Intelligently Frugal: Sweat the (Right) Small Stuff
I would venture to guess that most of the people reading this post are interested in being responsible with their money and planning intelligently for their future. And I’m sure we all understand the basics of how to save and plan for the future. The best way to increase the amount of money you have to save, of course, (real basic stuff here) is to either increase the amount of money you have coming in or decrease the amount you spend every month. Let’s focus on the latter for this post – what can we do to decrease the amount of money that is unnecessarily spent each month.
Keep more of your money…
So, you’ve decided to undertake the exercise of decreasing your monthly expenses. The first step is to keep track of all your expenses for a month or two or three and then analyze them to determine where to trim the fat. The entire budget (or as it must be named in our house: the spending plan) conversation is the topic of another post.
In this post, I want to focus on a single important facet of the overall strategy. After you have a listing of all your expenses, the most natural next step would be to find the ones that are the largest expense that can be eliminated or reduced. I mean, why bother eliminating a $2 expense when you can focus on a larger expense and make a much bigger dent in your spending plan? This matches up with the proverbial saying, “don’t sweat the small stuff.”
Do sweat the small stuff…
The problem here is that I am actually going to tell you to sweat the small stuff – well, with a caveat. I am going to suggest that you sweat the “right” small stuff. Sure, a $2 savings is not significant and won’t make a big difference….well, it won’t make a big difference, that is, unless you can cut out that $2 expense every day or even twice a day for most of the month. Making a large sacrifice to trim $20 from your monthly expenses is a good step, but if you can make a tiny sacrifice of $2 and repeat that sacrifice everyday, you’ve actually saved three times as much as the large sacrifice.
There are many, many ways that this can be accomplished and obviously the exact steps to take depend on your personal situation. Some examples include installing a programmable thermostat (and setting it!), installing CFLs, taking your lunch to work, eliminating your daily gourmet coffee, and so on and so forth.
Optimize your frugality…
My goal in this post is not to tell you exactly how to save the money. Instead it is to inspire you to think about your frugal choices in a different light. Maybe eliminating small, repeated expenses will create a bigger savings at the end of the month compared to focusing on one large expense that might be harder to completely eliminate.
Warning: I’m wandering off-topic again…
I would suggest that this technique also works for time efficiency as well. If you want to become more efficient with your time, don’t necessarily focus first on the biggest consumers of time, but rather on the repeated activities. Again, reducing only 2 minutes from an activity that is repeated 20 times a day will save you 40 minutes!
My lovely wife and I talk about this concept often. She is a physician who sometimes sees 25 or more patients in a day. If she can cut out even a few minutes of non-productive work from each encounter, she can spend more time actually interacting with patients and still complete her day sooner.
Life Lessons from Software Engineering…
This is a basic software development concept, actually. When you are tasked with writing or optimizing some software, you are careful to consider what you put into the loops that are repeated over and over again. You’ll want to move all non-essential steps out of those loops. In that way, you’ll do certain steps only once instead of over and over again and you’ll increase the efficiency of your program.
For those of you who do tasks repeatedly during your day, optimizing the time it takes to complete the task could end up saving you a bundle of time!
Eight and a Half Effective but Somewhat Less than Practical Ways to Save Money
Saving money is obviously a key component to any successful personal finance plan. You simply must avoid wasteful spending (or some of it at least) if you want to be able to spend less money than you earn. Well, I’ve been brainstorming…and I’ve come up with some methods to save a lot of money. Have a look…
- Live in your office - Why bother with expensive housing that is a distance from your workplace? If you do that, then you just have to drive to and from your office each day (or whenever you choose to go to work). Instead, just live in your office…you can cut down on housing and transportation expenses and love the environment at the same time - A win-win-win!! (well, I guess it is a lose for the cleaning person who has to step over your sleeping body while cleaning the office). Note - this works best if you don’t have a family and are in grad school. And it works really well if you actually have an office.
- Build a big shed, then sell your house - Our house has a generously sized shed out back. I’m sure I could live in it if I put in some electricity and maybe some running water. If you do this, make sure you build the shed close enough to your house so you can continue to get wifi from your (old) house. If living in a shed and selling your house sounds sounds too drastic, then try just renting your house out.
