The Ten Best Ways To Save Big

September 2010

There are plenty of ways to be thrifty. We do not mean to minimize Benjamin Franklin’s advice that “a penny saved is a penny earned”, but there are some ideas that have a much bigger impact. Here are the most important areas which are often neglected:

1. Your career is your most important asset - Investing in one’s income-earning potential is almost always a good idea. If you income is rising, a lot of other challenges disappear. In all decisions, both financial and otherwise, consider the impact on your long-term opportunities.
2. Maximize 401(k) investments - For many employees, the employer will match savings put into the plan. Think of this as free money. But, even if the employer does not increase your savings, the 401(k) (or an IRA if your employer does not have a 401(k)) is a tax advantaged investment that will save thousands in taxes. For most affluent persons, we suggest a Roth plan, as discussed here.
3. Use a Section 529 account for education savings – Here is another tax gift that should not be ignored. As long as you are saving anyhow for your children’s or grandchildren’s education (and you should be), there is little reason to not do this in a tax-advantaged investment. The accounts are usually sufficiently flexible, even when educational objectives change, yet are not as widely used as should occur.
4. Dump most mutual funds – Instead, keep your investments in exchange traded funds or low-cost indexed mutual funds. You will save around 1% annually in fees and costs, which adds up to a fortune over time. Similarly, be careful of the cost paid to investment advisors, whether that cost is paid directly as a fee, or more likely through marketing charges. Here are suggestions regarding specific investments, and our online risk questionnaire and allocation calculator.
5. Manage the cost of your debt – The easiest way of keeping your debt low is to restrict your borrowing for only those purchases that do not usually decrease in value. Consequently, borrowing for a home is sensible, but borrowing for a big screen TV would not be. Almost by definition, credit card debt breaks this rule. But, if you already have the debt, do whatever you can to refinance these obligations to a lower cost …. And then do not run up the cards again. If refinancing is not an option, then live well below what you might want until high-cost credit card debt is gone.
6. Sell the second home – Unless you are fortunate enough to use your second home quite regularly, this cost is rarely justifiable when compared to other vacation lodging or alternatives. Your costs are not just the monthly payment, but also include the opportunity cost of your equity in the home, maintenance, taxes, utilities, and insurance. The aggravation of keeping the home maintained is almost certainly more trouble than the imagined convenience that the home provides.
7. Delay large discretionary purchases – We all love having a new car, but this is certainly an expensive purchase since its value will drop significantly within a short period. We are not suggesting that you never buy a new car, but you do not do so frequently. Drive that existing car a few more years to save thousands of dollars.
8. Dump unneeded insurance – You should insure any loss than you cannot afford to incur. The corollary is that you should not insure smaller losses that would provide a setback but not be a disaster. This should cause most people to (i) drop small but relatively expensive policies, and (ii) accept larger deductibles for the remaining policies in exchange for smaller premiums. As one gets older, consider dropping life and disability policies that were critical at a younger age, but which no longer insure against economically catastrophic events.
9. Purchase only what you will use – Buying items on sale is certainly a good idea, as long as you were going to purchase the item anyhow. We are all tempted by a sale. But you can save even more by not purchasing the item at all. Impulse purchases are rarely a good idea.
10. Marry the right person – We appreciate that this is easier said than done. However, mistakes made here are devastating to one’s finances. There are two types of challenges. First, if your spouse is a spendthrift, you will probably never meet your long-term goal of a secure financial future. Second, a divorce is usually devastating economically as well as emotionally.

For related advice see the Seven Deadly Money Sins of the Affluent.

Fulcrum Inquiry performs accounting and economic consulting.