Unfortunately, there is no magic formula to accumulating money. You have to save, and that means spending less than what you earn minus taxes. If you are not saving money, you only have two choices: earn more money or spend less money.
There are lots of pithy articles about how to cut down your spending, like forgoing Starbucks. If you are like me, that might save you $5 a week. While every little bit helps, an approach like that will require a huge amount of effort to save any significant amount. In order to save a significant amount of money, you need to take a hard look at your big ticket items: housing and cars.
Where you live is probably the biggest contributor to how much you spend. In addition to the direct cost (mortgage, rent, etc.), where you live influences a lot of other spending. Your neighbors influence what you consider to be a normal lifestyle. They can also pressure you to donate to local schools or other community organizations and events. They can affect the number and kind of after school activities you send your own children to. The more affluent the neighborhood, the more costly the local restaurants and shops. And of course, where you live affects the cost of your commute. If you live in a walkable neighborhood with access to good public transportation, perhaps you will not need a car.
Speaking of cars, it turns out that the average loan payment in the US for a new car is $530 per month while the average loan payment for a used car is only $381 per month. This is despite the fact that the interest rate on the used car loan was more than 3% higher than that of the new car loan. The reason for this was that the average new car loan was for almost $31,000 and that for used cars was a bit less than $20,000. Another thing to consider is that the average new car loan results in paying over $5,000 in interest on top of the cost of the car.
One other thing I want to address is the idea of lifestyle creep. As we make more money, we have a tendency to increase our spending to match. This is called lifestyle creep. The idea is that if we spend half our raise, we can save the other half. As a result, we will increase our savings painlessly since we won’t miss what we never had. This would work if you were lucky enough to get raises that were higher than the inflation rate. The problem for most of us is that average wages have been fairly flat (once you subtract inflation) since about 1970. So, for most of us, we will have to reduce our lifestyle in order to save more.