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 keep it up with the Jones’ 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. Now you do have to live somewhere (though I would never knock you for spending a couple extra couple years in your parents basement if you are able to bank that money!), but there is a big difference from spending $1500+ living by yourself downtown and spending $500 to live a little further out and living with a roomate, especially your first few years starting out. This is good advice anytime, but it’s especially important the younger you are. For one, 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 $1500 on rent) invested at 25 turns into $91,000 at age 55. That compares to $12,000 at invested at age 30 turning into $65,000. Just 5 years difference in starting to save, turns into a $26,000 come retirement time. At that’s for just one year of saving on rent. Second, the younger you are, the more likely you are to be flexible with your living situation. Spouses, kids, and life tend to happen the older you get. Things that limit your choices when it comes to housing.
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 have to finance it at 7% annually. That ends up being about $350 a month for 6 years, including the interest payments. So your $22,000 car actually ends up costing around $25,000. And that doesn’t even take the 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. You will see a lot of articles about how to save more, or different odds and ends you can do to make money. Almost everything in those articles – while it can be good advice – won’t come close to the amount of money you can save by making good choices about your big ticket items.