Continuing from yesterday’s post on controlling your expenditures.
Develop Good Money Habits
The exercises mentioned in the last posting will point out some of your costly financial habits. You can start to control those. But there are a lot of little habits you might want to develop as well. Consider developing the following, but keep in mind that there are more than enough ways to accomplish financial control, so skip those that cause you too much stress and worry.
- Have your paycheck deposited directly into your bank account, so you’ll be less likely to spend a big chunk of it on payday. In fact, if you are thinking about payday as different from other days, you may want to work on your budgeting.
- Save windfalls instead of spending them. Put tax refunds, inheritances,bonuses and money received as a gift into a savings account of some sort. Use that for major goals, whether that means investing for retirement,starting a business or climbing mountains in Antarctica.
- If you and your spouse work, try to live off of one income and save the other for major goals. If you are already living off one income and your spouse gets a job, this should be possible. Otherwise try it for a while anyhow, to see what will happen if one of you loses your job. You might find a way to set aside at least half of one income.
- Regularly look for ways to cut expenses. Every time you pull out your credit card or checkbook or cash, think, “Do I really need this?” If you are going to the gym only once a week, for example, maybe you should drop the membership and exercise at home.
- Round up when recording your items paid by check. After a few months of doing this, you’ll have more money in the account than your balance shows. Transfer that extra to savings.
- Always apply “extra” money to your debts. If every time you have some overtime pay or a bonus or a tax refund, you use that money to pay off credit card debt, you’ll get out of debt sooner and spend a lot less on interest charges. This is a great habit to develop.
- Alter your perspective by converting the price of all discretionary purchases into “hours worked,” or “weeks worked to earn the necessary discretionary income.” The first is simple enough. If you take home about $12 per hour after taxes, a new television that costs $1,800 will cost you 150 hours of work. Before you buy, consider each purchase from that perspective – and do this while working – to decide if it is worth it.
The other perspective changer is to look at the weeks you’ll have to work to pay for the item out of your discretionary income. Let’s say you have $40 per week of excess income that you don’t need for bills or important goals, and you want to buy a new fishing boat for $4,800. With interest you’ll spend at least $6,400 you figure. Based on that, you’ll have to work for 160 weeks – more than three years – just to generate enough excess money for this one thing.
Jason, from www.FrugalDad.com, had yet another way to change how you look at your expenditures. He suggested considering how much you would need to set aside in order to pay for each expense when you retire. Then you can consider whether you want to maintain the habit.
For example, let’s suppose you drink a $3 cup of coffee four days per week. You might spend less than $2 to make delicious coffee at home, so this is a $10-per-week habit, or a $520-per-year habit. Now, assuming you will retire with income from safe investments that yield about 4% annually, you’ll need $13,000 extra in your retirement account just to maintain this habit.
That $13,000 will produce $520 annually at a 4% return. A round figure like 4% or 5% is easiest to work with, because you can simply multiply the annual expense by 25 or 20 respectively to arrive at the necessary investment amount.
Obviously this way of looking at your expenditure habits makes things look expensive. And just wait until you do this with truly expensive habits. Suppose you think you’ll want to continue driving a new car in retirement, at an extra cost of $400 per month (because of payments and insurance) versus a paid-in-full used car. That expense will require an extra $120,000 in your retirement account. That might change your mind, right?
Of course, if you do have the money set aside (or will), why not enjoy the expensive coffee stops and the new car? On the other hand, this does point out the true price of these habits. Maybe that coffee isn’t worth the extra year of work needed to save the $13,000. You might get more enjoyment from quitting your job sooner.
The difference is actually more profound than this suggests. Not only will you not need the extra money set aside for habits that you choose to drop, but you’ll also free up that money for retirement savings as well. In other words, a $30-per-week pizza habit that you quit will allow you to save $1,500 more per year. This can add up to many tens of thousands of dollars over the years, meaning you will be free to quit your job even sooner (or have a wealthier lifestyle when you do quit). Or to make this more relevant to the subject of this book, it will help you get ready to survive in interesting times.
- Pay cash. Research shows that people will definitely pay more when paying with a credit card. For example, there was a study in which those who were allowed to use credit cards at an auction for Boston Celtics tickets bid twice as high as those who were required to pay cash. This was true even though the latter were allowed two days to bring the cash (this was to be sure that immediate cash availability wasn’t an issue).
- Pay off credit cards monthly. It makes sense to use credit cards for convenience, but only if you pay the balance in full each month. If you do use credit cards, think of each purchase as though you were paying cash anyhow, so you don’t get tempted into spending more than you otherwise would.
- Procrastinate when spending money. Our minds work in certain habitual patterns, so why not use these habits in your favor? For example, when we procrastinate about something, we often just don’t do it. This is certainly true when buying something. Don’t worry, if it’s important enough, you’ll still buy it later, but some things will be forgotten – as they should be. Procrastinating on buying decisions can radically reduce what you spend.
This is especially true with large discretionary purchases. If you find yourself saying, “But I need that new TV for this Sunday’s game,” you may have identified your real motivation – to impress friends this Sunday. Do you really need an expensive television for a day? Wait and see if it is more than that. If you buy it later you’ll have it for every other game anyhow.
Why is the worst thing a salesman can hear, “I’m going to think about it.”? Because they know you’re not likely to return and buy the item. Time will often change your mind on things you thought you needed. Wait a bit (at least a few days) before making any large purchases, and you’ll almost certainly spend less. Then, when the truly valuable opportunities come up, you’ll have the money for them.