- Optimize your bathing schedule - Bathing is expensive and probably bad for the environment as well. You waste a bunch of water and loads of soap and shampoo and conditioner rinse down the drain each day. Instead of that tired and outdated routine, start off each day with a quick dip in the local pool. Your wallet and the environment will thank you (Note, it is unlikely that your office mates will thank you)
- Only drive downhill - It seems like your car has to work much harder when driving uphill. So, be smart about your route and only drive downhill. This will reduce the wear and tear on your car while saving you lots of money and reducing America’s dependence on foreign oil (and think of all the interesting places you’ll see that you haven’t explored before!).
- Institute no-heat Wednesdays or no A/C Mondays - Pick the day of the week you hate the most (it’s already the worst day, so it can’t get much worse) and turn off your heat or A/C all day long. Sure, you might get a little toasty or chilly, but think of the cost savings! Doing this each week will add up to big savings while simultaneously strengthening your self-discipline. As an added bonus, you just might find yourself spending more time with friends on these days (at their house, of course)
- No Electricity Tuesdays - While you’re at it, why not go all the way and shut off all your electricity wasters for the day. Turn them all off and reap some serious cost savings. When it gets dark at night, just go to bed. (You might want to try a battery powered alarm clock on these days)
- Cheap entertainment: Eavesdropping on the neighbors - Why bother with expensive movies or cable TV, just walk around (very closely to) your neighbors’ houses and peek in a few windows. I can almost guarantee you that this will be more entertaining that watching narcissistic overpaid actors pretend that they’re real people. (Note-check local laws before actually doing this)
- Walk everywhere - You’ll be doing this once you get to the lowest point in your city anyway, since you’re only driving downhill now, so why not just skip straight to it. Walking is great exercise and though it may take you a long time to get anywhere, think of how great you body will be feeling (except for the extreme ankle and knee pain)! And since you’re living in your office anyway, if you’ve chosen your job wisely you’ll already be at work and in close proximity of all your necessities like restaurants and a local pool!
Well, there you have it. Some ways you can save a lot of money! Implement some or all of these and you’ll be increasing that gap between your income and expenses by leaps and bounds (until they lock you away and you lose your job…but hey, look at that - that’s another way to get free housing!!)
Photo Credits: timparkinsonA Look in the Mirror: Are You a Borrower, a Consumer, or a Keeper
I am (slowly) working through my Personal Finance Basics , going into more details on each step. It is time for the discussion on #3: Spend less than you earn . I’m going to focus over the next few days on some techniques for budgeting (I’ve tried a bunch over the years). Today I want to step back and take a broad look at the topic. I think the importance of this aspect of your financial plan is illustrated well in the excellent book, The Bogleheads’ Guide to Investing 
The Borrowers
The Borrowers are living the high life. They have the best of everything - expensive cars, high-end clothing, a huge McMansion, and so on. They have numerous credit cards and they are not afraid to use them. When the balances on the cards become too high, its time for a cash-out refinance or home equity loan to clear the credit cards and start all over. Leased cars, no money down interest-only adjustable rate mortgages, and minimum monthly payments typify the Borrowers as they lead their life of luxury.
The only problem is that they are nowhere near able to afford their lifestyle. Forget about retirement, they will be working until the day they die. They are a job loss or a prolonged illness away from losing everything to the bank and their numerous creditors. In Texas, the term for this is "big hat, no cattle." (I find it strange that I’ve read a few different personal finance books that use that term)
The Consumers
The Consumers, in contrast to the Borrowers, do not live life restricted only by the limit of their credit cards. Instead, they live life restricted only by their take home pay. The question they ask themselves when investigating a major purchase is, "Can we afford the monthly payments?" Interest rates and the length of the loan do not matter, if they can wedge the affordable payments into their monthly budget, then what’s the big deal?
