If you’re you used to reading anything related to personal finance, you probably have ran into the age old income vs. savings rate debate. Basically, the community is split between those who think increasing income (i.e. negotiating a better salary, side hustling) and those who think we should just save more.
Both schools of thought are correct and I think we should find a way to do both and widen the income/spending gap. Unfortunately, both sides also have some extremists that helped promote two misconceptions.
The misconception created by “team income” claims that there’s no point in penny pinching. We don’t need to keep track of our expenses. As long as we can earn more, we’ll be fine. Team “Save more” believes that we should stick to necessities and not have any life.
In other words, the choice is between depriving ourselves of everything we care about or not worrying at all about what we’re spending.
In my opinion, as true as both philosophies are, their extreme versions are unappealing to me for obvious reasons. Thankfully, I understand that a realistic compromise between the two is possible and can play a big role in achieving financial success. To illustrate my point, I will go over a few decisions I made where it was just me reaching a middle ground.
The point is to show you guys that you can end up with a lot more in your portfolio by cutting expenses without necessarily giving up your lifestyle.
Saving doesn’t have to mean decreasing our lifestyle, and focusing on income definitely shouldn’t cause us to ignore our spending.
I work on a regular 9 to 5 schedule and I used to go out with co-workers every single work day, spending roughly $250 a month just on lunch. I slowly realized that the food I was eating was not only not very healthy, but the novelty and excitement that came with trying new foods every day quickly died off. Suddenly, I was eating out just to please my co-workers and maintain a lazy lifestyle.
Well, it came to a point where I had enough and I decided to cut it to twice a week. I was able to save some money and at the same time didn’t completely disappear in the eyes of my co-workers, which I didn’t want.
I now spend $100 a month on lunch outings and as a result increased my grocery budget by $60/month.
Monthly Savings: $90
What I gave up: nothing unless you count a few extra hours of cooking at home every week.
I’ve tried most of the major phone carriers and the common denominator is overcharging. Not only do I get penalized because I’m single and not sharing my plan with anyone, but the monthly bills are just stacked with unexpected charges. Before I started paying attention, I was spending almost $100 every month on my phone. For some strange reason, phone related expenses are among the easiest to ignore.
In order to stop that madness, I reduced my data allotment from 2 Gigabytes to 500 megabytes. I turned data off on all my apps except for Uber and Google Maps which are usually needed when we don’t have access to wifi. To entertain myself on my commute, I download all the music and podcasts that I like before I leave. I have an iPhone and Apple has a great app that automatically downloads episodes for the podcasts that I subscribe to.
Just doing that cut my bill to $65. And I wasn’t done.
Recently I decided to look into low cost carriers. I learned about MVNOs, which are cell phone companies that lease service from the big carriers at a discount and resell it to customers. Some of them also have the option of wifi calling, which is a lot cheaper. I plan to try one at the end of my horrible contract in a few weeks. Looking at the prices, I should easily get service similar to what I have now for less than $25/month.
Here is a list of MVNOs operating in the US. They all work with different carriers and their reception quality may vary depending on the area, so make sure to check that a company is a good fit before opting in. The good news is that many of them use no contracts so it’s easy to stop service anyways.
I tried an MVNO and had a horrible experience with them. The data didn’t work for some reason and the customer service was horrible. I had to cancel it after less than a week.
I looked into more MVNO options and unfortunately, most all the ones that are available only support networks that are not very good here in Boston. The rest of them were all subsidiaries of that one company I had the bad experience with.
As a result, I settled for a pre-paid plan with a major carrier. It costs $45 and I haven’t had any problems so far. The service is as good as what I had with the traditional overpriced plan and I’m getting the same amount of data (2 Gigabytes) for less than half the price. Plus there’s no contract!
Monthly Savings: $50-70/month
What I gave up: my 2-year contract. Translation: nada.
I am gonna be completely honest with you guys and admit that I share a cable subscription with my 4 roommates. At $150 a month (packaged with internet), it comes out to roughly $30 a person. Nevertheless, I plan on getting my own place eventually and there’s no way in hell I’m gonna be paying that much for television. As an avid sports fan, I looked into Sling TV and it looks like I can get all the live sports I watch for $20/month. And that’s all I need TV for honestly, as I have access to everything else with Netflix and Hulu. I’ll just get a standalone internet plan for $40/month or so. That’s a $60 total!
I will update you guys once I actually test Sling out, but so far it looks like it could be a great option.
Monthly Savings: $90
What I will have to give up: about 86 useless channels I never watch anyway.
P.S.: I did not include Netflix and Hulu in the calculations because I will keep them regardless of having cable or not.My expenses before and after the changes:
|Before ($)||After ($)||Savings($)|
|Cable & Internet||150||60||90|
If we add up the savings described above, we get a total of of $250/month. Assuming a 7% annual rate of return, that leaves us with well over $250,000 after 30 years!
I’m not saying that amount is enough to retire. my point is to show you that small changes that require no real sacrifice can provide a huge boost to our bottom line. Cutting costs does not always mean reducing our lifestyle, but it can have a big impact on our net worth.
This exercise proves that solely focusing on either cutting our lifestyle to zero or constantly increasing our income are both flawed strategies. A few simple and easy decisions can help our portfolio grow significantly without sacrificing anything in our lifestyle, and clearly small unnecessary expenses can add up to amounts that are significant no matter what our income is.
If I eliminated all TV service (cable, Netflix, Sling TV etc.), I would save more on a per month basis, but eventually I would get so sick of that deprivation that I would be at risk of going back to the expensive cable package. The same truth holds for the cell phone and the work lunches.
On the other end, ignoring that I was overpaying for no reason would cause a big hit to my portfolio. These bills, no matter how small they looked, were gonna have a compounding effect and I had to reduce them when and where I could.