A news story recently made the rounds based on an annual Federal Reserve survey. Four in 10 Americans – 40% of us – would struggle to pay for an unexpected, $400 expense.
For some, that’s likely a truly legitimate fact precipitated by events beyond their control. For others, it’s all the choices they’ve made to this point, whether that’s an educational opportunity spurned, spending and savings decisions that undermine their financial strength, rash decisions tied to a job, a relationship, an investment, whatever.
All of us are guilty of that to some degree. And without switching a job or seeking a salary increase at work, we have an opportunity through our daily spending to improve our financial condition.
Let me show you, in the average American household’s budget, how to save more than $5,000 a year through a mixture of painless belt-tightening and the savvy use of credit cards.
Average Income Facts
Average household income in America, according to government stats, is right at $86,600.
And, according to a different set of government stats, here’s how the typical American family spends their average household income:
| Categories | Costs total,% |
|---|---|
| Housing | 32,9% |
| Transportation | 17,0% |
| Food | 12,5% |
| Insurance | 11,3% |
| Misc. | 10,1% |
| Healthcare | 7,8% |
| Entertainment | 5,1% |
| Clothing | 3,3% |
| TOTAL | 100,0% |
Combine all the statistics and what we end up with is household spending that looks generally likes this:
| Categories | Сosts,$ |
|---|---|
| Housing | $28,491 |
| Transportation/Gas | $5,889 |
| Maintenace/repair | $8,833 |
| Food/Away | $4,763 |
| Food/Home | $6,062 |
| Insurance/Сar | $3,621 |
| Insurance/Life | $3,425 |
| Insurance/Home | $2,740 |
| Misc. | $8,747 |
| Healthcare | $6,755 |
| Entertainment /Streaming srvcs. | $530 |
| Entertainment/Movies, events, etc. | $3,887 |
| Clothing | $2,858 |
| TOTAL: | $86,600 |
Granted, this probably looks like no one’s life in particular, since all of this is based on government-tracked averages and statistics culled from various corners of the Internet. But the points I make remain valid no matter if you’re above or below the average.
How to Save Thousands of Dollars on Daily Spending
I’m not going to tell you to cut out your Starbucks addiction. The problem with such advice is that, while financially sound, it’s emotionally impractical. People want their little treats. Take them away and budgeting absolutely fails.
Then again: No pain/no gain. You have to sacrifice somewhere.
So, go through every spending category in your budget and scrub 10%. For now, skip housing and healthcare; we’ll deal with those in a moment.
10% doesn’t sound like much, however it adds up fast
I can’t tell you what to cut specifically because everyone’s spending habits are different. But I can tell you that you get to choose what to cut and where from your own budget, so you’re in control of this process.
Maybe you decide to grocery shop with a purpose, following a meal plan for the week, rather than simply foraging through the supermarket aisles and grabbing whatever looks good at the moment — that’s a surefire recipe for overspending on food that you often end up wasting.
How to Cut Hundreds of Dollars on Entertainment Spending
I know people with DirecTV, HBO, Starz, Netflix, and Hulu. Unless your job is professional media critic, no one who works has so much free time that so many streaming media services makes any kind of sense.
Be honest with yourself and get rid of what you don’t use. I was talking with a friend who has an HBO Now subscription on is iPad. It’s $14.99 a month. He used it only to watch Game of Thrones and Veep. Both have been gone for two months now, and he hasn’t used his subscription. But he still pays for it “because I keep forgetting,” he says, “and maybe I’ll find something else to watch.” In the meantime, he’s spending $180 a year on a purchase that brings him literally no value.
If you cut one or two streaming services that you’re not really using very much, you’re looking at a few hundred dollars a year in savings.
Save Hundreds of Dollars More: Cut More than 10% Where You Can
In some spending categories – I’m looking at you, Clothing – you should be able to find savings of greater than 10%.
Lots of clothing purchases are spur-of-the-moment and unnecessary. Those added savings will balance out categories where you might not find 10% to cut.
Using the example budget from above, a 10% haircut in transportation, food, miscellaneous, entertainment, and clothing saves roughly $4,156 a year.
Save Hundreds on Your Life, Home and Auto Insurance
I hate buying insurance. Everyone hates buying insurance.
Whether it’s life, home or auto, it’s just a hassle trying to comparison shop.
But here’s the truth: Insurance is not a standard product. Identical coverage from two insurance carriers can be priced hundreds, even thousands of dollars apart.
For that reason, it makes a lot of financial sense to shop your policy every couple of years. A new carrier might have entered the market and is trying to win business with lower rates.
