Ramit Sethi: How to Save More Money By Doing Less
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Today I’m going to show you how to generate an extra $200/month, which you can use for savings, investments, or even spend it on something you love. But I’m going to challenge you to put aside some assumptions:
- Myth #1: We need to track ALL of our spending to save money by keeping a budget. Not true. By focusing on your two biggest discretionary expenses and relentlessly cutting them down, you reduce the Paradox of Choice and limit the overwhelming number of choices we each have every day.
- Myth #2: “There’s no WAY I can save $200/month!” Maybe, maybe not. Many people waste 20-30% of their money without ever knowing where it goes. But even if you can’t save $200, perhaps you can save $150. Or $100. Or $50. The point is not the exact amount, but the process of optimizing your financial system. (And it can be done: Thousands of my readers took the challenge to save $1,000/month.)
Every day, we wake up and have 50 financial to-dos we can tackle. Should we pay off debt or increase our 401(k) contribution? Should we adjust our asset allocation or try to get a side job? Ultimately, those choices become overwhelming and we invariably do the same thing: nothing.
Today, I’m going to show you how to focus on two areas — just two — and relentlessly cut down on them to generate significant savings. While your friends worry about 50 things (like saving a paltry $4 on lattes), I’ll show you the system I use to save hundreds of dollars each month on just a couple of expenses — letting me spend time on the important things in life.
How most people manage their money
We love to believe that more information is always better. But as behavioral psychologists have discovered, more choices are not always better. In fact, they can paralyze us with indecision. Barry Schwartz writes about this in The Paradox of Choice:
…for every ten mutual funds offered by the employer, the rate of participation went down 2%.
There are hundreds of examples in the behavioral-psychology literature of increased choice leading us to paralysis by analysis. This is why humans use stereotypes and heuristics to deal with complexity: because to systematically analyze, consider, and act on every decision we face every day would be overwhelming. This is not about being smart or stupid — it’s about adaptive human behavior.
So, what does this mean for your finances?
It means you should focus on fewer, more important things. And despite the personal-finance “experts” who have cried out for us to keep a budget for the last 50 years — has that ever worked? — I prefer to use techniques that actually work. I recommend you figure out your two biggest discretionary expenses…and then crush them and save hundreds of dollars per month.
I call this The Two-Headed Savings Approach.
The Two-Headed Savings Approach: How to use save $200/month by focusing on LESS
1. Pick the two most important areas that you need to save on. You know what they are — the ones where you overspend and it’s clear you could be spending less. For me, these are (1) eating out and (2) going out.
2. Figure out how much you spend on these areas. If you don’t already have a free Mint account, go there and import your transactions. It will take about 10 minutes to tell you how much you’re spending in any category. Remember — although this is the least-sexy part of the tip, without knowing how much you’re spending, how can you set a target for savings?
3. Pick a savings number that you want to target within 6 months. I recommend you try to reduce the costs by 25% to 33%. Those numbers are guidelines, but I’ve found that range to work well because it allows me to cut costs in a significant way while not completely depriving myself. So if you’re spending $1,000 in one category, cut it to $750. If you’re spending $200, cut it to $150 — over 6 months. Rather than trying to cut 50% of your spending in 1 month, it’s important to set smaller goals and actually achieve them
4. Set up a spending reminder to help you keep track. You can do this the low-tech way or the high-tech way.
Recommended way: If you already use Mint, click “Overview” >> “Add Budget” and enter your target savings number. If you’re over the targeted amount, Mint will automatically notify you.
Low-tech way: But maybe you don’t use Mint — no problem. Just set a calendar reminder for each Sunday to make sure you’re on track. For example, if your target spending on eating out is $375/month, that’s about $94/week. Each Sunday, just log in to make sure you’re roughly on track.
If you are, great!
If not, you know you need to cut spending in the coming week.
This way, you can consistently correct any overspending and hit your target goal.
Example: You want to cut down on eating out
Let’s say your current spending on eating out: $500/month.
Target: I want to save $125 per month, so my spending should eventually be $375/month. ($500 * 0.25 = $125. $500 – $125 = $375)
Month 2: $450/month
Month 3: $420/month
Month 4: $425/month (notice you can still hit your goals even if you don’t consistently go down each month)
Month 5: $385/month
Month 6: $375/month
You’ve just saved $125/month, which is $1,500/year. And that’s just for one head of the Two-Headed Savings Approach. Do the same for eating out, and that’s $3,000 per year. You’re now generating $250/month in cash flow that can be used to invest or save.
Invest that $250/month for 20 years and you’ll end up with around $143,000 cash (run your own calculations). Is it worth it?
