This week I read a story on Get Rich Slowly about a couple who refuses to budget. The conversation ended when the person who needed to budget bragged about getting five shrubs on sale for $10 each. She didn’t need them, but the deal was too good to pass up.Consumerism is an easy trap to fall into because of easy credit, and the messages are all around us. Most people who know me probably categorize me as an extreme cheapskate. Certainly there are lots of things I could be doing that I don’t, but even by doing a few little things you can improve your financial situation immensely.
Watch less TV. I think this is a really big one, because TV is the primary source of marketing messages. It’s not just the commercials either. The TV shows give lots of messages about how you’re supposed to live. It’s not a realistic picture.
At one point in my life I was able to go a year without watching TV, just watching the World Series each year. I watch more now. I try to catch This Old House on Sunday evenings and sometimes I’ll watch a show with my wife, so I probably watch 3-4 hours a week now. But that’s a lot less than average.
My advice to someone who wants to watch more TV than I do would be to watch older movies (1940s-1960s), as that would make it harder to compare your life to someone else’s. Plus, there’s a lot less product placement and other marketing shenanigans going on, and if you watch it on video, no commercials.
Have realistic expectations. A lot of 20-somethings seem to think they have to have furniture as nice as their parents. That’s unrealistic and sometimes impractical. The previous generation didn’t always have what they have now. Walk into the home of a 50-something, and some of the furniture will be new, but some of it will be 10-15 years old, possibly more. The furnishings were bought over the course of many years. Plus, nicer things are impractical when you have kids running around. There will be spills and stains and dirt. Kids need to be taught to respect things, but what’s the point of ruining a $1,000 sofa to teach the lesson? It’s better to put something older and cheaper in harm’s way instead–much easier on the credit card and on your sanity.
Budget. A budget isn’t some mystical thing. It’s a simple list of your money as it comes and goes. It can be as simple as a spreadsheet. In one column, list all your sources of income–your paycheck, plus anything you make on the side. Add up that total.
In another column, list your monthly expenses. That’s everything–your car payment, rent or mortgage, credit card bills, utility bills, gasoline, food, and entertainment. You may have to save your receipts for a month to do this realistically. Add up that total. Hopefully it’s a smaller number than the first total.
I first did this in college when I was treasurer for my fraternity. We were in serious financial trouble but nobody knew why. I grabbed the checkbook, did the simple analysis I described above, and figured out we were spending more than $400 per member every month. We were only charging $380 a month for people to live there.
When we couldn’t raise rates, I started cancelling things. I cancelled the Super Bowl Party. I cancelled cable TV in the lounge. If it wasn’t a basic necessity of life, it went. It made me unpopular and it didn’t balance the budget, but it cut the shortfall.
I’m guessing most of the people who voted against me raising rates are having more trouble paying their bills today than they need to.
The expenses involved in a personal budget are different than for an organization, but the principles are identical. You still need to have more coming in every month than comes out, and if you can’t figure out how to make more, the only way to have more money is to spend less.
Reward yourself. Practically. A few years ago my budget was tight and I’d taken on an expensive hobby. Then I realized what I spent on food every day. It started with $1 for a cup of coffee and a doughnut. Lunch was $5 at the cafeteria. And usually I spent another dollar or two in the vending machine. I let my ego tell me it wasn’t worth my time to pack a lunch.
Then I did this math equation: (365-52-52-10-10)*7 and came up with $1,687. I was spending $1,687 a year on (mostly) bad food because I thought I was too important to pack my own lunch.
I was also making about $15,000 a year less than I make now. Dice.com tells me I’m slightly underpaid now, let alone then. Who was I kidding? That $1,687 was a luxury I couldn’t afford.
So I went to the store, bought a Thermos and a big can of coffee, bought some instant oatmeal and some breakfast bars and granola bars, and started packing fruit and sandwiches. What was left became my hobby budget.
I couldn’t motivate myself to cut that expense just to have more money, but being able to afford something I otherwise couldn’t was enough motivation for me. Eventually I shrunk the hobby budget and started using that money to pay down debt.
But had my situation been different I don’t think it would have been a bad thing, necessarily, to keep using that to fund a hobby. It’s easy to get discouraged when it seems like everyone else is passing you by, even if they’re passing you by on borrowed money.
Look at opportunity cost. Opportunity cost is about the only thing I remember from college economics. The theory goes like this: The cost of a new car isn’t $20,000. It’s what else I could have done with that money. So the cost of a new car is a plasma TV ($5,000), a high-def DVD player ($500), a nice computer ($1,500), a new high-efficiency furnace ($4,000), a nice vacation ($3,000), all three current generation video game systems (roughly $1,000), a new living room set ($2,000), and you’d still have $3,000 left to replace two or three appliances with high-end models, or all your major appliances with new low-to-mid-range models.
Would it be worth driving an older car for a few more years to be able to afford to go on a home-improvement binge like that?
Or here’s the way I prefer to look at it. I could invest that money conservatively, using a no-load index fund that just does exactly what the Dow Jones Industrial Average does. Historically, money invested in the DJIA doubles every seven years. Some seven-year periods are better than others, of course. If I dump $20,000 into that kind of a fund, it will be worth $320,000 in 28 years.
The sticker price on the Honda Civic sitting in my driveway was around $15,000, but that’s not what it cost me. It didn’t cost $16,500 either (I paid some interest on it because I didn’t have the cash to buy it outright immediately). It cost $264,000.
I know some people look down on me for driving what’s now a five-year-old car, but I can build myself a very nice nest egg just by keeping my cars two or three times as long as everyone else does. Will they still be looking down on me if I retire at 65 and they have to work 10 more years because they still have debt to pay off?
If the cost of a secure future is driving a car typical of what 16-year-olds drive, I’ll pay that price. It’s a bargain.
Don’t pay interest. If you have a choice between financing something and waiting a while and paying cash, wait and pay cash. Paying interest is like paying rent. It’s paying money off and having nothing to show for it in the end.
I do use interest-free periods to buy things because that gives me a little more time to get the money together. I financed a furnace earlier this year because they offered 6 months same as cash. I probably could have paid cash on the spot but it would have been less comfortable. Being able to spread my payments out over six months allows me to pay more on the mortgage, which does charge interest.
David Farquhar is a computer security professional, entrepreneur, and author. He started his career as a part-time computer technician in 1994, worked his way up to system administrator by 1997, and has specialized in vulnerability management since 2013. He invests in real estate on the side and his hobbies include O gauge trains, baseball cards, and retro computers and video games. A University of Missouri graduate, he holds CISSP and Security+ certifications. He lives in St. Louis with his family.