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Forget skipping coffee. Here's how to really save money.

If you live in an expensive city, you might want to consider moving somewhere more affordable, like Dallas.
If you live in an expensive city, you might want to consider moving somewhere more affordable, like Dallas.
George Rose/Getty Images

You’re probably not saving enough for your retirement. Check out this calculator and see. If you’re young, you need to be putting away about 15 percent. If you’re older and haven’t been doing that, then you need to be saving even more to catch up. Maybe 20 percent. Maybe 25. Seriously, check out the calculator.

When presented with these facts, many people react not with alarm but with outrage. Americans don’t save enough because by and large they seem to believe it’s not possible to save that much money. And for genuinely poor families, that may be true. But the problem of under-saving is much more widespread than that. Most of the people who have told me that it was impossible to save 15 to 25 percent of their income were relatively successful professionals who could expect to earn an above-average income over the course of their careers.

These people — the kind of people who are most likely to be reading this website — absolutely could and should be saving more.

Americans today save a lot less than their parents and grandparents

In 2014, the average savings rate was 4.8 percent, far short of what the average American worker needs to enjoy a comfortable retirement.

Americans used to save a lot more:

A generation ago, the savings rate was between 7 and 10 percent. Two generations ago, Americans saved 10 to 13 percent of their income.

And while some of this might reflect a rising cost of living, especially for education and medical care, it's also a result of increased consumption. For example, the average American today has a house that's 50 percent larger than the average house three decades ago.

There are probably people who live on a lot less than you do

(David Cooper/Toronto Star)

America is a rich country, but our high incomes are not evenly distributed. In 2012, the richest 20 percent of households had incomes of at least $104,097. The poorest 20 percent made less than $20,600.

What this means is that unless you're at the very bottom of the economic ladder, it's easy to find examples of people living more frugally than you. A household that made 2012's median income, $51,017, could save 20 percent of their income if they lived like a family at the 40th income percentile, $39,765. Similarly, a household whose income was at the 60th percentile, $64,582 could save more than 20 percent of their income if they lived like a family making the median income.

That's not to say that it's easy to cut expenses. Money makes our lives easier, which is why we like spending it. Cutting expenses is a painful process. But the fact that millions of people do it proves that it's possible. And it's important to remember that you face a tradeoff between a better quality of life now and a better quality of life later. If you don't tighten your belt now, you might be forced to tighten it more dramatically when you reach retirement age.

Saving now is easier than saving later

When it comes to saving money, young workers have several advantages over older workers. One is rising incomes. Workers' incomes tend to grow fastest early in their careers as they gain experience and seniority. Later in their career, they're more likely to stay at the same (hopefully higher) income level.

This means that for many young workers, saving money may not require any actual belt-tightening. It just means not boosting their spending when they get raises. It means keeping a roommate for a few more years rather than getting your own place. It means keeping a one-bedroom apartment instead of looking for a place with two bedrooms. It means continuing to patronize cheap bars and restaurants rather than moving upscale.

Even better, if you develop more frugal habits today, that can reduce the amount of income — and, therefore, savings — you need when you reach your retirement age. If you never upgrade from a Honda to a BMW during your working years, then you don't have to worry about whether you'll be able to afford a BMW in your golden years. So saving aggressively early in your career has a double benefit: it increases the amount of cash you have in the bank, while simultaneously reducing the amount you'll feel like you need later.

Most importantly, thanks to the power of compounding interest, dollars you save early go a lot farther. If you follow sound investment principles, you can expect every $1 you save at age 25 to grow to between $4 and $10 (adjusted for inflation) by age 65. A dollar saved at 35 will grow three to five times by 65. So if saving an extra $1,000 this year is difficult, imagine how much worse off your 65-year-old self will be when you have to cut expenses by $5,000.