The keys to the Two-Headed Savings Approach
- Don’t try to do everything at once. Nobody can manage saving money on 15 categories — you just spread yourself too thin and don’t even make a serious dent in your savings amount. I’d rather save 30% on two areas than 5% on 10.
- Why a 2-headed approach? Why not just one? I learned this from a professor at Stanford, who told me to always be working on two projects at work, so if one stalled, you’d still be moving forward on something else. Sometimes, you may have unexpected expenses come up: If you’re saving on eating out, and a friend comes to visit from out of town, it’s going to be tough to keep your costs down. But if you have two savings tracks going on in parallel, you’ll still be able to make progress on your overall goals. And because you’ve extended the timeline out to 6 months, you’ll probably be able to get back on track.
- Slow down. When people come to me and tell me they’ve cut their spending on clothes from $500/month to $10/month, I just sigh and stare at them, blinking in unwavering hatred. You can’t make rapid behavioral change that stick in such a dramatic way. I’d rather extend it out, slowly, over six months and guarantee that you stick with the savings amount. I’ve written more about this here: Set Smaller Goals, Impress Friends, Get Girls, Lose Weight. You’ll see how you can apply this approach to virtually anything that requires behavioral change.
- Stop feeling guilty! Forget about those $1 bags of Skittles you buy or $4 lattes. By focusing on the Big Wins, you’re saving significant amounts of money. As long as you’re hitting your savings goals, that’s the most important thing. Note: The biggest wins typically come from subscriptions, like cable. If you can cut $30/month off cable, that’s roughly $400/year. (How? Use the A La Carte Method.)
- This is a good example of being goal-oriented. Instead of randomly trying to save on expenses, by setting a goal, your tactics become very clear. If your four friends ask you out to dinner and you’re behind in your savings goals, you can easily say, “Sorry guys, but I’m trying to save money and I’ve got to skip this one. But I can meet you afterwards.” In other words, when it comes to dealing with others, focus on the plan and not the person — and work within the savings system that you’ve created.
- Now that you’re going to be saving $20, $200, or even $1,000/month, make sure you put that money somewhere where you won’t spend it. I recommend you store it in your savings account and consider investing part of it for long-term growth. Whatever you do, don’t leave this new-found money in your checking account.
Lots of people wonder what they would do with a 5% or 10% raise. By implementing this, you’ve just gotten yourself a significant raise. What will you do with the extra cash flow each month?
The Two-Headed Savings Approach is one part of the bulletproof financial system that I outline in my book, I Will Teach You To Be Rich.
Ramit Sethi is the New York Times best-selling author of I Will Teach You To Be Rich. He writes at http://www.iwillteachyoutoberich.com.
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34 Comments so far
leave a commentExcellent tips, I recently opened my Mint account last week and will be cutting 25% for my eating out budget. I’m trying to my best to buy groceries and bring a lunch to work instead of going out. I’ve been sticking to it thus far.
These are some of the most applicable tips around, especially in reducing spending eating out. . . I try to make small deposits when I find myself saving money or saying “no” to something. That way my savings goes up and I feel instantly rewarded for my discipline.
Thanks for the clarity and focus of this post. The examples are very helpful for making this a practical approach. Keep up the great work!
I love this article because it’s not just about finance. It introduces approaches which can be applied to improve all areas of life. Big ideas & goals are nothing without taking action and the proper motivation to continue. Being an intense and passionate person, I’ve always needed that big mountain to climb to motivate me to tackle any project. The challenge there is being too overwhelmed to even start or getting too burnt out to ever finish. Now I’ve come to realize that I just need to keep focused on taking small, clear steps so that I will one day find myself at the top of the mountain.
Thanks for using some realistic data. It’s great seeing those numbers – they feel more in line with the spending patterns that I’m familiar with, and know are actionable. That’s a great plan to take it slow, reducing expenditure bit-by-bit.
Too often on MSNBC or other less useful sites use unrealistic examples, like “cut your going out budget to $0 next month,” and I know that with my lifestyle and set of friends, living in a big city, there -will- always be expenditure in these categories – but it can be managed.
Thanks!
Its a great explanation.But i never done that way to save my money.Just make it simple and straight to the point.I don’t think saving money can be that technical with sorts of data and graph.Why not make it simple, at least everyone can understand and apply it.
Great Post Ramit!
I have read a lot of your stuff before but have honestly tended to forget about your knowledgeable site. Definitely going to have to subscribe.
Have a good day and thanks again!
Dave
LifeExcursion
I love all of Ramits tips but remember that reducing the amount you eat out increases your grocery bill so don’t forget to calculate that in. Sure eating at home is cheaper so you will still save something but the delta is not as large as one may first think.