Again, this is an unsustainable lifestyle in the long-term. If their take home pay drops for whatever reason, the low monthly payments quickly become huge. Retirement will not be the dream of a huge RV, traveling the country, and golf courses. Instead, it will be a very restricted one governed by the check received from the government each month (assuming that is still going on by the time they are no longer able to work).
The Keepers
The authors contrast the first two lifestyles with the Keepers. The Keepers live according to a net worth mindset as opposed to the credit card mentality or paycheck mentality. They are concerned more with their net worth than their net income. The first thing they do with their money each month is to save some. They avoid debt as much as possible (certainly no high credit card rates as they pay off the balance each month) and participate in tax-advantaged retirement accounts.
While they make no more money than the Borrowers or the Consumers, they are much more likely to achieve their long-term financial goals (partly because they actually have long-term financial goals other than buying the latest and greatest stuff). While this lifestyle may not sound as exciting as the first two, it certainly sounds a lot less stressful to me. Plus, I like the idea of being able to stop working 40+ hours a week to devote my energies to other pursuits at some point before I die.
There are numerous other lifestyles
Of course, these are three very broad generalizations. In real life, there would be more lifestyles too numerous to detail. I think that we all know people that fall into these three categories though. Obviously, the book portrays the Keepers as the best lifestyle (the chapter in which this is found is called "Choose a Sound Financial Lifestyle" after all) and I would guess most of us (at least those reading personal finance blogs) would tend to want to live as the Keepers do.
So which type are you?
I do think my lifestyle matches up most with the Keepers. I track my net worth monthly (oh, time to do another update in a few days). We do use credit cards but pay them off each month. I don’t care anything about monthly payments - when I buy a car I negotiate on the price, not the payment. I should take more advantage of tax deferred investing options, however, as neither my wife nor I max-out our 401ks.
Some people, however, would certainly say that we are not living life to the fullest. They would claim that we should spend more of our money to enjoy today instead of worrying so much about saving for tomorrow. That is probably a valid point to some extent, but for me, I think the stress of not feeling like I was being a good steward of my financial blessings would outweigh any short-term benefit. Though I probably do lean too far towards the "hoarding" side of things and that is something I’m working on.
Well, what do you think? Do you even agree that the Keepers are the lifestyle to emulate? If you do, do you hit the mark?
photo credits: David Boyle in DC and donandcarol
A Trip to IKEA
Recently, I wrote about how we had finished paying off our student loans and getting out of debt except for the mortgage. It seems that ever since then, I feel like I’ve been on a big spending spree. Maybe it’s like the traditional "yo-yo" diet, where you eat hardly anything for a while and then you binge. Since I have been putting off big purchases for a while to focus on the debt, maybe now the pendulum is swinging back in the other direction.
There are some necessary things on my list (new tires, new windshield) but most of the list is filled with "wants" (wireless printer, bigger monitor, etc). I haven’t purchased many of the "wants" yet, but I have accumulated quite a list. I hadn’t, that is, until yesterday when we dropped our kids off at their grandparents, cleared everything out of the van, and headed off to IKEA with visions of flat-pack furniture and meatballs.
What is the appeal of IKEA?
I’ll be honest, I love going to IKEA (other than the part about spending lots of money each time we go). I like the look of their furniture. I like the show-room. They seem to have a number of interesting pieces that I just don’t see other places. I like looking at the funky accoutrements they sell. I generally like the price. I like the restaurant. (I do NOT like that most of the checkout lanes are self-checkout now, but that’s another story).
IKEA is not convenient for most
All of this got me thinking about IKEA and how it is a very unique experience in American culture. First, there aren’t many IKEA stores around. Most people have to drive hours to get to one. When we lived in North Carolina, we’d have to drive four hours to the in-laws house and then another 1.5 to get to IKEA, but we still did it a couple times. Americans love convenience - and driving hours and hours to buy furniture is not convenient. On top of that, there is the whole experience of having to walk through the warehouse yourself and pile up your furniture purchases (flat-packed at least) onto a cart and wheel that up to the checkout. Again, this is not convenient - but many people still do it. On our way to IKEA, we stopped at a friend’s house. They had just had their second child and we dropped off a meal for them. There was another couple visiting and when we mentioned that we were on our way to IKEA, they said "Ooh, IKEA! We were just there two weeks ago."
