ADVERTISEMENT

The 3 smartest ways to cut costs and grow your savings during a pandemic, according to a personal finance guru

Ramit Sethi is an entrepreneur, and the founder and CEO of personal finance website I Will Teach You To Be Rich .

Ramit Sethi 2
  • During the pandemic, he recommends people find new ways to cut down on their highest expenses, which are typically rent, eating out, and discretionary spending on material items.
  • Sethi also strongly advises people to ramp up their savings and work towards building a one year emergency savings account the key to this, he says, it automating your savings each month.
  • Visit Business Insider's homepage for more stories .
ADVERTISEMENT

How can you save money during a global pandemic? Individuals and businesses alike have found themselves coming up against this issue.

To learn some of the best strategies, Business Insider spoke with personal finance advisor and entrepreneur Ramit Sethi, who is a New York Times bestselling author and creator of the platforms Earnable and I Will Teach You To Be Rich.

Under what Sethi calls the "CEO strategy" cut costs, earn more, and optimize spending he advises people to first focus their energy on cutting costs.

ADVERTISEMENT

"For individuals, cutting costs with your money is in many ways like flossing we all know we should do it, but most of us never get around to it," said Sethi. "We often feel guilt because we know we should have done it a long time ago, and we feel overwhelmed because there are hundreds of things we could cut back on."

South_agency/Getty Images

For most people, Sethi says it's wisest to reevaluate your top three expenses that you have the ability to cut back on. This will often be rent, which you can try to negotiate down during this time, eating out, and sporadic spending on clothing and material items that you may want, but don't truly need.

ADVERTISEMENT

"There's no need to go rummaging around to save on $3 expenses, because you can get the bulk of your cost-cutting wins from those three big items," Sethi shared.

During the pandemic, it's easy to cut down one a big-ticket item: eating out. Why? Because most restaurants and bars are closed.

"What's amazing is that it almost seems effortless at this moment to save money on it," Sethi said. "That tells us that cutting back is not so much about willpower, as it is about setting up the right systems long term."

ADVERTISEMENT

Courtesy of Ramit Sethi

Sethi shared a lesson from his book that he calls the "85% solution." If you're targeting an area of your finances that you want to improve, it's better to get 85% of the way there and move on, instead of only being satisfied if you achieve 100% success, which can be disheartening and undermine those accomplishments.

"Somebody wrote to me once and told me, 'Every week, I tell myself I'm going to go for a run three times a week, and I never do it.' I wrote back to her and said, 'Why don't you just go for a run once a week?' She writes back: 'Once a week what would that accomplish?' In other words, she'd rather dream about running three times a week than actually run once a week," Sethi said.

He explains that the same mentality can negatively affect attempts to gain control of your finances. "Many of us would rather dream about having perfectly organized expenses and perfect asset allocation, when in reality, if we just get 85% of the way there, if we just pick those three big expenses and cut those down, we would get most of the same benefits."

ADVERTISEMENT

dowell/Getty Images

"Money is about so much more than math," Sethi explained, adding that finances can have a big impact on your emotions and sense of meaning.

"Start off with quick wins, wins that you can achieve," he said. "You also want to pick something that over time is going to be meaningful. If you really decide to optimize by buying the cheapest salt shaker, you may have saved 13 cents over the course of your life, but that doesn't mean anything to anybody."

"Most of us have been taught in America that we have to try harder with our money. We have this almost puritanical belief that if we just try harder to save, it'll work. But of course that hasn't worked for the last 50 years. Right now, we see that sometimes putting yourself in a situation where you're almost forced to save money can be really powerful."

ADVERTISEMENT

Courtesy of Ramit Sethi

"Many people overestimate how much they need for a one year emergency fund," Sethi said. "They'll often say, 'I make $60,000, that means I need $60,000 in an emergency fund that's going to take me forever.' But that's not true."

To determine how much your emergency fund should be, calculate the minimum expenses you need to survive, which means cutting out anything that would be more than vital spending to have a roof over your head, basic necessities, and food. For individuals, that might mean considering moving to an apartment with cheaper rent, or adding a roommate to help with your mortgage. This may still be a substantial number, but it will be more approachable than thinking you need to save an entire year's salary.

