How to Actually Save Money

I heard something on the radio this morning that got me fired up. It was a segment about tips on how to save more money. What came was a predictable list of "brew your own coffee," "buy generic products," and "bring your lunch to work!"

I can't stand these lists. I think they're dangerous, because the average American's dismal financial state has little to do with coffee, name brands, or lunch. The people writing these articles mean well. But they're the equivalent of telling a drowning man how to dry his clothes -- advice that seems helpful but misses the bigger problem.

Most workers reading this article earn enough money to be saving a lot of it. If you can't, it's likely because the gap between reality and your ego is larger than it should be. And if you dig into that gap, I think you'll find just three things:

• your house 
• your car
• your education

If you want to actually save money, start there.

Your house
The average new American home now has more bathrooms than occupants. Nearly half have four or more bedrooms, up from 18% in 1983. While the median household's inflation-adjusted income has been stagnant for decades, the median new home's square footage has increased 38% since the late 1980s:

Source: Census Bureau, Bureau of Economic Analysis

In 1900, the average American family spent 23% of their income on housing, according to the Census Bureau. By 1950, that was up to 26%. Today the average household spends 35% of their income on housing. That nine percentage point gain means we spend an average of $6,000 per year more on housing today than we did in 1950.

A lot of people I know think housing is expensive. But it doesn't have to be. What's expensive is when your expectations outgrow your income. You can live without two guest rooms, three spare bathrooms, and a two-car garage. You might need roommates. The average American could save a ton of money by realizing that their largest monthly expense is inflated expectations of what a decent house is.

Your car
The average amount borrowed for a car in 2013 was $27,000, according to Experian Automotive. For people with the lowest credit ratings -- typically lower-income families -- the average auto loan was higher, at $29,385. And that's just the loan amount. The average transaction at an auto dealership is now $32,160.

Experian's director of auto credit explained why these numbers are so high: "If you look at the most popular segments, they are full-size pickups and SUVs. It's hard to find one of those models new and fully loaded for under $30,000."

Here's your problem, America: You need a car to get to work. You picked one that can tow a boat and consumes two-thirds of a year's income.

Add in the cost of gas and this is probably where the average American can find the most savings in their budget. You can buy an excellent new car that gets 35 miles per gallon for less than $17,000. These cars come entirely stripped of prestige, but this is where saving money requires closing the gap between your ego and reality.

Your education
This mainly applies to young people, but there are a lot of you.

I shake my head when I read stories about low income young people stuck with $200,000 of student loans. What's frustrating is that the stories invariably blame the soaring cost of tuition on these debt burdens. But that's not really the problem. The problem is the student didn't do college the right way.

Unless you have generous parents or scholarships, almost no one should attend private college. It's totally unnecessary. Four years of public university isn't even necessary.

For most, there's an adequate and much cheaper way to go to college: two years at a community college, two years at an in-state public university.

Prices vary by state, but most people can go this route for less than $25,000 total and obtain a world-class education. It can save people tens, even hundreds, of thousands of dollars before they're old enough to drink.

This route isn't as socially thrilling as going to a private school for four years. But you're 18 and broke. The first test of whether you're mature enough to attend college is whether you can grasp financial reality with both hands.

House, car, education. Take care of those three and you can drink all the coffee you want.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Read/Post Comments (19) | Recommend This Article (103)

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  • Report this Comment On June 24, 2014, at 1:42 PM, JonDinMA wrote:

    Morgan, while in general I agree with your overall premise I am going to disagree with your blanket statement on private college. If you look at net cost with financial aid, for many people private is actually cheaper than public, since the private schools tend to have endowments to draw the aid from. So for youth looking at going to school my suggestion is always to keep all the options open and look at the full cost for each (tuition, fees, room, and board less grants and scholarships) before making the final call.

  • Report this Comment On June 24, 2014, at 1:43 PM, TMFHousel wrote:

    <<If you look at net cost with financial aid>>

    From the article:

    "Unless you have generous parents **or scholarships**,"

    What I disagree with is being 22 years old with a degree you don't know what to do with and $100k in debt.

  • Report this Comment On June 24, 2014, at 2:16 PM, ejclason2 wrote:

    Morgan, I'm curious if you know the percentage of students, who start at a 2 year community college, that eventually get a 4 year degree. I was under the impression that is was much lower for students that start at a 4 year college. However thinking about it, I realized that this impression is from 35 year ago (when I was in college) and I have no idea if it is true today.

  • Report this Comment On June 24, 2014, at 2:18 PM, TMFHousel wrote:

    I'm sure it's low, but that's even more reason to start in community college. It's way better to learn that you can hack it in college while paying $800 a year rather than $42,000 a year a a private school.

  • Report this Comment On June 24, 2014, at 2:19 PM, TMFHousel wrote:

    Sorry, can't* hack it.

