A lot of personal finance experts have placed your Starbucks habit in their crosshairs and explained that eliminating your daily Starbucks cup of coffee can increase your savings by a little over $1,000 annually. I don’t disagree with the conclusion but you can make a much bigger dent in reducing your expenses and increasing the size of your investment portfolio by focusing on eliminating or reducing big costs such as these:
According to some recent figures, the average college student that graduated in 2017 had more than $38,000 in student loan debt. That number is pretty high but we probably know friends or family members that have student loan debt in excess of $100,000. Having this kind of student debt can really put a damper on your ability to become financially independent. Let’s assume a student incurs $50,000 in student loan debt with a 6% interest rate that is paid off over 10 years. In this case, the student would add a $555 monthly payment to his/her expenses and pay over $16,000 in interest payments over the loan term. I am not saying do not go to college but you should make sure to evaluate the financial consequences of your education before making a final decision on what is best for you. Assuming your undergraduate, graduate or other specialized education is not fully funded by mom and dad, you need to ask these basic questions:
- Which of the schools you can choose from is the most affordable per year based on tuition and living costs? Is there another school that is more affordable that you should consider applying to?
- Which of these schools will allow you to graduate without delays due to unavailable courses, etc.?
- Which school offers the largest scholarship amount or other form of low cost financial aid for you?
- Is it worth going to a local or junior college at first to reduce the costs of your overall education?
- Do I know what I want to do with my degree/certificate/etc. after I graduate and is the degree going to provide me with a realistic set of job opportunities after graduation?
My wife and I were fortunate to have much of our undergraduate education paid for by our parents. We will be eternally grateful to them for this head start. My wife was smart and graduated from college in three years to reduce the cost of her education. We both wen to graduate school and I went to graduate school after a period of working but I chose the school that offered me a full scholarship. My wife also chose a school that offered a scholarship to help her pay for her graduate studies. I worked during the first two years of graduate school to keep my income from drying up while I advanced my education so I could pay for my living expenses without incurring any debt. We could have gone to some more prestigious schools based on reputation for graduate school but my wife and I we evaluated our education choices with a financial mindset and as a result we had no student debt after graduate school. I recommend you perform the same kind of analysis. You can save tens of thousands of dollars in debt and interest payments if you evaluate your education with the right frame of mind.
I enjoy owning a car in California where the public transportation options are not always plentiful but I have always avoided having a significant car payment. Recent data shows the average new car loan in 2019 was over $32,000 and that average monthly payments exceeded $550. That is crazy considering your car depreciates in value the moment you sit in it. People are moving towards longer loan terms (5, 6, 7 or even 8 years) to afford the car they want to own or lease. At a minimum, consider the following to reduce/avoid a significant car payment that can hinder you savings/investment growth:
- Buy a car that is at least 30% below what you think you can afford and own your car for at least 10 years.
- Avoid a car loan if possible and do not get long-term financing to buy a car – if you can’t pay-off a car loan in 2-3 years you can’t afford it.
- Buy a car known for having low maintenance costs.
I have owned four cars over the last 25 years – a Nissan Sentra (new), a Toyota Tacoma (used), a BMW 5 series (used) and a Lexus GS (new). I avoided a car payment with my first three cars and I paid off my current car in 12 months. To be honest, I wanted to own a nice new car with my last car purchase but I made a poor decision. The new car feeling wore off in about 2-3 months and I could have put that money to better use in my investment portfolio. I plan to sell the Lexus and buy a more affordable used car in 2020. My wife has owned three cars over the last twenty years – a used Toyota Corolla, a used Toyota Avalon which we bought for $1,000 and sold over five years later for the same amount, and a new Honda CRV. She plans to own her current car for at least 10 years. We’ve always been able to plow more of our income into investments because we have avoided having a monthly car payment. You could easily save several thousands of dollars per year by making a financially sensible choice.