SWAG Calculation
Eating out $25
Cooking the SAME MEAL at home $15
Actual Savings $10 (for your time to shop, prep, cook and clean)
Was it worth $10 for the experience of enjoying the company of others?
Eat a lesser quality meal at home and save even more!
What in god’s name are you buying that costs 15 dollars for a one-person meal? You can eat VERY well for 3-5 dollars, and usually have enough leftovers for lunch the next day. One could easily have several types of greens, some carbs, and a really nice piece of steak, fish, etc, for way under 10 bucks a day.
Then again, anyone who thinks that cutting down 500/mo on costs of eating out.. Yeah you don’t need to be worrying about saving money, or you have such massive spending problems this blog won’t help you at all.
Dude, saving money is GOOD. I like saving money! The more I save, the better!
RT
http://www.online-anonymity.net.tc
I enjoyed your article and I completely agree with you. Thanks for your insite!
Eating at home is not just cheaper but healthier. I just eat out occasionally for a reason. If you wanna save, the first thing you do when you get paid, before paying any bills is send some money to your saving account. That way you wont spend it. You can start with a small amount and see how you make it. The next time a little more until you find your balance. Then when you want to go on holiday or buy a car you have the money there.
Knowing where you spend your money is essential
Reducing costs only gets you so far. And it won’t make you rich. Why don’t you share some wisdom that isn’t obvious? Save money by spending less. WOW.
Dude, saving money is GOOD.
Excellent Post. Ramit has some great ideas. Mint.com + Ramit = More money for your future! Thank you.
RT
http://www.facebook.com/brianmiller81
Love it. I see what you mean in my own life – I sometimes avoid making financial goals and implementing savings techniques, mainly because I come up with some complex ideas and plans that just end up not being worth my time.
-DC
And this is why I’ve stopped reading Personal Finance blogs. Now, I can only speak for myself. There are some people out there that spend money every month and are totally oblivious to the fact that they may spend $1000+ on dinning out. For these folks, these tips are golden.
Personally, these won’t work for me. There are things that I can cut back on, but they would only amount to $80 tops (and that’s with me becoming a hermit). There’s no Cable bill, the apartment is already laid out with CFL bulbs everywhere, low flow shower heads installed, very rarely eat out, Hulu.com and Redbox instead of going to the movies, exercising every gas saving tip I can find, etc.
Rent, Student loans, and Auto Loans make up my highest expenditure.
So, any tips for someone like me?
Baz L You are the man to follow. How in the world these tips can help anyone is just an indication of the wasteful lifestyle of so many. Please write a book. They need to hear from you.
We were in a house we couldn’t afford. I was in charge of budgeting and my focus was cut all spending so we could pay our mortgage. We’re renting that house out now so I’ve changed my outlook. I’m trying to get to a point where 50% of our income goes to mundane, pay every month, set amounts like rent and insurance. And then 30% can go to eating out, clothes, toys, or whatever. 20% goes to investing, savings or paying off debt (paying off your highest interest first). If you can’t get your rent and car loans into that 50%, consider relocating or settling for a cheaper car.
I think that what is said in the article has a lot of merit. Why worry or feel guilty about a visit to Starbucks when you can save so much more elsewhere?
I’ve been working towards reducing my spending for a time now. There are two thing that I’ve done that provide significant savings. First, I no longer have a cable service. For some this isn’t an option. For me it works and that is most likely due to the fact that I’ve found an alternative method of TV programming. I view shows via my laptop. Not on my laptop though. I use an S cable hooked directly to my big screen and there it is. I use an alternate set of speakers that I had on my desktop computer and I have all the sound I need. There are many many sites that offer good programing. I have about 8 place I can go to and watch movies, news, regualr tv shows etc. I don’t miss Brian Williams every evening because the news is available on their website. Great. No more cable. I’m saving about $75 month or $900 a year.
Next, I dropped my landline phone. Today you really don’t need it. My cell phone gets great reception and it works just fine. Why have a landline? Oh, faxes. That is true. However, what you can do is use your scanner to scan the item you want to fax. Save it on your computer and send it in an e-mail as an attachment. That seems to solve that problem. That was the only issue I had. I save my monthly phone expense and that is significant to. I always hated paying all of the user fees, and taxes on the bill each month anyway. Now I pay only for my cell phone.
So, there are a couple of ideas that might work for some of you. True, not for everyone, but probably for most people.
This is a great post. We’ve been a user of Mint since last fall. It’s helped us in a couple areas:
1. Our son’s savings and checking account are in Mint. We’ve had solid family conversations about spending habits. Mint has been a great barometer when spending got a little high. He has learned to be more of a saver as a result.
2. We started using a lot of coupons and other discounts. In fact we started a website that has gained more popularity than we expected. http://valuedining.com.