Or rates might have come down for other reasons (as happened with me with life insurance) and you’ll find you can save hundreds every year on your policy.
Or, you’re older now, or the speeding ticket you forgot that you received a few years ago, is off your driving record — which might mean a different group of insurance companies with lower rates are suddenly interested in your business.
Whatever the reason, going through the hassle of shopping your insurance policies around can be well worth your time financially.
Save $1,000 or More on Your Mortgage — Without Refinancing
For the most part, housing costs are set in stone. Your rent is your rent and that’s that unless you’re willing to move to a cheaper place to live. Or, if you own your home, your mortgage doesn’t change, unless you refinance.
But if you are a homeowner and you’ve been in your house a while, there is a way to potentially save $1,000 or more on your mortgage.
Look at your monthly statement and 1) see if you’re still paying something called PMI – private mortgage insurance – and 2) compare the outstanding balance still owed with the appraised value of your house.
If the equity you now own is greater than 20% of your home’s value, you can request that the PMI be eliminated, since there’s no longer a reason for you to pay it. On an average American home in the $250,000 range, you’re looking at a cost savings of roughly $100 to $200 a month, depending on various factors. That $1,200 to $2,400 a year that will instead stay in your pocket.
Save Money the Savvy Way: The Right Credit Cards
These days, credit-card cash-back offers are generous and increasingly targeted to various spending categories, such as “food and entertainment” or “streaming services.” By using the right credit card with each spending category, you can accumulate a nice chunk of change every year.
For entertainment and meals away from home: Capital One Savor, which offers 4% cash back in those categories.
For streaming-media and groceries: American Express Blue Cash Preferred, which offers 6% in those categories. (Note: After $6,000 in annual grocery expenses, Blue Cash Preferred reverts to 1% cash back.) The same AmEx offers 3% cash back on gasoline, so use it for fill-ups.
For everything else: Citi Double Cash® Card, which gives you unlimited 2% cash back on everything – 1% when you spend, 1% when you repay. (If you already have the Fidelity Cash Rewards card, offering an unlimited 2% cash back on every expense, you can use that card as well.)
Using that approach, our average American household has right at $1,400 in cash back hiding within its everyday spending – and this is after cutting 10% from each category. It looks something like this:
| Categories | Credit Card | Cash Back rate | Cash Back,$ |
|---|---|---|---|
| Transportation | |||
| Gas | American Express Blue Cash Preferred | 3% | $159 |
| Maintenace/repair | Citi Double Cash | 2% | $159 |
| Food/Away | Capital One Savor | 4% | $171 |
| Food/Home | American Express Blue Cash Preferred | 6% | $327 |
| Insurance | Citi Double Cash | 2% | 176 |
| Misc. | Citi Double Cash | 2% | $157 |
| Healthcare | Citi Double Cash | 2% | $30 |
| Streaming serevices | American Express Blue Cash Preferred | 6% | $29 |
| Movies, events, etc. | Capital One Savor | 4% | $140 |
| Clothing | Citi Double Cash | 2% | $51 |
| TOTAL: | $1,401 |
By the way, you might be able to do even better by also incorporating a Chase Freedom or USBank Cash+ card in your wallet. Both offer bonus cash-back rates of 5% in categories that rotate each quarter.
So if, say, “home-repairs” is the current category and you need to repaint the house, then use one of these rotating cash-back cards instead of the Fidelity Cash Rewards (or Citi Double Cash® Card) to nudge your savings even higher.
One Last Place to Save: Your Bank
The average American household is wasting $329 a year on banking fees for using out-of-network ATMs or overdrawing an account. Those are avoidable expenses. It might be a hassle but switch to a credit union.
Many of them offer to refund ATM fees, since most credit unions do not have a wide network of branches. Also, pay attention to your balances so that you do not get hit with useless overdraft charges and other such onerous fees.
The Three Year Saving Plan
If you’re something close to being the average American household, the exercise above leads to real savings of more than $17,650 over the course of three years.
Think about that: You increased your wealth by a meaningful amount just by using the right credit card with your normal purchases, and by thinking smartly about what you really spend. It’s basically pain free.
And what does $17,650 mean? It’s a 10% down-payment on $176,500 house, which, in many parts of America is still a nice house. It’s a significant down-payment on a new car that will keep your monthly car note manageable.
Or it’s just a nice cushion of cash to have in the bank in case of emergency, or a nice way to bump up your retirement savings.
However you use it, the point is simply this: There’s free money waiting for you in your everyday spending – if you take the time to look for it.