Updated: Jun 13
If you want to save money you need to spend less money than you make. That means that If you want to save more money you need to focus on your big three expenses
The three biggest living expenses, or as I call them “the big 3” are;
Housing, transportation, and food account for more than 60% of the average household budget. I am assuming that is more money than your daily coffee run costs. If you are looking to save more money, the big 3 is an excellent place to start.
Don't sweat the small stuff
One of the most common pieces of financial advice I hear is to focus on cutting out small everyday purchases as the best way to save money. The argument is that seemingly small and routine purchases like buying coffee can add up to large sums over time.
While it is true that cutting out small purchases and spending less money on “stuff” can add up to meaningful amounts of money over your life, these small purchases are not costs you need to control if you want to save money.
If you want to save money, you need to start with your largest expenses in life, not your smallest.
Let’s discuss why making smart choices around your big 3 living expenses is the easiest way to save more money.
Housing is most people’s most considerable expense.
Housing costs account for 37% of after-tax, household income in America. That means 37 cents of every dollar you bring home goes towards housing costs.
Let’s focus on the cost of owning a home because it has a lot more hidden costs compared to renting.
When homeowners budget their housings costs, they typically account for predictable expenses.
Homeowners Association (HOA) fees
Utility bills like electricity and heat
There is a whole other category of unpredictable costs associated with owning your own home that most people fail to include in their budget.
One of the major perks of renting is that when something breaks or needs to be repaired, you can call your landlord.
When you own a home, you are on the hook for those repair costs. The average homeowner spends $2,016 per year or $168 per month on general maintenance costs.
A common rule of thumb is for homeowners to budget at least 1% of the value of their home for annual maintenance costs. If your home is worth $400,000, you will budget at least $4,000 per year or $333 per month for home repair costs.
As a culture, we are obsessed with home renovations, and it is having an impact on our ability to save money. One report found that in 2018 homeowners spent an average of $6,649 on home renovations. That works out to nearly $555 per month.
Remember, these are renovations and upgrades. So, that $6,649 is in addition to the $2,016 spent on simple home maintenance.
Other hidden costs of homeownership
There are a lot of other costs associated with owning a home that people tend to forget about.
The average homeowner spent $638 or $53 per month on these services in 2018.
According to the U.S Bureau of Labor Statistics, the average American household spent $9,761 or $813 per month on transportation in 2018. That works out to 17.6% of take-home pay. That number is much higher for families that own a car.
I’m not a “car guy” and have never really understood the appeal of car culture. So I have never been able to wrap my head around why people spend so much money on their cars.
While housing accounts for a larger share of household spending, cars are a bigger money pit. If you buy a house, you are going to spend more money on your home. However, you will at least own an asset that is likely to increase in value over time. When you buy a car, you are spending a lot of money on something that will eventually be worthless.
The monthly costs of buying a new car
When you by a new car, here are the average monthly costs to keep that car on the road.
Car payment: $555
Registration fees: $12
The total monthly cost of owning a new car: $916.
Once you throw in parking, the monthly cost of car ownership easily climbs over $1,000 per month.
If you think your monthly car payment is the largest single expense of buying a new car, you would be wrong. The single biggest cost of new cars is depreciation.
Depreciation refers to the value your car loses the second you drive it off the lot.
What is the average cost of depreciation of a new car? According to CarFax, a new car depreciates by 20% in the first year you own it and 10% each of the next four years.
If you bought a brand new, $40,000 car, it would lose $8,000 in value in the first year after you bought it. That works out to $666 per month.
Spending more money than you need to on a brand new car is an easy way to drive your finances into the ground.
According to the U.S Bureau of Labor Statistics, the average American household spent $7,203 or $600 per month on food in 2018. That works out to nearly 13% of take-home pay. The total money spent on food includes food at home (groceries) and food away from home (eating out).
$4,049 or $337 per month was spent on groceries.
$3,154 or $262 per month was spent on eating out.
Reducing spending on the big 3 expenses
By now it should be abundantly clear that controlling our spending on housing, transportation and food is going to help you save a lot more money than cutting out your daily latte.
