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The key to wealth is your overall savings rate. I say this ALL THE TIME. Recommended savings rates vary from 10% (see books like The Richest Man in Babylon), 15-20% (Dave Ramsey), and upwards of 50% (see the entire FI/RE movement). Regardless of if you are saving nothing at all, or just a small amount, increasing your savings rate even slightly will make a HUGE difference in your future.
But how do you increase your overall savings rate when you're already feeling strapped for cash?
Here are a few suggestions:
1. GET ORGANIZED
- If you're not tracking your expenses routinely, it is nearly impossible to know where you can cut expenses to increase your savings rate. A monthly budget is a fundamental requirement.
2. PAY OFF HIGH INTEREST DEBTS
- Carrying high interest debts is the equivalent of running a race with weights in your pocket. Credit card debt, private student loans, etc will gouge you in interest payments and stall your progress. Get rid of them as quickly as you can.
3. DECREASE HOUSING EXPENSES
- Your two biggest "overhead costs" are housing and transportation. These will make the biggest changes to your overall budget. If your housing expenses are >25% of your take home pay, consider selling your house. If you're renting, consider moving to a lower rent district or adding a roommate.
4. DECREASE TRANSPORTATION EXPENSES
- Your car payment isn't serving you. If you can't pay off your car quickly, sell it and purchase one you can afford without a payment. The opportunity cost of even owning a car at all is huge (even if it is paid for), but we can't all bike to work. At a minimum, make sure you are driving a paid for vehicle with reasonable maintenance costs.
5. RENEGOTIATE YOUR RECURRING BILLS
- Get new quotes on major insurance policies. Consider changing internet providers or phone companies. These are changes that only require effort ONCE and can free up room in your monthly budget.
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