Have you ever thought about how you could free up more money to spend on lasting memories, fun and peace of mind? I know I did. So, I did some thinking and a little bit of research.
Use Pareto to get more money
A while back (when I was in college), I learned about the Pareto Principle, also known as the 80-20 rule. The Pareto principle is basically saying that 80% of the results come from 20% of the causes.
Simply put, if you focus on the right causes, the 20%, you’ll achieve 80% of your desired outcome.
So, if you want to get more money, what would be the 20% you need to focus on? I think you need to focus on these three factors, as they have the biggest impact on your monthly cash flow:
- Housing cost
- Transportation cost
- Income
Housing and transportation are the two biggest expenses for the average American household. Housing costs account for about 30-40% of monthly expenses, while transportation costs are around 10-20%. If you really want to make a big impact on your total expenses, you start by lowering these.
And of course, if you increase your income, you’ll have more money.
How to reduce Housing cost
Housing expenses are very likely your biggest expenses. That means they are also the best place to start cost cutting and leaving more money in your pocket. Here are some strategies you could follow to lower your housing expenses:
Move to a smaller house or apartment
Moving to a smaller place will mean your mortgage or rent will be lower. It’s realistic to assume you might be able to cut this cost in half. This is a big difference in monthly expenses. Less space typically also means reduced utility costs and maintenance expenses.
Move to a cheaper area
When you’re living in an expensive area, you could consider relocating to a neighborhood or city with a lower cost of living. The rent and home prices can vary significantly by location.
Moving even slightly outside of a high-demand area can reduce housing costs while keeping you close to amenities. Just keep an eye on the possible higher cost of commuting. Maybe you could do more remote work and commute less.
Refinance your mortgage
If you own your home, refinancing your mortgage to a lower interest rate can significantly reduce your monthly payment. This could become more important if the Fed continues to cut rates at its December meeting and into 2025.
Sell and rent
If you have owned your home for a while now, chances are the house has appreciated a lot in value. You could sell the house, cash in on the appreciation, and go rent a place.
This might be an option if you think that further house appreciation is not happening anymore or if you plan to be moving within a year or a couple of years anyway. Knowing you can walk out whenever you want can be so liberating!
Added benefits are no more property taxes and you don’t have to do maintenance yourself anymore. That will be the landlord’s job.
House hacking or fixer-upper
Two somewhat more extreme options to consider are:
- House hacking: this means buying a multi-family property, living in one unit, and renting out the others. The rental income from tenants can cover part or all of your mortgage, significantly reducing your housing costs.
- Buy a fixer-upper: If you want to put in some work, buying a less expensive home that needs renovations can reduce upfront costs. Over time, you can make improvements at your own pace. This option can be cheaper than buying a ready home, especially if you’re really handy and do the work yourself.
How to reduce Transportation cost
Transportation costs are very likely also a big part of your monthly expenses. So, cutting these will also have a great impact. These tips can help you lower your transportation expenses:
Use a bike instead of a car
My personal favorite cost saving action. I did this when I got a new job a couple of years ago. I switched from a car commute to riding my e-bike to work. Love every minute of it.
Therefore I know that switching from a car commute to a bike can lead to substantial financial savings. No more fuel costs, maintenance costs, insurance, and parking fees. Besides that, and maybe even more important, your physical health will improve, and you’ll enjoy a more sustainable and stress-free lifestyle.
Whether you commute every day or just a few times a week, cycling is a great way to reap these benefits. Even on an e-bike, studies have shown.
Use public transport
If you happen to live in an area with reliable public transportation, using that can be more affordable than driving a car. You’ll save a lot on fuel, maintenance, parking, and insurance. Some cities even offer discounts or passes for frequent riders, reducing costs further.
Buy a used car
If you really need a car, consider buying a used car instead of leasing or buying a new one. The overall costs are significantly less and you’re avoiding the steep depreciation that hits new cars in their first few years. The financial benefits are really impressive. Bonus benefit if you own a used car, you can decide when and how to sell or trade it in, potentially recouping some of your investment.
Downsize your car
If you currently drive a large, fuel-hungry vehicle, consider switching to a smaller, more fuel-efficient car. A smaller car usually has lower costs for fuel, insurance, and maintenance. It’s especially helpful if you rarely use the extra space. You can always just rent a big truck when you really need the space and power.
How to increase Income
Income is of course maybe the most important factor to get more money. But boosting your income is not easy and can be scary as well. You need to open up your mind and be willing to get out of your comfort zone. If you do, it will open doors to really improve your income. Here are a couple of great ways to increase your income:
Negotiate a raise or promotion
For this one, you need to prepare. Approach your boss with a strong case for why you deserve a raise. Highlight recent accomplishments, additional responsibilities, or industry benchmarks. This can be one of the quickest ways to boost your income, as it builds on your existing job and experience. It can however be a little bit scary.
Change jobs
Changing jobs can feel scary. But with the right preparation and mindset, it can be a great experience. People who switch jobs tend to get higher wages than other workers, and that’s even more true now because market wages are rising. Workers have the most leverage when they go out and switch jobs and find another employer willing to pay more. A typical job switcher got a pay raise of nearly 10%.
Take on freelance work
You could use your skills, like writing, graphic design, tutoring, coding, or any other skill to freelance on platforms like Upwork, Fiverr, or LinkedIn. Such a side gig can be flexible and will probably pay good money. Freelance work lets you earn money based on your schedule and skills, and it can grow into a substantial secondary income. Awesome, right?!
Start a business
This one could be a goldmine, but it won’t start out that way. You could consider turning a hobby or interest into a small business. This could be anything from selling handmade crafts online to offering consulting services. Or…or…your weird dorky hobby that nobody knows about, yet. Such a business can grow over time and may eventually become a significant source of income. Plus, this can start as a low-cost and low-risk side hustle.
Now you have money to spend, what to buy?
This is why you went to all that trouble. Hopefully, you’ve been able to cut expenses and make more money by now. Well done. Time to celebrate! And then you need to decide what to do with the money that is now burning in your pocket.
Now don’t spend it foolishly immediately, don’t be a total dork. My advice would be to something like this:
Buy memories
- Spend the money on experiences that you and your loved ones will remember forever. Enjoy these memorable moments.
- Use the money to improve your relationship with the people you care about the most. Have fun together.
- Support a charity you care about that makes a difference. Help always helps.
Buy peace of mind
- Pay down the mortgage if that debt is keeping you up at night. Don’t worry if it makes financial sense, as that little voice you hear in your head is right!
- Build an emergency fund so that you have a financial cushion, protecting you from unexpected expenses and giving you confidence to handle life’s surprises.
- Buy health insurance to reduce the risk of significant, unexpected expenses that could derail your financial future.
- Put some money away for (early) retirement. Some day you will not want to work anymore, trust me!
Buy fun
- Just spend it! At the end of the day you want to have a good time right now. Have fun. You have earned it, now go and spend it (foolishly).
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