If you reduce some of your discretionary expenses, you might be surprised at how much you might be able to save over the long run. By identifying opportunities to save money each month, and using the money you save wisely, you could potentially pay down your debt and put extra savings in your bank account.
What unnecessary expenses could you cut or eliminate?
I know, I know. The "skip the morning latte" or "get rid of cable" tips are getting old. However, most of us spend money on lots of things that we could scale back on. For example, if you like to dine out, simply cutting back by one meal per month could mean hundreds of extra dollars in your bank account at the end of the year.
Just to give you a few ideas, here are just a few of the possible ways you and your family might be able to cut back on expenses:
- Dining out less
- Buying new clothing less often
- Carpool to work
- Quit smoking (this one alone could put thousands of dollars back in your pocket in not much time)
- Get rid of cable in favor of Netflix, Hulu, or another service
- Stop paying someone else to mow your lawn, clean your house, etc.
- Stop buying bottled water -- get a filter for your tap water instead
- Magazine subscriptions
There are literally hundreds of possible ways that you might be able to cut back, so take a look at one of your recent debit/credit card statements, or try to make a list of everything you spent money on in the past month to see where you could be spending less.
What you do with the money you save is just as important
With the money you save, you can build up a fund for emergencies, pay down debt, save for a big purchase you want to make, or better yet, invest for the future. The main idea behind the well-known "latte factor" is not only that you'll save hundreds of dollars per year by cutting out your $5 cup of coffee in the morning, but by investing that money, it could turn into a six-figure nest egg over your lifetime.
You might be surprised at the long-term impact
This combination of saving money and investing it wisely can produce some pretty staggering long-term results. While investment performance fluctuates from year to year, over the long run, the stock market has averaged returns of almost 10% per year.
You don't need to be an investment expert to take advantage of this, either. Sure, if you have the time and interest, we love the idea of choosing individual stocks, but a low-cost S&P 500 index fund will do just fine. In fact, billionaire investor Warren Buffett has said several times that this is the best investment most people can make.
To put the power of saving and investing into perspective, consider that, if you can manage to trim just $200 worth of expenses each month and invest it into a stock index fund like I just mentioned, you could be sitting on a $130,000 nest egg after 20 years. After 30 years, you could have $360,000, based on the S&P 500's historical rate of return (about 9.5%, depending on the exact time frame you're looking at).
Furthermore, $200 may not require the amount of sacrifice you might think. Cutting out a few restaurant meals per month, and mowing your own lawn instead of paying someone else to do it, might do the trick.
We have an excellent calculator that can help you determine the long-term impact of your own expense cuts, so give it a try and see how much you might be able to save.
The bottom line on cutting expenses
Don't get me wrong. I'm not saying that you should cut out all of your discretionary expenses -- far from it. You work hard for your money, and treating yourself at a reasonable level is important. As a personal example, I'm a three-times-per-week Starbucks regular, and I refuse to give up my satellite TV. However, my wife and I have found many other ways to cut back our spending in other areas. For example, we only eat dinner out once or twice per month now, about a third of how often we used to. And, we cancelled our twice-a-month housecleaning service and now do it ourselves.
The point is to get you thinking about the ways you could cut back without too much impact on your overall lifestyle. Maybe you could eliminate one restaurant meal per month. Or one trip to the movies. Things like this add up, and now that you've seen the potential long-term impact, it may be worth the small sacrifice in the short term.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.