What’s the first step to financial freedom? What are considered smart purchases and good debts?
In Set for Life, Scott Trench reveals practical strategies to spend less and save more through smart, frugal living. His approach focuses on reducing major expenses such as housing and transportation while building substantial savings that can transform your financial future.
Keep reading to discover proven methods for cutting your expenses in half, managing your savings wisely, and accelerating your path to financial independence.
Spend Less and Save More
Trench asserts that the first step to financial freedom is to spend less and save more. He recommends that you focus on cutting expenses through smart, frugal living and that you aim to save over half of your paycheck and live on less than $2,000 a month. The less you spend and the more you save early on, the less wealth you need to accumulate later, and the faster you can reach financial freedom.
Trench argues that it’s better to focus first on thrifting and saving rather than earning for two reasons. First, you can cut expenses right away, whereas earning more money takes more time and extra commitment. Second, the money you save by cutting expenses isn’t taxed, whereas the money you earn gets taxed, so it’s more efficient to save money than to earn extra taxable income.
Trench recommends three habit and mindset changes that can help you reduce your spending.
1. Do it yourself. Become self-reliant by learning to handle basic tasks yourself instead of hiring professionals, such as simple home and car repairs. Research problems first and hire specialists only when truly needed.
2. Settle for good enough. Consider whether premium options provide enough extra value to justify their higher prices. The difference between the best option and a good option is often minimal—for instance, store brand grocery products often taste very similar to name brand items but at a fraction of the cost.
3. Make smart purchases that reduce your monthly expenses. Smart purchases are items or investments that may cost more upfront but save you money over time. For example, buying a reusable water bottle and filling it up from the tap instead of buying disposable bottled water can significantly cut your expenses and is less destructive to the environment.
Focus on Your Biggest Expenses
When it comes to reducing your spending, Trench suggests focusing on four of the largest expense categories: housing, transportation, food, and insurance. He writes that relatively small budget items such as entertainment and clothing aren’t worth stressing over, assuming you’re reasonably frugal.
Trench provides several tips to cut down your largest expenses.
Housing: Rent an affordable apartment close to your workplace and split costs with roommates. While the trendiest neighborhood might be alluring, choosing a more affordable area just a few miles away can cut your rent in half.
Transportation: Daily car commutes can be expensive, considering gas costs, car repairs, and the countless hours spent in traffic. By living close enough to walk or bike to work, you can save more than $10,000 annually, according to Trench. However, if driving is necessary, opt for a second-hand, fuel-efficient car instead of a new one.
Food: Make your meals at home using budget-friendly groceries, rather than ordering food or dining out frequently. Keeping healthy food readily available can help you avoid convenient, costly takeout orders. However, Trench writes that you can still enjoy an occasional meal out with friends.
Insurance: For life insurance, Trench recommends term life insurance, which is cheaper than whole life insurance because it only provides coverage for a set time period. This is because once you achieve financial freedom, you’ll have sufficient assets and net worth to self-insure and provide for your family, so you’ll no longer need life insurance coverage.
For health, auto, and other types of insurance, choose high-deductible plans to keep premiums low. As you accumulate savings, you’ll be able to cover those higher deductibles if needed. Trench writes that in the long run, the money saved on premiums would outweigh an occasional hefty bill. He adds that combining high-deductible health plans with health savings accounts (HSAs) can also provide tax benefits that save you money.
Manage Your Savings Wisely
Once you’ve saved some money by cutting expenses, Trench advises that you use your savings in three ways:
1. Create an emergency fund. Set aside $1,000 to $2,000 for unexpected costs. This safety cash allows you to handle sudden bills, such as a car repair, and avoid taking on new debt.
2. Clear your debts. Your approach to clearing your debts would vary depending on the kind of debt you have: Bad debts are those that have high interest rates, incur late fees, or hurt your credit score. Pay those off immediately after you set up a small emergency fund. Good debts are those with low interest rates such as mortgages, student loans, and car loans, and you can pay these off more slowly. For good debts, choose to either clear small debts first for psychological wins or target the highest-interest debts first for maximum efficiency.
3. Set aside a year’s worth of savings. Trench encourages you to save $10,000 to $25,000 in easily accessible wealth. You can keep this money in a bank account or invest it through after-tax brokerage accounts in stocks, bonds, and funds. While investing offers potential higher returns, you’ll need to decide if you’re comfortable with the risk versus keeping it safely in cash. Regardless, having a year’s worth of savings gives you the flexibility to pursue new opportunities without fear of running out of money. You could, for example, switch careers or start a business knowing you have a year’s cushion of savings to fall back on.
Exercise: Spend Less and Save More
Trench argues that the first step to financial freedom is to spend less and save more through frugal living. In this exercise, you’ll audit your monthly spending to identify areas where you can reduce costs and increase your savings rate.
- Take a close look at your spending for the past month. What were your three biggest expense categories? How much did you spend on each?
- For each of your top three expense categories, brainstorm a few specific ways you could cut back. What changes could you make to your lifestyle or habits to reduce these costs?
- Which of your current expenses would you classify as “premium options” that could be replaced with “good enough” alternatives? Estimate the monthly savings from making these switches.
- What are a few smart purchases you could make that would cost more upfront but save you money over time? How much could you save per month or year by making these changes?
- After completing this audit, set a specific savings goal for the next month. How much will you aim to save by cutting back on your expenses? How will you hold yourself accountable?