So you have met the love of your life and are ready to plan the big wedding to cement your promises to each other. You really want to create a unique, meaning expensive, event for all to witness. Well, the average cost of a wedding in the United States exceeds $35,000 and can easily exceed $50,000. This expense is for one day – a blissful day for sure – but if you have to use your savings or take out credit card debt, the cost to you can be significant. You say “it’s okay in our case because the parents are going to pay for it.” If you are lucky enough to be in that situation why don’t you avoid the big wedding and have a smaller and more economical ceremony and ask the parents to provide the balance of what they were going to spend on your wedding as part of a down payment on your first property? Someone close to me had the option for a (1) big wedding or (2) a small wedding and help with purchasing her first home. She chose the big wedding (it was an awesome event) and she has never saved enough money for that down payment on a single family home. Instead, her family owns a small condo that she’s not happy with. It’s been over 10 years and home prices have gone up a lot so the down payment required for her to buy the house she wants for her family is growing larger by the day. Find a way to avoid the big wedding cost and put that money to work for you instead.
My wife and I did a very small destination wedding that also doubled as our honeymoon and we later had a small reception at my parents’ house for friends and extended family where we kept the costs down. We could have afforded a larger, more expensive wedding, but we would have had to use a lot of our investment portfolio at the time when the portfolio wasn’t very large. Instead, that money stayed invested and kept growing. We understand that sometimes it’s the family that wants a glamorous wedding but we tried to not give into the pressure of having a large wedding that would please others but hurt our financial future together.
I’m a homeowner and have been one for almost twenty years. So I’m not going to advocate owning versus renting your home in this post. However, I am going to advocate selecting a housing option that meets your needs but does not exceed it. I have written on how much housing costs can vary depending on the home you choose to live in. Recent government data shows that the average American household spends approximately $19,000 on annual housing costs. This cost includes a mortgage or rent payment, property taxes, maintenance, utilities and furnishings and appliances. Per data from the U.S. Census Bureau, the average home size over the last 40 years has increased from 1,600 square feet in 1973 to over 2,600 square feet in 2016. Interestingly, the average U.S. household size has gone down during this same time period. If you can reduce your housing footprint by 20% (assuming the same quality of footprint per square foot) you could reduce your annual housing costs by thousands of dollars per year. Using the average of $19,000 per year in housing costs, if a household could reduce their housing footprint and costs by 20% then they could save approximately $3,800 more per year.
My wife and I have always had a housing footprint well below what we could afford. After first getting married we chose a very small apartment to rent but it allowed us to save a significant percentage of our income. Our first purchase together was a Real Estate Owned (REO) property that we bought from a bank and it was significantly less money than what we could afford. It was a small 3 bedroom, 2.5 bathroom townhome where we raised our two kids for the first several years of their lives. In 2016 we purchased a larger home (4 bedrooms, 2.5 bathrooms) but it was still significantly below what the banks were telling us we could afford to purchase. We were able to pay-off our home recently and part of it was due to the fact that we started with a lower mortgage amount, our taxes and other housing costs were probably 40% below the home we could technically afford, and we did not buy a lot of new furniture, etc. for this home. We were always able to save 30%-50% of our income because we chose a housing footprint well below what others told us we could afford and not in excess of what we needed to live comfortably.
Recent data from the U.S. government says the average American spends approximately $11,000 per year in healthcare costs. Health insurance premiums for a family can easily exceed $1,000 per month. My wife and I have been very fortunate to work for companies that have paid a large portion of our health insurance premiums. We don’t have that luxury anymore and our monthly health insurance premiums for the family currently exceed $1,800. We are in good health at this time so are going to be looking into high deductible plans combined with Health Savings Accounts. I do not have a great answer on how to reduce these costs just yet but it’s on my mind. After I complete my research I am going to write a separate post on healthcare expenses and how to try to reduce them.
Credit Card Debt
The average U.S. household has revolving credit card debt in excess of $6,800. It’s important to note that this amount is “revolving” debt which means it is not paid off every month and therefore these households are making monthly interest payments on high interest credit card debt. In fact, it’s been estimated that households with revolving credit card debt are paying an average of $1,141 per year in interest on this debt. This is where I will tell you if you cannot afford to pay your credit card debt in full each and every month then you should not be buying your daily Starbucks coffee. In August 2019, the average credit card interest rate per the Federal Reserve was just under 17%! My wife and I have good credit scores, and we use credit cards to our advantage, but our interest rate easily exceeds 10%! We therefore make a real effort to pay off our credit card balances in full each month. If the monthly balance for a credit card starts getting too high we will discuss why it went up and make sure we trim our future spending in specific ways. I am all for finding a good credit card to rack-up points, etc., but only if you can pay off the credit card balance each month.