The question remains, how can you reduce the amount of money you spend on the big 3 expenses?
Let’s dig into the question by discussing ways to save on each of the big 3 expenses, one at a time.
The simple solution to reducing housing expenses
Let’s start with housing, which, as we covered, is most people’s largest expense in life.
We all know housing costs have increased significantly, and, they seem to keep going up every year. How can you reduce your housing costs, if the prices keep going up?
To answer that, we need to look at the reason they housing costs going up. Here is a fact that might blow your mind. Adjusting for inflation, the average housing cost per square foot has only increased by 4.6% in the U.S between 1973–2015.
The main reason housing costs have increased so much is that people want to live in bigger houses.
In 1973 the average house size was 1,660 square feet
in 2015 the average house size was 2,687 square feet
The average home was 62% bigger in 2015 than it was in 1973. What makes this even more expensive is that we have fewer people living in our giant houses.
Three people occupied a house in 1971.
Only 2.5 people occupied a house in 2015.
Houses are nearly two-thirds larger, and we have 16% fewer people living in them than we used to. As a result, the number of square feet per person has nearly doubled.
In 1973 the average house had 551 square feet per person.
In 2015 the average house had 1,058 square feet per person.
And we are mystified about why housing costs have increased so much. The simple solution to cutting your housing expenses should be obvious; downsize your home!
The worst advice anyone ever gave me about real estate was to buy more house than you need today because “you’ll grow into it.” If you buy a house and you have an empty room, think about all the costs to maintain that room.
Additional property taxes.
A larger mortgage.
Higher utility bills.
Higher maintenance and renovation costs.
If you want to save more money, live in the smallest home you are comfortable living in. Which is probably smaller than you are thinking it is right now.
A more aggressive way to cut back on housing costs
If you are willing to make a more considerable sacrifice than merely downsizing, you could cut your monthly housing costs all the way down to $0 or even have your house provide positive cash flow.
Let me introduce you to the concept of “house hacking.”
House hacking is a pretty simple concept. The idea is to find a way to generate enough income from your primary residence to offset your personal housing costs.
How great would it be if someone else was paying your mortgage, utility bills, and property taxes? Do you think you would be able to save more money than you are today?
That is the appeal of house hacking and why it is so popular in the Financial Independence, Retire Early (FIRE) community. If you can eliminate your largest expense in life, saving money and building wealth gets a whole lot easier.
There are a number of different ways you can pull off a house hack.
Rent out a room in your house.
Rent out your entire house on Airbnb when you are out of town.
Buy a multi-family property, while living in one unit and renting out the others.
If you rent and live alone, taking on a roommate is even a form of house hacking.
Whether you choose to downsize or house hack, there is a sacrifice that needs to be made. Downsizing involves giving up living space, while house hacking involves potentially giving up privacy.
You need to figure out which sacrifices are worth making given your goals and preferences. The main point is that you probably need to think a lot more about your housing costs than you currently are.
Reducing transportation expenses
We have already covered that the monthly cost of owning a car can be as high as $1,000 per month. That is a lot of money.
Here is the simplest solution to reducing your transportation costs; don’t own a car.
If you are struggling to save money and you don’t absolutely need to own a car, considering selling it and buying a transit pass. Yes, this would require a sacrifice. Car’s provide a lot of conveniences and make getting around a lot easier. They are also one of the biggest money pits in life.
Whether you decide to own a car or not, there will be an opportunity cost.
The cost of owning a car is all of the money you need to spend to buy that car and keep it on the road.
The cost of not owning a car is the lost convince of moving from Point A to Point B as quickly and efficiently as possible.
You need to decide which cost is worth paying at this point in your life. If you have three kids, the financial cost of owning a car is one you may gladly pay.
If you don’t have kids and you live in a city with a decent transit system, the amount of money you’ll save by selling your car will likely outweigh the opportunity cost getting around town less efficiently.
There is a reason we refer to managing our money as “personal finance.” The answer to nearly every financial question is largely dependent upon our personal preferences and circumstances. There are very few answers to a personal finance question that universally applies to every person.