ADVERTISEMENT

This fund will take time to build, which Sethi says is perfectly normal: "Once you start to see that number grow, you're going to feel much safer and much better equipped for whatever comes our way."

"We're in the riskiest economy in our lifetimes, that's why playing defense first is really important. You want to live to fight another day."

Westend61/Getty Images

ADVERTISEMENT

Sethi said that too many people distract themselves trying to determine which high-yield savings account is the best one, when, realistically, small differences in interest rates do not make a meaningful difference.

"The yields on these savings accounts are not that high anymore that's fine, that's normal. You do not really make money from having your money in a savings account," Sethi explained. "A common mistake that people make with their emergency fund is spending a month researching the right account. Don't worry if it's a 1.3% or 1.4% interest rate if you run the math, you're talking about $2 to $3 a month, maybe. Just find a simple high yield savings account, pick it, and go with it."

What does make a huge difference, however, is setting up automatic withdrawals of money from your paycheck into the savings account.

"Automation is one of the best decisions you can make in your entire life, ever, bar none," Sethi said. He explained that if you don't automate your savings, you're depending on "the better angels" of your own nature to remember to manually contribute every month. And despite all good intentions, most people will forget to do this.

"The data shows us that when you automate contributions to a retirement account or savings account, that money grows because we forget about it and let the system take over. A big finding in personal finance that more people should listen to: Systems over willpower. That is profoundly important," said Sethi.

ADVERTISEMENT

Although he doesn't use too many tools, if you are looking for an app to get a better handle on your day-to-day expenses, Sethi suggests You Need A Budget (YNAB). Another popular option is Mint , which allows you to link your bank accounts and keep track of bills and other spending.

Dmitry Shundeev/Shutterstock

For businesses, there are exceptions to how they should keep spending during the pandemic. You can streamline costs by shelving exploratory or experimental projects that don't directly impact revenue and profits, but don't give up on marketing.

ADVERTISEMENT

"In the 2008-2009 recession, we saw that many business owners' first temptation was to cut back on marketing, and those that did often experienced a slow decline in their business. Savvier business owners often made the decision to continue investing in marketing, even while they streamline in other areas, and those businesses tended to perform better," said Sethi.

Advertising rates are lower during the crisis, and consumers still want to spend their money, albeit in different ways. This provides a perfect opportunity for entrepreneurs to get creative in their outreach efforts, especially through email newsletters or social media. "Marketing is how people are going to know about you," Sethi explained. "If you continue investing in marketing, that can be one of the best long term decisions that you make."

See Also:

SEE ALSO: How to save money during the pandemic: A personal finance expert explains how to negotiate your rent and bills and build a successful side hustle

ADVERTISEMENT

SEE ALSO: 6 tough conversations you need to have about money and how to have them even if you don't want to

FOLLOW BUSINESS INSIDER AFRICA

Unblock notifications in browser settings.
ADVERTISEMENT

Recommended articles

Sony’s creators convention redefines the creative landscape for content creators

Sony’s creators convention redefines the creative landscape for content creators

Egypt, Nigeria, and South Africa ranked as Africa's most polluted countries in new report

Egypt, Nigeria, and South Africa ranked as Africa's most polluted countries in new report

10 African countries with the lowest life expectancy according to the World Bank

10 African countries with the lowest life expectancy according to the World Bank

Kenyan women are more obese than their men - here’s why

Kenyan women are more obese than their men - here’s why

Africa’s richest man Dangote stands between Europe and $17 billion in revenue

Africa’s richest man Dangote stands between Europe and $17 billion in revenue

After months of exchanging blows, Kenya and Uganda takes steps towards resolution

After months of exchanging blows, Kenya and Uganda takes steps towards resolution

Africa's first black billionaire could join $2.9 billion Vivendi bid for MultiChoice

Africa's first black billionaire could join $2.9 billion Vivendi bid for MultiChoice

10 most dangerous African countries in 2024

10 most dangerous African countries in 2024

Russia’s nuclear influence expands further north of Africa

Russia’s nuclear influence expands further north of Africa

ADVERTISEMENT