You Can't Save What You Spend

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Some of you may have heard that it’s “good to save 10-20%” of your income.

Over the last 20 years, however, Americans have averaged savings of only ~5% of their income.

Interestingly, that 5% is fairly consistent across all income levels.

Why is it so hard to save?

From my experience, it’s because people aren’t in-tune with their spending.

I can “decide to save” $500 per month. But if during the month I spent that $500… I can’t save it.

This is kind of obvious, but I think it calls our focus to how we can actually improve our savings: Managing Spending.

Let’s look at a handy spending chart shall we?

This 2022 chart from the US Bureau of Labor Statistics shows average American spending by category (excluding taxes and saving).

Data from US Bureau of Labor Statistics 2022

Charts like this are helpful to see where our money is actually going each month.

Let’s say you’ve decided you want to start saving an additional 5% of your income.

In order to do that, you decide to cut your spending by 5%.

That’s a great goal, but now the tough part: Where should you cut?

I think most of us jump straight to fun purchases.

“Gotta hunker down and be frugal!”
“Dave Ramsey would want this!”

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From the chart, entertainment makes up 5% of spending. So if you wanted to cut spending 5% you should just eliminate all entertainment, right?

That may sound like a virtuous, idealistic place to cut, but let’s be honest with ourselves, we wouldn’t stick to that budget for long.

If you want to change habits for the long haul, you want to be realistic with your spending cuts: the best plan is one you actually stick with.

So, where else could we get that same 5% without the drastic lifestyle adjustment?

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Well, I could get 5% by cutting my food budget by 1/3 (take a look above at the black section of the pie chart). That would mean a lot less eating out, but that’s more manageable.

Any way to make it even easier? What about a combination of cuts?

Remember, in this scenario we are looking for 5% of our total spending. That could be just a few percentage points of:

• Food
• Entertainment
• Insurance

Again, look at the black slivers below.

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The Problem with Housing and Cars:

When trying to cut spending, it’s important to look for the lowest effort ways to make the largest impact.

Ironically, the two largest spending categories are ones that are hardest to change: Housing and Transportation.

You’ve got at least a 12-month apartment lease, all the way up to a 30 year mortgage.

And most of us only buy a car every 4-8 years.

What does this mean for our spending?

When big decisions come up, be planful about them.

Overspending on food one month can be corrected the next. Overspending on a 12-month lease cannot.

Savings isn’t about setting a number, it’s about changing how you spend.

If you want to start saving more, take a look at your budget and find a few places for small cuts.

Over time, those can turn into meaningful savings!