  • Report this Comment On June 24, 2014, at 3:10 PM, mhayon wrote:

    And I see the housing argument as a renter, too, and it's not always the sheer size of the place. I understand "location, location, location," but there are areas outside the city or a short train ride away (I live in NYC) where the differences really start mounting. And people try to justify it-- "it's only $500 extra a month, and you get to live in the heart of the city. You're already paying XX thousand, what's another couple of hundred?"

    These are the people who don't immediately realize the $500 saved on rent is the same $500 saved elsewhere on your budget. And it's not likely they can make up that $500 elsewhere.

  • Report this Comment On June 24, 2014, at 4:47 PM, KayakerRW wrote:

    ecclason2: In response to your question:

    According to the National Student Clearinghouse Research Center report, 51.4% of all students graduate within six years of starting school.

    36% of those who start at 2 year institutions complete a college degree within six years, with 20% still enrolled somewhere, and 44% no longer enrolled. For full time students, the completion rate is 53 %. For part time it’s 18%.

    Those who start at a 4 year public institution have a 61% completion rate with an 81% completion rate for full time students there versus 19% for part time students.

    Whether students start as a full time versus part time students seems to be more significant than whether they start at a 4 year or 2 year school.

    There are a number of reasons why a lower percentage of students attending community colleges finish with a 4 year degree, including:

    Some find a good paying and fulfilling job with an associate’s degree, so they don’t go on for the four year degree.

    Some chose community college because of severe financial hardship and realize they don’t have the money to continue (at least their debt is lower than if they had started at a four year school). Many of these are part time students.

    Some weren’t prepared for college and are unable to develop the skills they need to be successful in college (again, their debt is less than if they learned that at a 4 year school).

    Some are older adults who are returning after years out of school and can’t make the adjustment. Those who start in their late teens/early 20’s are more likely to finish than those who start at a later age.

    Many students who start at a community college don’t have the same level of support as students who start at a four year school. This includes financial support and families that strongly encourage a college degree. This includes students who are the first in their family to attend college (in some cases, the first to graduate from high school). They and their families aren’t as familiar with the unwritten rules that help someone successfully graduate with a 4 year degree.

    Even with the lower rate, community colleges are a great choice for many and a good way to avoid excessive debt.

  • Report this Comment On June 24, 2014, at 4:53 PM, plantpower wrote:

    Morgan, thanks for the insightful article. Shocking that the average transaction at a car dealership is 32k. Relative to the average income this seems ludicrous. Keep up the great work!

  • Report this Comment On June 24, 2014, at 6:18 PM, 8bravo wrote:

    "Today the average household spends 35% of their income on housing" We're spending 18% of our income on rent and find it way too expensive. The area is rather nice but nothing fancy. We'd be living somewhere else (i.e. cheaper) if it wasn't for the superior schools around us...

  • Report this Comment On June 25, 2014, at 3:18 AM, ScottmFool wrote:

    > two years at a community college, two years at an in-state public university.

    That's me. In addition:

    * I drive a 9-year old car, and my wife drives an 8 year old car. Both are paid-in-full.

    * except for mortgage, we have no debts.

    * I make an above average income (number not mentioned since that would be a little douch-ie :) ).

    * we max out our IRAs and 401k (admittedly, my income makes that easy to achieve. But we've also resisted buying more than we need).

    * our home has less bathrooms than people in it :)

    Not going to a private college didn't hold me back one bit. And while I totally respect what it takes to get a degree from Cornell, Brown, Columbia, etc, you'd be hard pressed to say those schools are better than some of the top public universities.

    When my daughter gets to college age, if she gets to chose between Brown and Berkeley, and chooses Berkeley, I'll be the proudest papa on the planet.

  • Report this Comment On June 25, 2014, at 8:59 AM, Mathman6577 wrote:

    If the government ends or reduces mortgage interest deductions and reduces subsidies to universities it would help things.

  • Report this Comment On June 25, 2014, at 9:38 AM, XMFAimeeD wrote:

    @ScottmFool, there are certain schools at Cornell that are public, which is an incredible deal for anyone living in NYS. Ivy league education at a fraction of the price. But otherwise I agree with you.

  • Report this Comment On June 25, 2014, at 11:16 AM, SwampBull wrote:

    "Here's your problem, America: You need a car to get to work. You picked one that can tow a boat and consumes two-thirds of a year's income."

    This, coupled with the alarming stat about loan size based on credit score, was the most nail-on-the-head accurate thing I have read all day. There are way too many people complaining about wages, expenses, taxes, and everything money-related in the richest country in the world, no less - and they have yet to point the finger back at themselves.

  • Report this Comment On June 25, 2014, at 11:24 AM, Lea77 wrote:

    I wonder if that total loan number includes people who roll other debt/previous car debt into their current loan. I think that might explain why lower income means higher loans...

