10 Lazy Ways to Increase your Savings Rate

Maximizing your savings rate is key if you hope to reach Financial Independence (FI).  There are numerous ways to increase you savings rate, but they are not created equal.  Some require constant effort and/or sacrifice, such as taking your lunch to work every day, reducing your driving, forgoing your morning latte (or whatever it is you drink), and shopping at lower price grocery stores.  I would consider these “active” means to increase your savings rate because you have to work at them every day.  Others, such as installing energy savings measures provide savings long after you install them, but they require up front cost and effort.

Don’t get me wrong, these are great things to work on, but isn’t there a easier way that doesn’t involve so much effort?  A way that doesn’t involve so much sacrifice?

Yes, there is.  It’s called Passive Savings and it has the power to substantially increase your savings rate.

What Does Passive Savings Mean?

Passive savings, in the context of this post, is when you no longer have to pay for something, or receive an influx of cash, and instead of spending the money, you redirect to your savings strategy.

Since this money was already being spent, you aren’t going to miss it.  Unlike the cappuccino you had to cut out to reduce your beverage expenses or the delicious curry dish at your favorite Thai restaurant you that try to steer clear of as part of active savings measures.  But the best part about passive savings: You only have to do one thing!

Nothing!

Well, almost nothing.  You still need to transfer your extra cash to whatever savings/investment/debt payoff strategy you choose.

You might be saying,”Well that sounds pretty freaking awesome.  What do I need to go to take advantage of that?”

Nothing, actually.

On top of not having to do… well… pretty much anything, another advantage of these passive saving opportunities is that they also ensure your spending doesn’t not increase.  That’s working the FI equation from both ends!

You again: “Yeah, yeah, yeah, you sold me.  Give me some examples, already!!”

As you go through life, various financial situations will present themselves… let’s call them forks in the road. Take a wrong turn at the fork and you may find yourself detouring far away from your financial goals.  Take the right turn and you will reap the rewards of passive savings and could find your dreams within your grasp far faster than you imagined.

These forks in the road manifest themselves as choosing between allowing lifestyle creep (also known as lifestyle inflation) to eat away at our new windfalls… or not.

If you are a veteran FI-Seeker, these forks in the road can be few and far between because you’ve probably already grabbed all the low-hanging fruit.  But if you have just set out on this journey from mindless flabby consumer junkie to financial decathlete,… then you will find these forks around every bend.

Disclaimer Time!

Now, I need to be clear here.  I firmly believe in a life of balance.  In a race towards FI, we need to be mindful not to overextend ourselves leading to burn out or endangering important relationships.  The occasional indulgence can help maintain a healthy balance.  Just be sure that these indulgences provide you with the benefits you seek and don’t leave you stranded with more debt or lost opportunities.

So, let’s get down to it.  What are these Passive Savings Opportunities?

1. Paying Off Consumer Debt – An example would include paying off a credit card, or other high interest loan.  For most, this will be the first chance at passively increasing your savings rate because the grotesquely high interest rates associated with consumer debt usually makes its destruction Priority 1 on the path towards FI.
2. Paying Off a Vehicle Loan – Don’t be the person who goes from one car payment directly to another! (we used to be this way)  This one is particularly nice because, let’s face it, car payments are expensive!  When I paid off my truck, I redirected the former truck payment to my student loan, which really got our debt snowball rolling.
3. Job Raises – You’ve been busting your tail all year and your company has awarded you a raise.  Awesome work!  Fight the temptation to run out and buy a shiny new (Fill in the Blank) that will only give you a brief shot of enjoyment, but leave you with lingering monthly payments.
4. Job Bonuses – Your job performance was especially good, or maybe you are benefiting from the overall company’s performance.  Who cares?  Here is your big check! Whoohoo!  Instead of going all Clark W. Griswold and building a pool, perhaps use it to get you across the finish line in paying off a student loan (we did this last year, and I am so happy we did).
5. Paying Off Your Student Loan –  As far as satisfaction goes, eliminating this debt ranked near the top for us.  No longer are we paying for coursework and lectures we can’t even remember!  Much like killing off a car payment, this can give you a big boost.
6. Daycare Cost Reductions – If you have kiddos, then you probably know just how expensive daycare can be.  I mean, like second mortgage expensive.  But the good thing is that as they develop from helpless bundles of joy wrapped like burritos into rambunctious, opinionated, terrorizing, toddlers…. daycare gets substantially cheaper.  Make sure you grab this cash and put it to use right away.
7. PMI Elimination – PMI stands for Private Mortgage Insurance.  So you’ve bought a property with less than 20% down? (Guilty).  If so, you’ve been paying money every stinking month to protect the lender in case you don’t make your payment….Ugh. When you reach 80% loan to value PMI should go away,  When it does, be sure to add the difference to your savings/investment plan or roll it into your mortgage payment as extra principal paydown.
8. Tax Returns – After you file your taxes you may receive a refund.  As an aside: If the refund is huge, then I suggest you take a closer look at your W4 elections.  I would much rather have this money every paycheck then once a year, what can I say, I don’t like handing out interest free loans.  Many people immediately run out with this “bonus” and go buy X, Y, or Z.  Recently, I’ve heard several car dealers offers special “Bring us your Tax Return” promotions.  To that I say:
9. Inheritances – I’m sorry for your loss.  No amount of money can replace the family member you lost, but alas you might receive some… or a lot.  What would your loved one have preferred:  you blowing it all on a Disney Vacation, or fully funding your children’s 529 plans?
10. Property Tax Reduction – Property values dropped in your area?  The amount you owe in yearly property taxes may drop as well.  I know it did for most people following the 2008 recession.  Instead of blowing it all on hats, consider adding the difference onto the principal payment for the mortgage!

By simply saving NO to lifestyle inflation when these forks in the financial road crop up you can set yourself up for success with as much effort as falling asleep in a hammock.  The important take-away is to recognize these moments for what they are and to withstand the urge to spend on short-term gratification.

So, what do you think.  Got any other examples of Passive Savings?