The economy might have just dipped, but for students like me, or anyone interested in frugality, the pinching of the pennies is not a new ritual. Yesterday marked a good day for my finances — the last payment on my credit card.
I’m now officially more financially successful than a homeless person. Before, the homeless person had nothing, and I had less than nothing, which made him more financially successful. Heading towards the quarter century mark of my life later this year, I’ve had plenty of time to reflect upon the meaning of money, and how to best leverage it to service me.
I’d like to share a few very simple core-principles on money management. I’m sure it won’t be anything you haven’t heard before, but if you’re anything like me, it’ll take you a few times around to really internalize them. Once you do, you can begin to notice incremental improvements in your finances.
1. Learned Expected Lifestyle
Consider that the lifestyle that you have, and want to have, is shaped largely by your parents and friends. I would say more so your parents, because as you grew up with them, you considered that you would at least have as good a life style as them, and then work your way up. The problem is that unless you come out of school earning as much as your parents, with the savings to back it up, you’re going to have to work hard to work up to the same lifestyle as them.
You can’t really expect to jump into the same size house, drive a comparable car, or even eat out as much as your parents. If you’re doing these things, you’re either putting yourself into debt, not leaving any money for savings, or simply making a significantly larger sum of money than your parents do. Chances are that you’re getting yourself into financial danger, so it’s important to make a change.
A simple paradigm-shift is all the change that you need. Understand that your parents level of comfort and luxury is something you have to build up to, before you can exceed it, not something that you’re obligated to start at.
2. Make Things Special Again
As most kids we had very limited cash flow. When we went somewhere cool, like a restaurant, theme park, or movies, and we actually had some money for it, we really appreciated it. This wasn’t an everyday thing, and it might not have even happened every week.
As we got a little bit older, and got a little more money, we started spending more and more on the activities that we were starving to do before. Then when we got credit cards, we participated in these activities like it was our job, and experienced instant gratification. As the debt ran up, we couldn’t fully enjoy the experience, and we often experienced buyers remorse right after the sale.
Once again, a paradigm shift is necessary. Don’t allow yourself to splurge, so that things you currently take for granted can become special again. You’ll enjoy them more.
3. Find Cheaper Activities
Many of us have a vice, hobby, or addiction that costs us a lot of money. If your pockets have a limit, then you need to conceive of a limit for your spending. One of the things that you don’t want to eliminate is entertainment, after all, it’s your reward for working so hard.
Entertainment doesn’t always have to be a $200 restaurant bill, front seats on Broadway, or a Caribbean vacation. In essence, a good time can be a simple gathering with friends, where everyone is really present and having fun. This can be cheap, especially in comparison to some of the items I’ve mentioned above. You don’t have to pay to laugh, laughing is free for everyone!
While you’ve got that pen and paper out, brain storm 50 cheap activities that you can do with your friends. It will be easy in the beginning, and then a bit harder, but the whole process will be fun in and of itself. In fact, get together with a few close friends, and brain storm these things together — that’s your first fun and free activity. Make it sort of a cheap bucket list.
4. Have a Routine
I usually try to plan out my weekends, so that I keep myself engaged and stimulated, and not rotting away doing nothing. This Sunday was a bit of a slow start though. Marina and I both slept in a bit late, and we left planning for whenever we could think of something.
The truth is, if we had a plan before hand, we’d have a jump start, and would be out and about enjoying each others company. That’s when her dad said something that really resonated with me. Have a weekend routine that you stick with, unless you happen to have better plans. This is to say that you should have a fun and productive routine, but you shouldn’t be so fanatical about it that you don’t make room for new and exciting opportunities.
We’re going to keep tweaking it, but our Sunday routine should look something like this: Meet up around 9am, have a small breakfast, go for a group jog at Road Runner’s at 10:30am, and then go ice skating for a couple of hours. After that we’ll have lunch, and she’ll practice her singing while I do some writing. I’m sure that more often than not other plans will occur, but there’s less chance of getting sucked in to an undesirable or expensive activity when there is a fun and frugal routine to lean back on.
5. The Cash Budget
The budgeting technique that I find to be the most personally useful is cash budgeting. I simply cash my check, take what I need to pay bills, put away what I can for savings, and divide the rest into weekly spending money.
I can easily look into my wallet, and see how much money I have left for the week. This is a much more effective way to feel the small expenses add up as opposed to using a credit card. You know that you bought x, y, and z, and you know it’s eating up your weekly cash, so you’re much more liable to say no to things that aren’t necessary.
It’s a good rule in general to say no to people trying to sell you something. Most likely they’ll create a need that you didn’t previously have in order to make the sale. As a rule of thumb, only buy things you set out to buy. Cash budgeting makes this much easier, because as you look into your wallet, you’ll realize that the money you have set aside will better serve you elsewhere.
6. The Wish List
The wish list is an important tool to analyze the want and importance of an item. Many times when we set our sights on an item that we want, we’ll whip out the trusty credit card, and make an impulse purchase. This is great if the credit card pays itself, but, for the other 99.9% of us, we’ll have to pay the price for bad decisions at a later time.
Instead of getting ourselves into a financial problem, where we’ve spent out of our budget, to get that pretty-shiny-sprocket, what if we could first decide if we really want it. All we have to do is create a document, or keep a piece of paper, where we write down the items we wish we had, had we much more money to allocate frivolously.
Chances are that if our item sits on the list, without being purchased, for at least a month, we’ll realize that we did just fine without it, and that we don’t need it as bad as we do. If we’ve been saving for it for a month, we’ll either realize that we don’t want to blow our cash on it, or, when we finally get it we’ll appreciate it that much more.
7. Buy The Best
This might seem counter-intuitive to some people. If we’re trying to save money, shouldn’t we be looking at the cheapest possible alternative? Yes, and no. If we look at each item that we purchase as a long-term investment, then we need to consider the life-cycle cost of the item, so we can get the most bang for our buck.
When I was about 18 I bought my first serious dress suit. It was expensive, looked killer on me, and was made out of high quality material. Six years later, I still have the suit, it’s in perfect condition, and I’ve been able to wear it to everything from job interviews to weddings.
You could use the same principle for buying quality furniture, clothes, homes, gadgets, or anything that will last forever or pay for itself over time. Instead of buying cheap items, that break and need constant maintenance and replacement, consider buying expensive items that will save you money over the span of your life.
These are just 7 tips that I myself find useful. There are an infinite number of other tips out there, so you shouldn’t rely on my lessons alone. Which one tip, that I haven’t mentioned, works best for your own financial growth?