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Why Big Wins Are the Best Way to Boost Your Saving Rate

This article was written by in Personal Finance. 7 comments.


This is a guest post from J.D. Roth, who founded the Get Rich Slowly blog and currently writes at More Than Money. J.D. recently launched a year-long "Get Rich Slowly" course, which is based on the idea that you’d have greater financial success if you managed your money as if you were running a business. I’ve previously written about approaching your finances like a business.

I’m convinced that more people would achieve financial success if they managed their home economy as if they were running a small business. We all know that a company needs to earn a profit to survive, but few understand that the same principle applies to our personal lives.

To build personal wealth, you must spend less than you earn. When you do, you’re earning a “profit” and building wealth. But if you spend more than you earn, you’re losing money and in danger of falling into debt. The greater the gap between your earning and spending, the faster your net worth grows (or shrinks).

The key is to boost the profitability of your personal economy by spending less and earning more.

But not every path to profit is equal. Some opportunities are unappealing because they take either a lot of time or a lot of effort -– or both. Other options are a low priority because they have only a small impact on your bottom line. The best paths to profit – in business or personal life – are those that provide some combination of low difficulty and high reward.

There are four types of things you can do to reduce your expenses or boost your income.

  • Pyrrhic victories are activities that take a lot of time or effort without yielding an equivalent payoff. In business, these might include sweeping the parking lot or leasing a large office space. On a personal level, these are things like making your own laundry detergent or raising money by collecting old newspapers door-to-door.
  • Ongoing projects also require a lot of time or effort, but they provide huge payoffs when they’re finished. Last year, for instance, I organized and sold my collection of comic books. That project took over 100 hours of tedious work, but paid off with a $25,000 windfall. Similar projects might include moving to a cheaper home in a cheaper city or returning to school to earn a degree.
  • Daily victories are the bread-and-butter of personal finance. They’re easy (or quick) actions that yield small rewards, such as working overtime, clipping coupons, or making use of the public library. Because there are so many small, simple ways to boost your personal profit, these are the things most commonly covered in books and blogs and magazines. These daily victories are great—but it takes a long time for them to affect your bottom line.
  • Big wins are the Holy Grail. They’re the easy (or quick) things you can do to supercharge your saving rate. These include negotiating your salary (which takes minutes, but can pay off for decades to come) and reducing your transportation costs (which you can do in a matter of days).

You can improve profits by doing things in all four categories, but it’s important to keep each action in its place.

You should only pursue Pyrrhic victories when you’re unable to do any of the tasks in the other three categories. It’s foolish to try to get out of debt by making your own laundry detergent while you still have a huge mortgage. That’s like Microsoft trying to boost profit by spending less on pencils instead of selling more copies of Windows.

And what are the best ways to achieve these big wins? Well, it’s doing the things that most other people are unwilling to do:

  • Down-size your home. Housing is the biggest expense for most Americans, and by a wide margin. The typical household spends $1408 on housing each month, or about a third of its budget. Drop that by 10%, and you’ll save $150 per month. Drop it by 30% and you’ll save more than $5000 per year!
  • Drive less. Transportation is the second-largest expense for the average family. You can save big by biking or walking, using public transportation, or swapping your current car for a less-expensive used model with good gas mileage.
  • Earn more. You can cut costs only so much, but your earning potential is theoretically unlimited. If you really want to boost your personal profit, make more money. Go back to school, become a landlord, sell your stuff, take a second job. Of course, as an entrepreneur, you’re already working hard to increase your income.

The biggest barrier between the average person and financial success isn’t ability. It’s psychology. Big wins require effort and sacrifice, which can be tough to stomach. But the sooner you see that these choices aren’t extreme measures but the best way to achieve your financial dreams, the quicker you’ll get out of debt or reach financial independence. The small stuff forms a great basis for behavioral change, but it’s doing the big things that will make you rich.

This is a modified excerpt from "Be Your Own CFO", the 120-page guide included with the year-long "Get Rich Slowly" course. The guide includes tips for boosting revenue and cutting costs so that you can maximize profit in order to achieve your dreams, whether those are to retire early, send your kids to college, or travel the world. Want to know more? Buy it now.

Published or updated April 21, 2014. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

J.D. Roth has been blogging since before "blog" was a word. He is the mastermind behind the personal finance blog, Get Rich Slowly and now writes at More Than Money. View all articles by .

{ 7 comments… read them below or add one }

avatar Donna Freedman ♦75 (Newbie)

I suggest that people try for all four, at least for a while. Doing the daily/Pyrrhic route might make a small but noticeable difference in the bottom line while you’re also working at the ongoing project (e.g., cataloging those comics) and brainstorming the Big Win.
I’d also like to mention that for some people (e.g., those living paycheck to paycheck or in truly desperate situations), detergent-making could represent being able to do laundry at all and the coupon-clipping could mean the difference between eating just a peanut-butter sandwich or being able to afford a little jam on top. See John Scalzi’s “Being Poor” essay for more on that:
http://whatever.scalzi.com/2005/09/03/being-poor/
Not that I don’t think people should strive for bigger things! We should do the best we can with the money we have while always looking to improve our lives. But don’t write off those who practice small economies. It’s like Luke’s post the other day: “Some people can’t make changes to their lives as easily as those who write the books.”
(Not intended as a slam at you, J.D. Congratulations on your accomplishment.)

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avatar Aldo @ MDN

I love seeing J.D. over here. I’m a big fan of Get Rich Slowly and I’m excited about the new guide. I’d have to agree with Donna though, that people should try all four. I understand that Big Wins might sound the easiest and most rewarding but sometimes there’s nothing you can do. I’ve been negotiating my salary for a while to no avail (I guess we know what my next move will be).
Like Donna, I believe a combination of all four, at least for a little while, would help more in the long run.

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avatar qixx ♦1,890 (Half-Dollar)

Even with unsuccessful negotiations you can still accomplish the BIG Win of earning more. It might just require a different method. Since you know what your next move will be it seems you agree. It might be time to move on.

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avatar Marie

When I changed my career a few years ago, for me, that’s one of the best decision I ever made. I worked from 9-5 p.m. daily and when I got home, I was totally drained and I only had less energy to take care of my baby. But now that I’m self employed, aside from earning I can even take good care of my daughter.

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avatar Thegooch

I agree with most of these, the big wins for me personally were negotiating salary and cutting expenses. A couple of the items on the list didn’t work for me:
Sell your collection – I sold 30 year old collection of 500 comic books, all preserved under plastic sleeves, for $40. They comic book store would not budge on their offer.

Public transportation – I did this for about 2 years before switching back to driving. Not only was it more expenses than driving(including gas and wear and tear on my car), but it added 2 hours( you read that right) to my daily commute. Plus you had to time everything perfectly because if you forget you employee badge and had to run back home for it, you’ll miss the train or bus and have to way 30 to 45 minutes for the next one to arrive .

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avatar Ceecee ♦53 (Newbie)

While the big wins save the most, there is also something about the power of maintaining a habit. One or two small habits a day can reap big rewards over time. I go to a few sites each day that would probably be under the “daily” category above. While the daily pennies earned seem negligible, after a few months I get a nice treat from all those pennies added together.

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avatar Jason

Big wins! Extreme cheapskate techniques are no way to live your life. Great article
-Jason

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