penny spent!
Ø Cut back where you can
Ø Negotiate or find other companies who are willing to give you a better price for a comparable service on your ongoing expenses
Ø If you have credit cards, you can choose to pay them off first with your additional savings. In fact if you have debt, I would definitely use the 50% rule between paying off debt early and saving for the future.
§ $50 of savings = $25 you can put towards investing: $25 towards pay off debt or enjoy
§ $100 of savings = $50 you can put towards investing: $50 towards pay off debt or enjoy
§ $200 of savings = $100 you can put towards investing: $50 towards pay off debt or enjoy
§ $400 of savings = $200 you can put towards investing: $50 towards pay off debt or enjoy
If you happen to be far behind in the investing game and have finished paying off any debt, don’t waste your efforts with 50% rule. Use 100% now for investing for the future. To be able to build a million dollar portfolio, you must start as early as possible and you must contribute as much as possible. It’s never too late to make it happen!
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