How to Save $150,000 (And Still Have a Life)

With Steve jumping off the corporate treadmill and starting a new career as a blacksmith, the Portland, Ore., couple knew they'd need to build a bigger savings cushion. To get there, they sweated the small stuff. The Carters kept their house mostly dark, relying on a lightbulb or two at a time. They plotted shopping trips with the precision of NASA physicists, making sure they'd use the shortest possible route — and the bare minimum of gasoline. Gone were the thrice-weekly dinners out. Forget about 80-channel cable. Hello to a kitchen timer next to the shower stall — designed to cut back their hot-water bills.

And hello, as well, to a serious case of cheapskate's malaise. "If you're so vigilant about the day-to-day stuff, it really wears on you," says Lisa, a staffer at a local university. "You start to feel deprived." And for all their corner-cutting, the Carters weren't saving enough to justify their sense of sacrifice — until they changed tactics and started thinking bigger.

Knowing that they'd soon move to a larger property to accommodate Steve's ironwork, the Carters replaced their 30-year home loan with a hybrid adjustable-rate mortgage (ARM) that cut their interest rate from 6.875% to 4.625%. The mortgage move shaved $468 a month off the Carters' home payment, saving more money than all their other penny-pinching put together.

Today the Carters still retain some of their money-saving habits: Steve loves to cook, for example, so restaurant visits remain rare. But the couple feels better knowing they're working smarter, not harder, to save. "It's much easier to focus on the big picture, knowing that little splurges won't derail our plans," says Lisa. "It's exciting to see your results grow. . . . Opening your utility bill and realizing it's $10 lower just isn't the same."

It's certainly possible to save money using all of those dreary commonsense tactics that fill the Sunday-paper advice columns — choosing a brown-bag lunch over Au Bon Pain, buying clothes only on sale, clipping coupons and rolling loose change. But for most people in a consumer-centric culture, pinching pennies doesn't come naturally. Faced with schoolmarmish lectures about giving up our creature comforts, our ids rebel: We don't have the time to be frugal; we deserve a reward for our hard work; we want our HBO. If we do discipline ourselves, we may wind up like the Carters, waiting impatiently to see results. And like fad dieters, if we backslide by splurging on the things we've denied ourselves, we can wipe out our progress with one binge.

Fortunately, there's a saner way to save, and it boils down to one tip: Hunt for bigger game. In any given year, you'll spend tens or hundreds of times more on the big-ticket items in your budget — your house, your car, your medical bills — than on cappuccino and compact discs. It stands to reason that you'll find the biggest savings in those same places. "The small stuff matters, but I'm telling people more and more often, see if you can do one huge thing to cut your costs," says Mary Hunt, founder of the Cheapskate Monthly newsletter, which covers the small tips as well as the big ones. Dozens of financial planners we interviewed this spring sounded the same theme.

To put this approach to the test, we posed ourselves a challenge: How could a middle-to-upper-income household trim its expenses to set aside an extra $150,000 over 10 years — on top of what they're already stashing in 401(k) plans, college-savings accounts and such? And could they do it without feeling like martyrs to miserliness?

To find out what those families were spending, we studied data on the expenditures of households with income of more than $75,000 per year. The data came from the federal Bureau of Labor Statistics' annual consumer-expenditure survey and from a similar study by Mendelsohn Media Research. We found that by focusing on the expenditures that make up the four cornerstones of a typical household's obligations — home, cars, investments and insurance — our family could come up with at least $137,500 in savings by making a few shrewd strategic moves. And that's a conservative figure; in each section, our "baseline savings" rounds down from the maximum available savings to account for those already spending less than average. From there, we got our family over the top by coming up with 14 other smaller and equally painless tips, on everything from travel to credit cards to even your home computer. Pick and choose from those and you'll easily save another $12,500.

It's a potentially terrific haul — for not much work. Indeed, it's striking to see how many relatively simple tactics go unheeded by most consumers. Too bad for them, because saving the big bucks turns out to be a matter of doing some smart legwork before you make your biggest expenditures. It takes effort — but not nearly as much effort as trying to nickel-and-dime your way to riches. And best of all, you won't have to give up your "Sopranos," your salon or your Starbucks.

House and Home
Baseline Savings: $30,000 over 10 years
Mortgage — it's French for "death pledge." When you become a homeowner, you make one of life's biggest financial commitments. In 2002 and 2003, some 20 million homeowners made that pledge much less onerous, arranging refinancings that have already saved them $48 billion. With interest rates creeping higher, fewer homeowners have much to gain from a traditional refi. But a little creativity can still wring big savings out of your home payment — and there's more than one way to shrink that beast.

When Greg Weyandt looked for alternatives to the 6.5%, 30-year fixed-rate mortgage on his home in Birmingham, Ala., significant savings seemed elusive — until he found out about LIBOR loans, an option that most mortgage brokers can arrange. While typical mortgages are tied to American banks' prime rates, a LIBOR (London Interbank Offered Rate) loan is tied to banks in Europe — where a slower recovery has meant lower rates. That's why getting a LIBOR slashed Weyandt's interest rate to 3.875%. The drawback to a LIBOR: The rate is reset every month, and there's a chance that a homeowner's rates can spike. "But we're saving so much, it was worth the risk," says Weyandt. If rates go crazy, he plans to jump back to a fixed-rate mortgage, but if they don't, he could save $30,000 over 10 years.

Like many refinancing strategies, the LIBOR works best for people in the earliest years of their mortgage: You benefit most from low rates in those years, when your payments predominantly go to interest rather than equity. But for people who plan to hold on to their home for 10 years or less — and 72% of homeowners flip their homes that quickly — the hybrid ARM can be the more attractive option. The payments on typical ARMs float with interest rates, but hybrids let you lock in a fixed rate for the first three to 10 years of the loan that is higher than that on a traditional ARM, but lower than that on a 30-year fixed-rate mortgage.

When they realized they were falling short of their retirement-savings goals, Paul and Jane Brandes took an ARM against their sea of troubles. By switching from a 30-year fixed mortgage to a hybrid ARM, fixed for seven years at 4.9%, they cut their house payments by $800 a month. "We're not great savers," insists Paul, but the Brandeses look great on paper: They're taking their $9,600 a year in savings and plowing it into their daughters' educations and their retirement plans.

If there aren't any moves in your future, you don't have to reinvent the wheel to save money on your home. Closing costs on a refinancing can hover between 1.5 and 2% — as much as $5,400 on a $300,000 loan — but by renegotiating a lower rate with your current lender, instead of hunting elsewhere, you can considerably shrink them. And the investment of one extra payment a year can slash the total cost of your mortgage. On a $300,000, 30-year mortgage at interest of 6.875%, the strategy could retire your mortgage 10 years early, saving almost $59,000 in interest charges. The most painless way to do it: Boost every month's payment by one-twelfth.