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Ramit Sethi: How to Save More Money By Doing Less

Ramit Sethi / Author portraits/ Workman Publishing Author:  Rami

Today I’m going to show you how to generate an extra $200/month, which you can use for savings, investments, or even spend it on something you love. But I’m going to challenge you to put aside some assumptions:

  • Myth #1: We need to track ALL of our spending to save money by keeping a budget. Not true. By focusing on your two biggest discretionary expenses and relentlessly cutting them down, you reduce the Paradox of Choice and limit the overwhelming number of choices we each have every day.
  • Myth #2: “There’s no WAY I can save $200/month!” Maybe, maybe not. Many people waste 20-30% of their money without ever knowing where it goes. But even if you can’t save $200, perhaps you can save $150. Or $100. Or $50. The point is not the exact amount, but the process of optimizing your financial system. (And it can be done: Thousands of my readers took the challenge to save $1,000/month.)

Every day, we wake up and have 50 financial to-dos we can tackle. Should we pay off debt or increase our 401(k) contribution? Should we adjust our asset allocation or try to get a side job? Ultimately, those choices become overwhelming and we invariably do the same thing: nothing.

Today, I’m going to show you how to focus on two areas — just two — and relentlessly cut down on them to generate significant savings. While your friends worry about 50 things (like saving a paltry $4 on lattes), I’ll show you the system I use to save hundreds of dollars each month on just a couple of expenses — letting me spend time on the important things in life.

How most people manage their money

We love to believe that more information is always better. But as behavioral psychologists have discovered, more choices are not always better. In fact, they can paralyze us with indecision. Barry Schwartz writes about this in The Paradox of Choice:

…for every ten mutual funds offered by the employer, the rate of participation went down 2%.

There are hundreds of examples in the behavioral-psychology literature of increased choice leading us to paralysis by analysis. This is why humans use stereotypes and heuristics to deal with complexity: because to systematically analyze, consider, and act on every decision we face every day would be overwhelming. This is not about being smart or stupid — it’s about adaptive human behavior.

So, what does this mean for your finances?

It means you should focus on fewer, more important things. And despite the personal-finance “experts” who have cried out for us to keep a budget for the last 50 years — has that ever worked? — I prefer to use techniques that actually work. I recommend you figure out your two biggest discretionary expenses…and then crush them and save hundreds of dollars per month.

I call this The Two-Headed Savings Approach.

The Two-Headed Savings Approach: How to use save $200/month by focusing on LESS

1. Pick the two most important areas that you need to save on. You know what they are — the ones where you overspend and it’s clear you could be spending less. For me, these are (1) eating out and (2) going out.

2. Figure out how much you spend on these areas. If you don’t already have a free Mint account, go there and import your transactions. It will take about 10 minutes to tell you how much you’re spending in any category. Remember — although this is the least-sexy part of the tip, without knowing how much you’re spending, how can you set a target for savings?

3. Pick a savings number that you want to target within 6 months. I recommend you try to reduce the costs by 25% to 33%. Those numbers are guidelines, but I’ve found that range to work well because it allows me to cut costs in a significant way while not completely depriving myself. So if you’re spending $1,000 in one category, cut it to $750. If you’re spending $200, cut it to $150 — over 6 months. Rather than trying to cut 50% of your spending in 1 month, it’s important to set smaller goals and actually achieve them

4. Set up a spending reminder to help you keep track. You can do this the low-tech way or the high-tech way.

Recommended way: If you already use Mint, click “Overview” >> “Add Budget” and enter your target savings number. If you’re over the targeted amount, Mint will automatically notify you.

Low-tech way: But maybe you don’t use Mint — no problem. Just set a calendar reminder for each Sunday to make sure you’re on track. For example, if your target spending on eating out is $375/month, that’s about $94/week. Each Sunday, just log in to make sure you’re roughly on track.

If you are, great!

If not, you know you need to cut spending in the coming week.

This way, you can consistently correct any overspending and hit your target goal.

Example: You want to cut down on eating out

Let’s say your current spending on eating out: $500/month.

Target: I want to save $125 per month, so my spending should eventually be $375/month. ($500 * 0.25 = $125. $500 – $125 = $375)
Month 2: $450/month

Month 3: $420/month

Month 4: $425/month (notice you can still hit your goals even if you don’t consistently go down each month)

Month 5: $385/month

Month 6: $375/month

You’ve just saved $125/month, which is $1,500/year. And that’s just for one head of the Two-Headed Savings Approach. Do the same for eating out, and that’s $3,000 per year. You’re now generating $250/month in cash flow that can be used to invest or save.

Invest that $250/month for 20 years and you’ll end up with around $143,000 cash (run your own calculations). Is it worth it?

The keys to the Two-Headed Savings Approach

  • Don’t try to do everything at once. Nobody can manage saving money on 15 categories — you just spread yourself too thin and don’t even make a serious dent in your savings amount. I’d rather save 30% on two areas than 5% on 10.
  • Why a 2-headed approach? Why not just one? I learned this from a professor at Stanford, who told me to always be working on two projects at work, so if one stalled, you’d still be moving forward on something else. Sometimes, you may have unexpected expenses come up: If you’re saving on eating out, and a friend comes to visit from out of town, it’s going to be tough to keep your costs down. But if you have two savings tracks going on in parallel, you’ll still be able to make progress on your overall goals. And because you’ve extended the timeline out to 6 months, you’ll probably be able to get back on track.
  • Slow down. When people come to me and tell me they’ve cut their spending on clothes from $500/month to $10/month, I just sigh and stare at them, blinking in unwavering hatred. You can’t make rapid behavioral change that stick in such a dramatic way. I’d rather extend it out, slowly, over six months and guarantee that you stick with the savings amount. I’ve written more about this here: Set Smaller Goals, Impress Friends, Get Girls, Lose Weight. You’ll see how you can apply this approach to virtually anything that requires behavioral change.
  • Stop feeling guilty! Forget about those $1 bags of Skittles you buy or $4 lattes. By focusing on the Big Wins, you’re saving significant amounts of money. As long as you’re hitting your savings goals, that’s the most important thing. Note: The biggest wins typically come from subscriptions, like cable. If you can cut $30/month off cable, that’s roughly $400/year. (How? Use the A La Carte Method.)
  • This is a good example of being goal-oriented. Instead of randomly trying to save on expenses, by setting a goal, your tactics become very clear. If your four friends ask you out to dinner and you’re behind in your savings goals, you can easily say, “Sorry guys, but I’m trying to save money and I’ve got to skip this one. But I can meet you afterwards.” In other words, when it comes to dealing with others, focus on the plan and not the person — and work within the savings system that you’ve created.
  • Now that you’re going to be saving $20, $200, or even $1,000/month, make sure you put that money somewhere where you won’t spend it. I recommend you store it in your savings account and consider investing part of it for long-term growth. Whatever you do, don’t leave this new-found money in your checking account.

Lots of people wonder what they would do with a 5% or 10% raise. By implementing this, you’ve just gotten yourself a significant raise. What will you do with the extra cash flow each month?

The Two-Headed Savings Approach is one part of the bulletproof financial system that I outline in my book, I Will Teach You To Be Rich.

Ramit Sethi is the New York Times best-selling author of I Will Teach You To Be Rich. He writes at


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