The 2 Things You Need to Cut Back on to Save Money, According to a Woman Who Retired at 38
This article originally appeared on BusinessInsider.com.
In her book, "Work Optional: Retire Early the Non-Penny-Pinching Way," she says there are a number of ways to fast-track yourself to financial independence and create support structures to stay on that path.
There are four key steps that create a formula for a fast savings progress, she adds: "The more you can maximize each one, the more you'll accelerate your pace."
Here's a closer look at each.
1. Underspend on housing.
According to Hester, reducing your housing expenses can free up hundreds of dollars a month, which can be funneled into investments. "No amount of couponing or thrift-store shipping will give you such a big savings boost all in one shot, so question your housing expenses before you nickel-and-dime the rest of your budget," she writes.
She calls underspending on housing her best money hack.
"We may have been spending obscene sums on dinners out and travel, but we did so while living in a dingy one-bedroom apartment in West Hollywood that we rented for years, even though our earnings increased and we knew we could afford to move if we wanted to," she says.
She suggests a number of ways to reduce housing costs — like downsizing, moving to a less expensive area, getting a roommate, or renting your home out on the weekends on Airbnb.
Consider Kyle Stimpson, who socked away 30% to 40% of his post-tax income for three years for a mini-retirement. He and his girlfriend saved between $1,000 and $2,000 a month by living in a small, non-renovated bedroom in a walk-up.
Hester says housing makes up half the bulk of where most people's income goes, so reducing this can help you save significantly. The other half is transportation.
2. Underspend on transportation.
"After housing, transportation is the next biggest expense in most households," Hester writes.
If you have a car, it's likely you have monthly car payments, and "even a paid-off car comes with ownership costs of several thousand dollars a year from insurance, gas, maintenance, and parking," she says.
Living in a walkable city or in a place with good public transportation can save money on commuting, but that's not feasible for everyone. If you must have a car, Hester suggests keeping it for a long time instead of upgrading, buying instead of leasing, buying used, increasing your insurance deductible for a lower premium, or driving less to save gas.
"The conundrum for many people is that housing and transportation have an inverse relationship," she writes. "You can live closer to the urban center and pay less for transportation but more for housing, or you can live in the suburbs where homes cost less but where you have to drive more."
She suggests taking a look at prices in your area to see if you can save enough in transportation costs to make it worth moving closer to the city center and paying more to live there, or vice versa.
Another early retiree, self-made millionaire Grant Sabatier, also recommends focusing on controlling the biggest expenses of housing and transportation, a better strategy than budgeting that can help double your savings rate.
3. Focus on increasing your earnings.
"There are two sides to the saving equation that affect how quickly you can save: how much you earn and how much you spend," Hester writes. Reducing what you spend is finite, she says.
"There's a baseline amount that you require to live comfortable," she adds. "You can't always cut more from your spending, but you can always earn more."
Hester suggests increasing your income by starting a side hustle, retraining for a higher-paying career, increasing your focus in your current career, negotiating for more money, or by going to work for yourself.
Sabatier is of a similar mindset: Increasing your income is more powerful than cutting back your expenses, he says, because you can cut back only so much. "This gives you the opportunity to invest more money more often, accelerating the rate of compounding and the growth of your money," he writes in "Financial Freedom: A Proven Path to All the Money You Will Ever Need."
4. Bank your raises, and increase your savings rate to match your increased earnings.
"Earning more and banking the increased earnings in investments is the absolute best way to increase how much you can invest year over year," Hester writes.
One of the best ways to do this, she says, is to "hide the money from yourself," also knowing a "paying yourself first." It's a classic strategy in which you save and invest your money before paying other expenses and splurging on wants.
You can do this by setting up your payroll to divert part of your paycheck to a high-interest savings account, setting up recurring debt payments, setting up automatic monthly investments to a taxable brokerage account, and setting up 401(k) contributions through your work plan.
"When you create an automated system like this to save, the growth will feel like magic," Hester writes. "You set up the system and then your only real job is to let time and compounding do their thing."
By getting in the habit of banking every windfall — such as a bonus — and constraining your spending at a constant level despite earning more, "your goal money will balloon and your savings rate will increase exponentially over time without it feeling like you're doing any additional work or sacrificing things you enjoy," Hester says.