There are some expenses you just can’t avoid, like taxes, health care and funeral costs. Sure you can maximize your tax savings and try to avoid overpaying for health insurance, but generally we must live, and die, with these costs. However, you can control most of your other big-impact expenses and with a little foresight, you can use these budget and investment adjustments to supercharge your net worth.
Control these expenses to increase your net worth potential
#1. The high cost of education
I once wrote an article about the true value of a college degree and since then, things haven’t improved much for brick-and-mortar educational institutions. College enrollment costs have continued to soar while enrollment rates have rapidly declined. Meanwhile, receiving at least an undergraduate degree is still considered a rite of passage for many good employment opportunities.
But there’s hope…still. Beyond some of the tips we mentioned last time we covered this topic – like evaluating loan repayment terms against your prospective salary, applying for scholarships and loan forgiveness, or considering quality foreign universities – there are some other great ways to control the cost of getting a degree.
- Pay for your children’s education
Financially speaking it makes a lot more sense for parents who are in the mid or late point in their careers, to supplement the cost of their children’s education. It’s really hard for an 18 year old to grasp the reality of repaying such an enormous debt, well into their 30s and starting out with a lot of debt makes it nearly impossible to get a foothold on solid personal finance practices, like saving money and investing early. Parents who had to take out student loans when they were going to school probably feel that student loans are also a rite-of-passage. However, considering the current cost of education compared to historical costs and lower average starting salaries, it has arguably never been harder for a prospective student to justify the investment. Of course, that’s not to say that there should be no limits on the education expenses that parents cover, or no repayment plan.
- Use the community college “hack”
As a “commuter school” attending a community college undoubtedly kills the “college experience.” However, the ability to receive fully transferable credits at a fraction of the cost of a major university, makes starting your education at a community college a powerful way to boost your future net worth. In many cases you can transfer two years of core credits to an accredited university, earning the same degree as a student who spent all four years on campus. Don’t assume that junior colleges provide a subpar education either, I’ve attended a top 100 private college and public university, as well as a community college and for core credits, there’s really no discernible difference.
Related: Harvard Extension School: The Backdoor to the Ivy League?
- Take an apprenticeship
Fewer people are also entering the skilled trades but the value of a hands-on education in a profitable trade cannot be understated. Specializing in a trade provides you with job stability and veteran trades people are often in high demand and consequently, are highly compensated. Not that the work is easy, office workers definitely have the advantage of not having a physically taxing career. Trades people often work in tight, uninsulated spaces for long periods of time and often do a lot of driving from job to job. But, as experts in their craft and industry, trades people can also start and run successful businesses more easily.
#2. Housing expenses
Housing costs are the biggest expenses most of us will ever have to cover, and they never go away. Even after you pay off your home loan, you are still obligated to pay property taxes, utilities, HOA dues, maintenance and upkeep. With the housing market increasing in value at such a rapid pace recently, It’s easy to feel disenchanted about the prospect of ever purchasing a property, let alone paying one off, but there is good news –
There are steps you can take to significantly reduce your housing expenses and increase your net worth over time:
- Sometimes it makes sense to rent
There is no doubt that buying affordable real estate is a good financial move, however in some markets it makes a lot more sense to rent. In places where rental costs are significantly lower than average mortgages, like in Los Angeles where home prices are about three times higher than the national average, renting is usually a more prudent choice than buying a house you can barely afford. If you can invest the money you save by renting you likely earn more money than if you had entered the housing market. The stock market returns about 9.2% whereas the housing market has historically returned closer to net 5.1%.
- Buy a house and don’t pay it off too fast
Like I recently wrote about in, The Pros and Cons of Rapidly Paying Down Your Mortgage, the problem with rapidly paying off low interest debt is that you can earn a lot more money by allocating those funds to risk-adjusted stock investments.
- Buy something that’s affordable
It’s really hard to know the total cost of being a home owner unless you do the math. I did the math once and it turns out that the first few years of home ownership are much more expensive than simply the sum of the mortgage and utilities. If you set your sights on a less expensive property than you think you can afford, you have a much better chance of it actually being affordable. By “affordable,” I mean that you’re able to cover all first and second year expenses while saving money for emergencies and enough to max out tax sheltered investment accounts.
#3. Transportation costs
The cost of a owning a vehicle, or even using public transportation, is often high. In college I did a study comparing the total costs of public transportation against the cost of owning a car and found that they were roughly equivalent, at least in Boulder, Colorado, and only if you don’t have a car payment. However the cost of transportation can be mitigated in several ways.