Returning to the family that includes three kids. It might be a no-brainer decision for that family to own a car. But do they need to have two cars? If they went from a two-car family to a one-car family, would the financial savings be worth it to them? Maybe and maybe not. However, it is a discussion that any family with three kids and two cars should be having.
I’m not saying you shouldn’t own a car. I am saying that you absolutely need to be thinking about the opportunity costs of owning a car vs. not owning a car. Most people don’t think about the decision to buy a car in this context, and it can cost them a lot of needless financial headaches.
Buy the crappiest car you are comfortable driving
If you have considered the opportunity cost and decided that, yes, it is worth it to you to own a car, the next decision you need to make is how much should you spend on your car?
Here’s my advice; buy the crappiest car you are comfortable driving.
To be clear, when I say “crappy,” I don’t mean an unsafe car. I mean the safest, fuel-efficient, boring car for the lowest price possible. Meaning, don’t go buy a brand new Mustang when a three-year-old Toyota gets the job done.
Remember the two biggest expenses of buying a new car.
The monthly payment.
If you buy a new sports car or another expensive car, you are going to have a high monthly payment, and you are going to be paying a lot of deprecation. If you buy a $40,000 car with all the bells and whistles, that car is going to begin losing value the second you drive it off the lot. Sooner or later, that $40,000 car will be worth nothing.
Do you know what most people do when that happens? Buy another $40,000 car and start the process all over again.
That’s financial insanity.
Part of the reason people buy expensive cars is that they can easily get a car loan. Many people believe that if the bank is willing to lend them $40,000, that means they can afford a $40,000 car.
Car loans are a financial trap.
If you can’t afford to buy your car in cash or you would prefer to invest that money, then a car loan makes sense. The problem for most people is that car loans trick them into thinking they can afford a more expensive car than they can. That’s why so many people end up spending more on their monthly car payment then they save for retirement.
There is nothing wrong with buying a cheap, dependable, boring car. Stop worrying about looking cool and start worrying about where your money is going every month.
Generate cash with your car
If you want to get really aggressive with cutting back your transportation costs, you might consider the possibility of using your car to generate some cash. There are two ways you can do this.
Use your car to drive for Uber/Lyft or other ride-sharing or food delivery companies.
Rent your car on Turo or other car-sharing apps.
We are right back to the concept of opportunity cost. Driving for a ride-sharing company can help bring in extra money to offset the cost of owning a car. However, that income comes with two costs;
The commitment of your time.
Faster depreciation of your car through increased mileage.
Renting your car out on a ride-sharing app is another way to bring in additional money to offset the cost of owning a car. However, it also comes with two costs;
Faster depreciation of your car through increased mileage.
The risk that whoever rents your car totals it and any potential associated liability.
These are not options that will work for everyone. Again, you need to weigh the opportunity costs and make the decision that works best for you.
Reducing food expenses
Finally, we come to food which is most people’s third-largest expense and the expense we can most easily control. Making changes to where we live and how we move around take time, but what we eat and how much we pay for food is something we can change immediately.
Cook your own food
The simplest way to reduce the amount of money you spend on food is to minimize your cost per meal. If you want to bring down your cost per meal, you need to buy your own groceries and prepare more of your food at home.
It costs nearly five times more money per serving to eat at a restaurant than cooking the same meal at home.
Using meal kit services isn’t much better, with the average cost per serving nearly three times higher.
There is no way around it, if you want to save money on food, you need to cook more of your own food.
I am not saying you should never go out to a restaurant again. But, when you do go out to a restaurant, make it count.
Going out to a restaurant to celebrate an occasion or to try a new experience has value.
Grabbing lunch at a “big-box” restaurant or fast-food spot because you were too lazy to pack a lunch to work has no value.
How to save money on groceries
If step one to saving money on food is to buy and cook more of your food, step two is to spend less money at the grocery store.
Here are a few tips to reduce your monthly grocery bill.
Have a plan.
Focus on cost per serving.
Think of food as money.
Have a plan
The executives at big food retail companies are not stupid people. They know that the more time people spend in a grocery store, the more money they are likely to spend.
