It wasn’t until I first started tracking my expenses that I realized the power of small amounts in personal finance. Of course, it applies both way to spending and saving.
Spending small amounts here and there can add up to a large total that can really break your budget.
Saving small amounts, though, goes even further in taking advantage of compound interest to create a large sum.
SMALL TRANSACTIONS ADD UP TO LARGE AMOUNTS
Overall, I’d say that I’m a natural saver and my husband is a spender. Before my husband & I implemented an allowance system to be able to have our own guilt-free spending money, I thought he spent a considerable amount more than I did. However, once I tracked our expenses, and I saw how much my frequent little expenses added up, it wasn’t that far in total from his less frequent, larger purchases.
It is very common when you start tracking your expenses to be shocked at how much you spend in specific categories such as groceries or eating out. For me, my weakness is craft and organization supplies (The Container Store opened up near me and I’ve not allowed myself to step foot in there because of this).
The key to being successful is not to try to cut out every single small expense, but to prioritize spending money on things that are important to you and minimize spending on things that do not provide value in your life. It’s less about frugality (at least for me) and more about simply paying attention to the things you spend money on.
That being said, some examples of the most easily cut expenses that slowly add up include the following.
Switching from cable to a Netflix subscription could save you (on the low end) $50/month or $600/year. The average cost for cable is $65 (source) and a Netflix subscription is only $10/month, which would result in $55/month savings.
Eliminating a few magazine subscriptions that you don’t really use could easily save you $50/year. If you have monthly subscription boxes or others, you could save a lot more!
Heating & Electric
Just unplugging things you aren’t using and installing a programmable thermostat can save you around $25-30 per month or $300-$400 per year (source).
Bringing your lunch to work instead of going out to eat even a couple times per week can easily save you $50 or more per month or $600 per year (source).
Buying store brands instead of name brand products saves you approximately $15 per weekly shopping trip or $60 per month (source). This equates to $720 per year. I personally can’t even tell the difference the vast majority of the time.
Get organized with your finances to eliminate the small overdraft and ATM charges that add up to $6 billion for just the top 3 banks alone (source). The average American family spends $290 annually on total bank fees, which are largely unnecessary (source).
This is why tracking your expenses is so important. If you stop to look at what you’re spending and make sure that it’s in line with your values, you may find that many of the things you spent money on really aren’t very important to you. In addition, there are many things that you’re buying that are negatively impacting both your wallet and your health or happiness. These are the things to cut! You can see from the examples above that cutting just a few small things can result in thousands of savings per year.
Of course “small” is a relative term. The more money you make, the less $100 is worth to you. I remember once while working my way through college there was a $100 discrepancy in a bank deposit I made, which was never worked out. It was a huge amount to me at the time and I was really upset about it. Losing $100 wouldn’t have the same impact on me today, as I can more easily move on and forget it. However, that $100 still matters to me in my budget, as I realize the value of $100 in meeting my savings goals.
SMALL REGULAR SAVINGS ADDS UP TO LARGE AMOUNTS
Cutting small expenses really helps your finances but it’s what you do with these savings that ultimately makes the biggest impact on your bottom line.
Using the monthly savings to pay off your debt can mean several hundred dollars of money previously used for debt are freed up to save or invest. Assume that you have a balance of $2,500 on a credit card with 16.49% interest. Even just $65/month extra on this debt can mean the difference between paying off the balance in 3 years versus paying it off in 13 years with just the $25 minimum payment. That’s a 10 year difference, plus it will also save you nearly $2,000 in interest. The impact may be less on lower interest-rate debt, however, it is still very significant! Getting rid of those pesky monthly debt payments is essential to changing from paying for the past to saving for the future.
A couple thousand dollars of “found” savings per year could be a very good start for your financial future. I would highly recommend that your first thousand dollars or so be the start of your emergency savings. From there, you can prioritize your other savings goals such as vacations, education, hobbies and others.
The savings from cutting out unnecessary expenses or the monthly debt payments can then be invested in retirement or college savings plans, which grow exponentially over time. We’ve talked previously about time value of money and how compound interest works. A great simple example is contributing $50 per month to college savings account for your child. If you start when they are born and save $50 per month for exactly 18 years, you will have contributed a total of $10,800. However, assuming a conservative 7% average interest rate, the account will have grown to $21,536. This is double the amount you’ve contributed! This is the power of compounding.
Using the money you save instead of spending on small things that aren’t important to you can make the difference between living comfortably in retirement, or relying almost solely on Social Security income to make ends meet. It can make the difference between being able to enjoy a vacation with your family without having to worry about the payments for the next 10 years on the credit card. It is the difference between peace of mind and worry about the next paycheck, the next dollar, the next financial fight with your spouse.
While you may not feel like it’s making a big difference to make your own lunch or buy the store brand over the name brand at the grocery store, remember that it’s the power of small things that result in big results. Your daily decisions determine your destiny and it’s just as true in finances as in any other decisions you make daily in your life.
What are some ways that you have seen the impact of small amounts creating a big impact on your finances?
It is amazing how much seemingly small amounts add up over time. I think that’s why people were so inspired by the “latte factor” that David Bach developed. It’s true that $10 here or $20 there doesn’t seem like a lot, but over a year or a decade it really adds up. I’ve mostly seen the power of small amounts in investing. Back when my oldest was born I could only put $50 per month into his 529. Sometimes people will say “why bother” if you can’t do large amounts, but keeping at it every month has helped it grow over the last 13 years into enough to pay for four years of tuition at my state’s flagship university (two years if you count room & board and other expenses)
It really makes a difference! In the past we’ve only put money into the college funds when we had a big chunk of money to feel like we were making a difference, but recently set up automatic monthly payments. We’ve always done that with retirement savings, but can already see what a big impact it’s going to make on the college funds. That’s amazing that you were able to start from the very beginning and see that growth!
My husband and I just started getting serious about saving money this year. It really is amazing how all these little things add up. All of this “found” money is going right on paying down our debt. Great post!
Awesome! I was a little bit short on my stretch goals for the year (namely college savings account contributions I wanted to make) and have seen this especially that cutting just a little here and there on other things that I don’t care about has allowed me to reach those goals. Good luck with paying down your debt-those small amounts are really going to add up for you!
We’re pretty similar – I’m the saver, he’s the spender, but he’s more of the small daily purchases (and occasional big thing) where I’m more of the once in a while bigger things! It’s tough given the nature of his job, and like I tell him, it’s up to him if that’s what he prefers to do with his $, but making lunches as much as possible is a huge money saver.
I’ve heard there’s generally a saver and a spender in every relationship. We’ve definitely had to compromise on some spending habits-we’ve had that same discussion, as he likes to eat out every single day!
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