  • Report this Comment On June 25, 2014, at 1:24 PM, Darwood60189 wrote:

    How to actually save money in four easy steps:

    Your Car: Look for a good demo unit and negotiate. You will get a vehicle less than one year old and well maintained for 25% off. Then drive it for 10 years while maintaining it. I know, I do this.

    Your Education: Get the minimum education (time and cost wise) to get into the career you desire. Every year you spend in school is one year less of income and retirement saving. Plan on a life of change and ongoing education. In other words, that 4 or 6 year stint is only the beginning to a life of work and education. Are those years really worth it? The world is changing. Plan on a life of continuous change and continuous education. Anyone who thinks they can go to college at the age of 17 for 4-6 years, borrow to the hilt with the intention of achieving a and plan a successful financial career spanning 50 years is delusional. The MF promotes indexing (cheap, generic funds) for a lifetime of investing. The MF also promotes the impossibility of predicting the future. So why on earth would any teenager ever expect that they can predict the outcome of their education for 40-50 years? Why would any parent support them in this? I practiced what I preach. Got a public school education supplemented by about $5,000 in out of pocket funds. I'm in demand 52 years after leaving high school, got my continuing education in incremental steps over a span of 40 years which means I got that education which was necessary to maintain my current relevance and income at every step of the way. Trying to predict the future is a fools errand.

    Your house: A house is a place to live. There are millions of places to live in this country, and you can rent or buy. Purchase is a long term (6-10 year) financial commitment. Yes, you can flip and get rich. You may also win the next competition at "America's Got Talent." My suggestion? Go to the NYTimes Rent versus Buy Calculator and figure it out. You can rent forever and hand it to the landlord, or you can plan your life and reap the rewards.

    Avoid credit debt and live within your means. Want to buy a home, or a car, or whatever? Put money into your emergency fund first, then your retirement account, then into your piggy bank for the things you say you need. Save until you accumulate sufficient cash to purchase. I know, that's what I do. I purchased my most recent place to live (a condo) in 2001 for cash. I purchased my cars for cash. I purchased my RV for cash. I pay off each and every credit card each month. The interest I have saved doing this has facilitated the next purchase. Most Americans pay $4,000 or more each year in interest. After 10 years, that's $40,000 saved and available for deployment.


  • Report this Comment On June 25, 2014, at 4:47 PM, pelicangirl wrote:

    Seems like you touched a nerve with your comments on college. I will agree with your statements. Here is what we did: We live in Ohio, home to THE Ohio State University. Our kids attended one of the OSU branches, with the oldest finishing on the main campus. The youngest was able to do his entire degree at the branch. And guess what - the diploma is the same whether at a branch or main campus. The cost was cheaper at a branch, plus they lived at home and saved the cost of a dorm. Before our youngest graduated, his college was paid in full! We paid tuition and helped with other necessities; however, they paid for vehicle, gas, insurance, books, etc. with jobs while in college. Didn't hurt - and they are both debt free. It CAN be done, and a QUALITY education is in reach! PS - I applaud your article, the savings on car and home can be done, too!

  • Report this Comment On June 26, 2014, at 6:46 PM, CoreAndExplore wrote:

    Wow, this article sure brought out a lot of ego-stroking posts by people extolling their own accomplishments. How about saving and making money with class? What ever happened to that notion?

  • Report this Comment On June 27, 2014, at 12:39 PM, mdk0611 wrote:

    An additional thought with respect to education. Take AP exams while still in HS and get credit towards college. I did that with a number of courses and got to skip 1 quarter (college was on the quarter system) of college. Best of all, I didn't have to take freshman English.

  • Report this Comment On February 13, 2015, at 8:10 AM, candacechan895 wrote:

    Saving money. Hmmmm.

    1. Try not to live paycheck to paycheck. Plan for life sucking at times.

    2. Try to have six months of budget saved up.

    3. If married, or have children, get life insurance.

    4. Try to enter into retirement debt free. You can save on things like gym (at Planet Fitness) and car insurance ($24/month at 4AutoInsuranceQuote). Try to cut back wherever.

    5. Look at your family medical history. Average out how long your ancestors lived. Add 5 years to that average. Is it 68? 75? 92?

    6. Now, plan to have what ever your budget is plus a 5% increase per year. If you have a 2k monthly budget now, that is 24k per year. Multiply that times an extra 5% per year. Finally, multiply that for how long you intend or think you will live. Me? My number is 144k (2kx12monthsx6years)(average family death=66 so I go to 71 (if I retire at 65).

    My number will rise with inflation.

    Now, this notion that we all need to save (or invest in 401's) 1 or 1.5 million dollars is what the BANKS want you to do.

    7. What do I do with the rest of the money? LIVE LIFE TO THE FULLEST EVERYDAY YOU ARE ALIVE!!!!!!

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