The internet is flooded with advice on how to save more money. Sadly, in my opinion, most of it exists simply to fill pages and keep people from focusing on the important stuff.
Who cares about the random latte you may or may not buy or the lipstick you may treat yourself to? These are not the kind of expenses that are going to make the biggest difference with the least effort.
If you want to save a significant amount of money, focus on the 80 / 20 rule.
The 80 / 20 rule
This rule was coined by Pareto, an Italian philosopher and economist born in the 19th century. He noticed that in his garden 80% of the peas were produced by 20% of his plants. The more he looked around, the more he saw how this rule can be applied to all paths of life. It is a universal rule.
80% of results come from just 20% of the action.
Savings and the Pareto rule
If you want to make a serious difference and save more money, start with the 5 biggest expenses most people face:
- Housing
- Transport
- Food
- Tax
- Childcare
Housing
My parents’ generation’s rule of thumb was to spend no more than 25% of their net monthly salary on housing. Nowadays rents and house prices are much higher, especially in a high cost of living area like London.
I get it, it’s just difficult to find something decent without spending a fortune.
The question is – do you really need to live in that area of London? Do you really need a very large place? Can you be happy with something a little different – maybe only for some time – if that means reducing your fixed costs and saving more?
What is most important is that you don’t feel deprived by your choice, because that will backfire. Also, your choice of accommodation now doesn’t have to be forever. And maybe in a few years time we may be able to build our own beautiful home for $10,000 or so.
Try to spend time objectively looking at options and understanding your current needs.
Let me give you an example from my own life. When we bought our flat 4 years ago we could have gotten a much bigger mortgage, but we chose not to max out and instead have a lower monthly expenditure that wouldn’t put too much strain on ourselves and our finances.
This saving and two redundancies allowed us to make enough overpayments to reduce our monthly mortgage cost by £250. At the beginning of the year we remortgaged, bagging a lower interest rate and our mortgage went down again by £250 month. By focusing our efforts, our mortgage is now £500 lower than 4 years ago. What a piece of mind!
Transport
Most people in London don’t own a car and save vastly on the cost of purchasing and maintaining one. However public transport is seriously expensive, and increasing in price every single year.
The two obvious ways to cut on transport expenses are:
- Living close to work so you can walk
- Cycling
Are either or both of these an option for you? Seriously, stop and think about it again.
We lived for 5 years in Camden Town and cycled pretty much everywhere, saving about £100 each month. Over 5 years that alone saved each of us £6,000!
Currently I work in Richmond and cycle to work along the river in half an hour. Pretty sweet!
If I were to commute into Central London, public transport would cost me £240 each month (we live in zone 6). Even if I now take the bus when the weather is horrible and sometimes go into Central London at the weekend, I still save about £200 every month. And that is money that goes straight into my ISA.
I am by far not the only one. I know people who agree with their employer to work from home a few days a week, or cycle to work an hour each way to stay fit and save on transport. Some of them even used this strategy to retire early, like The Escape Artist.
Food
Most people are not fully aware of how much they spend on food. Don’t forget to count in take away dinners, lunches, snacks and all the small shops at the local supermarket or corner shop. It adds up.
Mr Money Mustache and Brad at ChooseFI eat meals costing about $2 per person.
I am a fairly good cook and quite good at “throwing ingredients together”, so most our meals are about £2 – £3 per person. That excludes alcohol and snacks, but you get the jist – I shop once a week mainly at Aldi, cook in the evening and bring in my own lunch to work. We spend about £300 a month for a family of 3.
If you want to try it, limit your weekly shop to once a week and you’ll start thinking ahead of what you will want to eat and what you may need. Then get creative and cook whatever you’d like to eat. Do it a few times and you’ll enjoy it more and more 🙂
Tax
They say tax is one of the few facts of life. Then again, tax avoidance is also a (legal) thing 🙂
If you are unsure why this is important, check your payslip and how much you pay every month in tax and National Insurance Contributions. Are you with me now?
In the UK, the most common strategies to minimize everyday tax are:
- Maximise pension contributions (though you can’t access this money before 55)
- Be a contractor (you can avoid paying NICs)
- Invest using ISAs (although you pay tax on the money you put in)
If you want to know how the ultrarich do it, google Panama papers or similar. I won’t be writing about that here.
A website and app I love is The Salary Calculator where I can check how much tax I’d save if I contributed more (or less) to my pension. Remember, from the age of 55 you can take out up to 25% of your pension pot tax free every year, which you can put into your ISA where you don’t pay tax on your interest (or dividend). And because you didn’t pay tax when you contributed to your pension, you will have effectively avoided tax 3 times!
Childcare
I appreciate this category doesn’t apply to all, but it may apply to most at some point.
Childcare in the UK is shockingly expensive! Every month we pay way more than our mortgage to send our daughter to nursery full time – how absurd! And if that was not enough, it increases every single year by about 4%, more than inflation.
Compare that to Germany where nurseries are heavily subsidised by the government and even offer a 50% on siblings. My brother-in-law in Germany pays 100 Euros a month for his son, then 50 Euros (half price) for his other kid. 150 Euros a month to send 2 kids to nursery! I find it a very difficult comparison.
At the same time we don’t have grandparents living nearby, we both find that our nursery is excellent and our daughter loves it, and we both want to work enough to be able to save plenty of money.
It is a financially tough decision, but we agree it is for the best of all 3 of us. By saving in other places and investing wisely, we are able to do this.
So before you stress yourself out on how to save more money on small expenses, take the time to analyse your big ticket items, one by one. It will be worth it on the long term.
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