As we watched our spending in Mint we wanted to control our discretionary spending. We reduced our eating out to 1-2 times per week – versus 3-4. We almost exclusively use coupons and discount gif cards. The result: $250/ month savings.
Mint is an awesome tool – and we are big fans.
Ramit, you are amazing. I never used to track my spending until I read your book and knew about Mint.com. Now I love it. I like to look at all my past spending and see where my money is going.
Good going Mint and Ramit. Keep us educated!
Mint is just fantastic…
Thanks Ramit. This is good advice and more people need to be made aware of these facts. Some may think “spend less, save more” is stupid and obvious, but in reality tons of people are totally unaware of how much they spend. Anyone who thinks spreading knowledge is dumb needs to re-think their way of life.
Do You realize that you are unwittingly contributing to the contracting of our economy? If every adult saves $200 a month by not spending money (assuming that they DO have the money, it’s not a loan or debt), it’s $2400 a year. Multiply that by the adult population and hey presto, your country’s GDP has shrunk by that amount! How much? Assuming that there are 100 million adults in the US, we have $2400 X 100 million = $240,000 million which is about $240 billion, say one third of the first stimulus package.
So you’ve just killed one third of the bearded Ben’s stimulus by one blog entry. Waaaa!
So the green shoots will become brown, wither and die.Do you really want this to happen? It is known in economics as the paradox of thrift. What may be good for the individual may not be necessarily good for the country. Unbelievable but true.
@Sam, yes people saving money does reduce consumption, but not this article is about people who need to save money doing so, not people with money to spend.
Also… if you read the article more carefully you would have noticed that SAVING the money was not the only goal, but having the money to save OR spend on something big that you want.
Finally… the vast majority of our national consumption comes from the top end of the upper class. While someone saving $250/month does have a small impact on the economy, it is a multi-millionaire deciding not to spend $250,000 on a new yaght that has the much larger effect on the economy (obviously). The danger of excessive thrift is not from a freshly graduated college student saving $100 / month in order to make larger payments on their student loans.
This article is full of very sound advice.
I’m sorry but that is a really ignorant statement. What are you basing that off of?
Anyway, saving means that banks are more secure and will loosen up their tight credit which is what is causing a lot of the problems right now. Which was caused by overspending in the first place.
And honestly, if Ramit can really “kill one third of the bearded Ben’s stimulus”, then he should be our next president for solving our economic problems
Great suggestions, thanks to mint which helps me layout my financial plans, I have been doing lot of cost cutting these days but at the end of the month it looks like what ever I make, I end up spending on bills, groceries, utilities etc (just hand to mouth existence) Unless I get a raise in the salary I wont be able to save… ???
“When people come to me and tell me they’ve cut their spending on clothes from $500/month to $10/month, I just sigh and stare at them, blinking in unwavering hatred. You can’t make rapid behavioral change that stick in such a dramatic way.”
I tend to strongly disagree with this statement. People are perfectly capable of sticking to such a plan if their priorities shift. For example, my husband and I are saving for a vacation – so, our extra cash goes into the vacation fund and we get by just fine with $40 a month for clothing expenses. We live on an extremely structured budget with allocations for car maintenance, home maintenance, entertainment, etc. We’ve been on this budget since the beginning of our marriage and have never had any kind of argument about money. I see where your coming from, but I disagree and believe people can dramatically change their habits if they make a commitment to a bigger goal and stick with it.
Let’s Face It: Eating out and buying groceries should be categorized under food.
Everage person uses abot $ 15.00 a day, that will make it three meals $ 5.00 a meal. If any body spends an additional $ 500.00 on eating out would weigh 300 Lb.
The point is, you are spending already $ 450.00 on food. Use the other $ 50.00 for entertaiment.
In other words, if your budget for eating is $ 500.00 there is not much room to save.
This guy is right as far as he goes but what you need to do is to figure out “what it costs you to get out of bed each day”(c). Don’t cut down, cut up…..Look at Clemba.blogspot.com
I love the two phase approach. You can apply it to everything. It’s great!
Love your tips! Dining out eats up alot of my cash…no pun intended
)
Well you mentioned behavioral finance first, so I am going to remind you that the guaranteed way to save this money is to have it automatically taken out of your account before you ever see it. You will begin to automatically adjust your spending because you know you have less…each month have a little more taken out until you have your monthly goal of saving 200. No disicpline required, just subconscious adjustments.
True that we are bombarded with too many choices these days. Your Two-Headed Savings approach is a bit different from conventional budgeting but i can see that it would work well for a couple of good reasons.
It is a simple approach, it makes you set clear goals and it will keep you focussed on getting some runs on the board with starting to save money.