If I were asked what is the most important rule for personal finance, I would confidently say that it is “It’s not how much you make, it’s how much you save.” At the end of the day, your salary means a lot less than your saving rate. A person making $40,000 a year after taxes that lives frugally and only spends $20,000 is ahead of a person making $100,000 but spending almost all of it, in the retirement game.
Humans have a tendency to live at or above their means. Call it keeping up with the Joneses or whatever you like, but it is something that unfortunately too many of us fall into the trap of doing. And it’s the big ticket items that really do the most harm. The two most common big ticket items people, especially young people, tend to splurge on are rent and a vehicle.
You do have to live somewhere, but there is a big difference between spending $1,500+ living by yourself downtown and spending $500 to live a little further out with a roommate, especially your first few years starting out. This is good advice anytime, but it’s especially important the younger you are. The younger you are, the more time you have to let your money compound. $12,000 (the amount you save per year by spending $500 instead of $1,500 on rent) invested at 25 turns into $91,000 at age 55. That compares to $12,000 invested at age 30 turning into $65,000. Just 5 years difference in starting to save turns into a $26,000 gap come retirement time. And that’s for just one year of savings on rent.
Cars are the next big ticket items that provide an opportunity for saving. While you do want to avoid going too cheap and ending up costing yourself in repair bills, you can get a reliable used car for around $10,000. Getting more car than you need, especially if you have to finance, is an avoidable way to set yourself back on your path to retirement. Let’s take a reasonable example where you purchase a $22,000 car and finance it at 7% annually. That ends up being about $350 a month for 6 years, including interest payments. So your $22,000 car actually ends up costing around $25,000 — and that doesn’t even take into account what you’d be earning with that additional money invested over that time.
The moral of the story is that if you are able to live below your means, future you will greatly appreciate it. Almost everything you read about saving odds and ends won’t come close to the amount of money you can save by making good choices about your big ticket items.