Focus on big-ticket items

Your retired self will thank you for driving a car like this. (Justin Sullivan/Getty Images)

Often, when people try to cut costs, they do it by reducing small, optional expenses — like making coffee at home instead of buying it from a coffee shop. But while trimming those kinds of expenses never hurts, it's often more important to focus on expenses that people think of as the essentials — especially housing costs.

Obviously, everyone needs a place to live, so you're not going to be able to eliminate housing costs altogether. But there are a lot of things you can do to reduce them. You can get a smaller apartment or get a roommate. You could move farther out in the suburbs where you can get more housing for less money. And if your personal circumstances allow it, it's worth considering moving in with parents to save money.

Housing costs account for such a large fraction of many people's incomes — especially in big cities — that even modest reductions can free up a lot of cash.

Cars are another big-ticket item that may offer room for savings. Some people view a new, expensive car as a status symbol, but you can probably find a used car that will do the same job while saving you thousands of dollars.

Consider moving to a cheaper metropolitan area

If you don't mind the cold, Minneapolis is a great place to live. (Tom Dahlin/Getty Images)

If you live in a big metro area like New York or San Francisco, it might be a struggle to find affordable housing even if you get a tiny apartment or move far out into the suburbs. In that case, it's worth thinking hard about whether you really need to live in an expensive metropolitan area.

Housing costs are dramatically lower in other parts of the country. Philadelphia has many of the same amenities as other coastal cities but is dramatically cheaper than New York or Washington, DC. And the Midwest and the Sun Belt have cities that are cheaper still. As my colleague Matt Yglesias has pointed out, Minneapolis offers an appealing combination of high incomes and low housing costs. And if the cold weather doesn't suit you, Southern cities like Dallas and Atlanta are equally affordable.

Of course, some people have careers that require them to live in a particular, expensive city. And it might be difficult to earn a comparable salary in a lower-cost area. But many people could move to a much less expensive city without taking a big pay cut. If you're one of them, you could dramatically improve your standard of living.

It's okay to save less if you're building human capital

Most working adults should be saving 10 to 20 percent of their income each year. An important exception is young people who are accepting a dramatically lower income in the short run to prepare them for more lucrative or prestigious careers later on.

The most obvious example is people who are still in school. If you're waiting tables to cover the costs of getting a college degree, or if you're a graduate student with a $15,000-per-year stipend, it's going to be hard to save money for retirement. In this case, it's best to think of your education as a kind of savings in its own right — you're acquiring a valuable credential that will allow you to earn, and save, a lot more money in the future.

A similar point applies to people who are just starting out in a highly competitive career, like acting, writing, or fashion. Almost everyone in these industries starts out working a low-paying day job like bartending, waiting tables, or answering phones until they're able to get enough work to practice their passion full-time. Again, this is best thought of as a kind of investment: you're developing a skill that — you hope — will later allow you to earn a good living in a career you'll enjoy a lot more than bartending.

But it's important to be realistic. At age 25, it might be reasonable to live paycheck to paycheck as you focus all your energy on breaking into an acting career. But if you're still doing that at age 30, you need to start planning for the possibility that you're never going to get your big break. You need to either get a more lucrative job or cut expenses enough to save 10 to 15 percent of your bartending income.

Tackle peer pressure head on

Pressure from peers can be a major force driving higher spending. If you go out to eat with a group of friends and one of them wants to order a bottle of wine, it's awkward to be the one who objects to the added expense. But Megan McArdle has some good advice on dealing with this kind of situation:

Go to the mirror. Take a long, loving look at yourself. And then repeat after me: "I can’t afford it." That is what you say to friends who suggest going out when you don’t really make enough money to even stay in. It’s what you say to yourself when you’re feeling bad and want a splurge. There is nothing shameful about making very little money, so there’s no reason you shouldn’t tell your friends that you’re on a tight budget.

McArdle was writing about people who were having trouble finding work, but this is good advice for anyone who is trying to keep their spending down. If your friends are worth keeping, they should be more than happy to work with you to find activities that fit in your budget. More importantly, some of your friends might feel the same way, and be grateful to you for speaking up.

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