IKEA doesn’t sell ultra high-end stuff that the cool people "need"
The furniture IKEA sells is decent furniture priced inexpensively. This is not like buying jewelry from Tiffany or getting your wedding gown from Vera Wang (it took me a while to come up with an example…I guess I’m not used to shopping at these places). In our culture, I can see people spending gobs of money and time to purchase the perfect, "must-have" item from really high-end boutiques (just like the one all the celebriteis have)…but I don’t think of IKEA as a high-end boutique.
So why do people go to IKEA?
Is this real life? Normal people want to buy nice furniture without drastically overpaying so they make the trek to IKEA? Do all people do this? Or just people like me (or us?) who want good value and don’t need to tell their friends, "yes, it’s from Ethan Allen." (sorry, that’s they highest-end furniture store I could think of…I guess I really need to watch more commercials on TV) Though we do it, telling people, "it’s from IKEA" doesn’t seem to have the same cachet (maybe with the value minded it does!)
Anyway, the store was packed full of people yesterday; I’ve never seen it that crowded. Of course, we shopped for hours, ate some meatballs, and spent a lot of money. (I can’t imagine how much they grossed at just that one store yesterday!)
Does anyone else out there shop at IKEA? Do you think it’s silly to drive all that way just to spend all that money? Or do you agree that it is a fun place to browse through and get some good deals?
What if Everyone only got Paid once a Year?
I have no idea what I was thinking about the other day…but this thought popped into my mind:
"Would people take better care or worse care of their finances if everyone only got paid once per year?"
I like to come up with these strange questions to try to get myself and others thinking - I feel like it stretches my brain somehow (not literally) (I guess this is why I ended up having to answer most of my own questions in that Bible study we used to host in Arizona) (I should really stop talking to myself). I know it isn’t practical and it would never work and all of that - but practicality is not the point of this exercise.
Payday
So, on January 2nd (the 1st is still a holiday) (ok, the first weekday after January 1st - how’s that?), everyone got their single paycheck for the entire year. What happens next?
At first, I thought this would be a complete train-wreck. A number of people would have that money blown by Groundhog day. On the other hand, for fiscally responsible people, this would actually be somewhat of a boon. If you had all your entire year’s salary up-front instead of accumulating it little by little throughout the year, you’d be able to earn significantly more interest during the year.
Taking into account how much credit card debt the average American has, I think it is obvious that some people have a problem delaying immediate gratification to focus on the long term. Therefore, would people flush with cash at the beginning of the year run out and satisfy their every whim? I would say "probably." (you might say, "at least they’re not using a credit card," and this is true…but come the end of the year all expenses would end up on the CC)
But maybe, just maybe, if people knew that they only got this one paycheck and they were not getting any more, maybe they would be inspired to be more careful about their planning and living. Yeah, you’re right, that’s unlikely and it would probably end up being worse than now. Now that I think about it, that large lump sum would probably distract some normally fiscally responsible people and cause them to overspend early in the year as well.
So, I would answer the question like this: for some people it would work out a lot better. For some others, they would be inspired to get more serious about saving and planning. Unfortunately, I’d guess that some people would get distracted by the money, lose sight of the long-term, and end up being worse off. And, of course, I still believe that a number of people would have it all spent by MLK, Jr Day. The bottom line is it would be a lot better for some and a lot worse for others.
What do you think? Better? Worse? Why am I even wondering about this?
This Week in the Blogosphere
- This is just a great post discussing the different stages of how we view the purpose of money (@ The Happy Rock )
- Here’s a post discussing debt, debt myths, acceptable debt, and reasons to avoid debt . There are some really good reasons in his list of why to avoid debt. (@ Bible Money Matters )
- Frugality sometimes gets a bad rap - but I agree with Bob that there is a difference between being frugal and being cheap (@ ChristianPF )
- Tithing! Anyone still here? Here’s a story about someone going through the process of tithing for the first time (Guest post for Gather Little by Little written by Capital Couples Finance )
Have a great weekend and God bless…
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