In random conversations in recent weeks, the desire to save more has come up repeatedly. A number of factors probably account for the flurry of concern. For one thing, households have borrowed significant sums during the long economic expansion. Despite the current low unemployment rate, the prospect of getting laid off sometime in the not-too-distant future is a gnawing concern. For another, many near-retirees worry they haven’t set aside enough money for their elder years.
So, let’s talk savings or, more accurately, spending. The reason for highlighting spending is that frugality on big-ticket household expenditures is the best way to free up cash for savings. Think home, transportation and education.
To be sure, much of the conversation about how to save more involves finding small sums through budgeting. The classic example is to steer clear of lattes and invest the money instead. For example, if you saved the $5 currently spent on coffee during the workweek you might have nearly $50,000 compounded annually at 2 percent at the end of 30 years.
The value of the latte-orientation is the budgeting exercise can be useful when trying to get spending under control. You want to know where your money is going and where you might trim. Yet budgeting is a short-term tool rather than a long-term savings strategy.
I like the perspective of Eric Tyson, the author of the “Personal Finance for Dummies” series (among other books and writings) on the topic of a budget. In an interview, he doubted people “need to be tracking all of their spending on a monthly basis.” Instead, he advocated if people “set a specific savings goal like we are going to save 10 percent of our income or 8 percent of our income each month and they are able to do that, then my feeling is who cares where [the money] goes after you have accomplished that savings.”
The trick for boosting savings is to spend less on big household expenditures. Homeownership is a good example. It’s still too easy to borrow more than is prudent. For instance, a standard guidepost is people shouldn’t commit more than 36 percent of their gross income when figuring out how much home to buy. Problem is, that kind of commitment leaves too many people financially vulnerable.
Smaller homes are also cheaper to own. Larger homes cost significantly more to maintain. Energy costs run higher. So do property taxes and insurance premiums. The savings from owning a smaller home compound over time. You can do similar calculations with a car.
Chris Farrell is senior economics contributor for “Marketplace” and commentator for Minnesota Public Radio.