1. How many hours do you have to work to buy something?
For everything you’re considering buying, think of how many hours you have to work to pay for it. For example, if you make $10 per hour after taxes and are looking at a $50 pair of jeans, is it worth 5 hours of your hard work to have those jeans? If you make $20 an hour after tax and want an $800 TV, is it worth 40 hours of your hard work for it? If yes, great! Enjoy! If not, I wound up making some really frugal decisions with this habit and built a healthy net worth at a young age, which I also enjoyed.
2. Track where your money is going and look for savings opportunity
Sign up for mint.com. It’s free! It automatically tells you where your money is going after you hook it up to your bank accounts and credit cards. Unless you’re on a cash budget, then you can add your expenses manually.
Where do you spend most of your money? Car payments? Eating out? I always start with looking at the biggest expenditures and trying to cut them. Sometimes it’s the mortgage and you can refinance. For other people eating out once less a week really adds up over the year.
3. Invest with Vanguard.com
You may have heard from various media outlets that mutual funds are a rip off and really hinder your savings or retirement growth. For the most mutual funds, it’s true! I’ll run the numbers to show you in a later post. The devil is in annual management fees and Vanguard has very tiny fees compared to competitors.
I’ve been with Vanguard for over a decade and they have really done right by me. I invested in the stock market myself along with my Vanguard investments for 6 years made some really good money for myself. After running the numbers, however, I found that Vanguard did just as good with my money as I did and it was a lot less stress having money with Vanguard.
4. Force yourself to save and pay cash for things
I know, I know… The most common tip ever. But lets talk about emotional gratification here. Buying a new $30,000 car for $450/month sounds totally doable if you’re making $3,000 a month. Totally gratifying, right? But going back to rule #1, if you’re making $3,000 a month, after taxes $30,000 is a whole year of work for you! So yeah, gratifying in the short run. But in the long run, often this move really stresses people out. Do you know for sure that a car today will be worth a full year’s worth of future work? Will you wind up hating your job and you’re stuck with it because of your new, but not so new car 18 months into payments? Not to mention the higher insurance, immediate loss of value when you drive the car off the dealer’s lot, and that insurance will only cover the depreciated value if you get hit and your car is totaled. And then there’s loan interest.
Lets say you force yourself instead to save up 3 months of pay for a $9,000 5 year old model of the same car. Sure it’s not brand new, but you’ve already done the 3 months of work to earn the money and you know what you’ve gotten yourself into. The car is yours! Talk about feeling good! Likewise, if you save up a full year worth of pay and still want a $30,000 car, now you get a model that’s a couple of years newer than if you took a loan and you know for sure that it’s worth it to you! You’ll have all the more appreciation for your new car.
I actually did save $30,000 in cash and wound up deciding my old vehicle was reliable and comfortable enough to drive for years to come. Later on that decision paid off because I wasn’t married to my job and I was able to leave when I wanted to.
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