- Finance an affordable modern vehicle at a low interest rate rather than buying a car with cash
Just like with real estate, by accepting a little interest and saving as much cash as possible on your vehicle purchase, with the cash you save you can invest in a simple index fund and earn much more than you pay in interest. Even if you don’t have perfect credit and the interest rate is 5%, it still makes sense to deploy your cash to index fund investments. This is especially true given that you would likely being buying a safe, fuel efficient, modern vehicle rather than any old car you could afford to buy outright.
- Seek out the middle ground
If you focus on value you’re more likely to make smart choices when buying vehicles. I analyzed dozens of cars, crossovers and SUVs and found that there is always a choice, between the base model and the top-of-the-line, where you can find the best value. You probably don’t need all the bells and/or whistles. It’s easy to think that you need a high horsepower vehicle but I’ve been driving for nearly two decades and have found that most city and highway driving doesn’t demand great 0-60 MPH times. Beyond that, very few drivers are even using all that power they have. I drive a 4,000 pound, 174 horsepower Dodge Journey and though I’m not enamored with it’s lack of power, I routinely overtake much more capable cars at normal driving speeds.
- If you don’t already own a car, consider public transportation, riding a bicycle or even trying to secure a remote/mobile career!
Related: The True Cost of Buying a Car: 5 Common Costs and How to Cut Them Down
#4. Child Care
Watching children all day, especially several of someone else’s children simultaneously, is incredibly challenging. I would think, I’ve only watched my own kids and usually not all day alone. However, after having two kids in full-time daycare and pouring over the quotes from local facilities (all between $1350 – $1,500 per month), I’m still not sure it’s a hard enough job to justify the enormous costs. Or, maybe it is, it’s not like these places are hurting for business. In my attempt to lower our cost of child care, I recently contacted several facilities in my area but only one place had an opening for a toddler. Thankfully my son is already in an equally expensive program that we were “waitlisted” at for several weeks before earning entry. But when he gets has a high temperature he has to be out of daycare for 72 hours, which usually equates to us paying for an entire week of child care, while taking time off of work to care for him. For comparison, many places operate on a 24 hour rule and though I understand an abundance of care, he has probably only gotten sick from his daycare.
However, there are ways to save money on child care, especially with the ever growing mobile workforce:
- Home daycare can save you money
Honestly, most home daycare scenarios make me nervous. I’m sure that the people who operate at-home daycare centers are usually great, but there is undoubtedly a benefit to having the support of a team at your disposable, as well as some oversight. That said, once my daughter turned two and was walking and talking confidently, we placed her in a carefully vetted home daycare and had no complaints. In fact, we saved a tremendous amount of money and because the provider is Italian, my daughter was able to eat great home cooked meals while learning about a foreign culture and language.
- Try to organize your career around your kids, not the other way around
As more of the workforce becomes remote, the traditional 9AM-5PM work model is no longer as relevant as it used to be. As I wrote about in, 5 Reasons Why Flexibility is More Important than Salary, the ability to work remotely can allow you to balance your work around your personal life. If both parents are flexible, you might be able to get away with part-time childcare or even eliminating the need for childcare altogether.
- Quit your job and stay at home… for a little while
This is probably not the wisest financial decision unless you’re making under 30K a year, but if one spouse can support the family, you might consider taking some extended time off to be with your children, at least for a few months. Not only do kids benefit from having the full attention of at least one parent in infancy, but given how much infants sleep, you may also find an opportunity to work on personal projects that could prove to be lucrative down the road.
#5. Lifestyle choices
Though this is a general category, lifestyle choices account for an incredible amount of overspending. The brands that you are aware of have spent billions to make you aware of them and they typically pay for all that advertising by providing a mediocre product at a higher price point. Though it’s difficult to stop allowing brands define your so called “status”, if you can distance yourself from marketing messages you can save a lot of money over time. Everyone seems to know that many brand-named products have equally viable off-brand counterparts, but fewer people are actually purchasing those off-brand products. I once read a story about a tennis ball supplier that would receive a shipment of balls, split them into two equal groups and put half into off-brand labeled containers and half into containers of a well-known brand. Though conjectural without reference, I don’t doubt it at all.
You may also experience some interesting personal benefits when you start reducing the number of times that you update your phone or buy a new car. I had a flip phone up until early 2020, when it was just becoming cool to have one again. I admit I held out too long but now that I have an iPhone 6s, it feels like such a huge jump in functionality that I have been satisfied ever since I upgraded. Similarly, my first car was a 1989 Isuzu Trooper, my next car was a 2004 Nissan Altima and my most recent vehicle (or whatever you would call it) is a 2015 Dodge Journey. With each new car I immediately experienced entirely new functionality, technology and safety features that would have been a lot less meaningful had I purchased a car every few years. Not that I recommend holding on to less safe, outmoded vehicles for a long time in order to save money. But it does make sense to keep analyzing the market and only buying a car when it becomes necessary to improve on safety or reliability.