That is why grocery stores are designed to make you cover as much distance in the store as possible. The more aisles you walk down, the more products you see, and the higher the possibility of you filling up your cart with stuff you don’t need.
Something as simple as a written shopping list can help you from filling up your chart. You write down your shopping list before you enter the store, you buy what is on the list and nothing else.
To take this a step further, you might consider planning out all of your meals for the week in advance. If you have a schedule that tells you what meals you are having on each day and all the ingredients required to make each meal, it becomes easier to stick to your grocery list.
Focus on the price per serving
If the way to save money on groceries is to minimize your cost per meal, you will need to minimize your cost per unit of food. Buying in bulk is one way to accomplish that goal.
When I look at food in the grocery store, I don’t look at the sticker price, I look at the cost per serving of each product.
Let’s consider two options for buying ground beef.
Half a pound of ground beef for $10.
Three pounds of ground beef for $49
Many people would be scared of the $49 sticker price for the three pounds of ground beef and opt for the $10, half a pound serving. Let’s look at those same options when measured in dollars per pound.
Half a pound of ground beef for $20 per pound
Three pounds of ground beef for $16.33 per pound.
Although the three-pound option costs $39 more, it is actually 18% cheaper on a per pound basis.
Focus on the price per serving, not the sticker price.
Think of food as money
A study by The Natural Resources Defense Council (NRDC) found that 40% of food that is produced ends up in a landfill and that the average American family throws out $2,000 worth of food every year.
Putting aside the moral implications of throwing that amount of food in the garbage when so many people are going hungry, it’s also a huge waste of money.
Next time you throw out produce because you let it rot, think to yourself, “I just threw $10 in the garbage”.
If you think of food as money, you will be less likely to waste it.
Remember when people used to cut coupons out of the newspaper to save money on groceries?
That still exists. Only now the process is done through apps.
First, every major grocery chain has its own app. While you are planning your meals for the week, you can easily hop on each store’s app and see who has the cheapest ingredients for the meals you plan on making that week.
In addition to the grocery store-specific apps, there are lots of third-party websites where you can find tons of sales and coupons. The smart thing to do is find out what is on sale or what you can find a coupon for and make a meal plan around these items before you enter the grocery store.
It’s not a good idea to buy something only because it’s on sale or you have a coupon. Buying broccoli because you had a coupon is not a good use of money if you’re not going to eat the broccoli. That’s how we end up with food waste.
That is why making a meal plan is so important. Once you have a specific set of ingredients that you are going to buy, all you need to do is find it at the lowest price per serving.
If you can find a coupon or a sale to bring the cost down further, that’s great.
The big 3 expenses will make or break your finances
If you are struggling to save money or reach your financial goals, the first place you should be looking to cut back on your spending is on your big three expenses of housing, transportation, and food.
The average person spends nearly 70% of their take-home pay on these three expenses. Making any changes to your big three expenses has an opportunity cost.
The opportunity cost of saving money on housing is to live in a smaller home or execute a house hack.
The opportunity cost of saving money on transportation is giving up a car, driving a crappier car than you used to, or finding a way to make money from your car through a ride-sharing app.
The opportunity cost of saving money on food is to eat out less and put in more time and effort by planning your meals in advance.
There is no free lunch. If you are going to spend less money on the big three expenses, it requires a sacrifice. Either a sacrifice in scaling back the lifestyle you are accustomed to or a sacrifice in dedicating more time to reduce your spending.
You have to ask yourself why it’s worth it to you to make the sacrifice that is required to save more money?
Finally, if you’re going to make the sacrifice to cut back your spending, it’s critical that you don’t squander that opportunity. Any money you save on the big three expenses should be automatically redirected to help you achieve your financial goals.
If you can save $1,000 per month on the big three expenses and you are deep in credit card debt, you should set up an automatic process to increase your principal payment by $1,000.
If your goal is to save for retirement, you should set up an automatic process to redirect that $1,000 to retirement savings.
If you make smart choices with the big three expenses and automate your savings, you will be amazed at how quickly you turn your finances around.
If you're ready to master your money, don't forget to enroll in my video-based personal finance course, "Millionaire In The Making: The 30-Day blueprint" Click here to enroll.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions