Don’t let the title of this post deceive you. Its not about being aggressive in business or investing. Its about being aggressively frugal.
I have a somewhat similar approach to this topic that Ramit Sethi of “I Will Teach You to be Rich” fame has. We differ on some of the details but his ‘09 April fools joke lampooned the practice of majoring in petty savings and struck me as a novel way to get the point across. Saving a few dollars on coffee or clipping coupons to save a quarter on baby wipes can be downright demoralizing if it is not part of a grand plan. It is like filling a giant hole one cupful at a time. The cup at a time method has its place only after the hole has been mostly filled with an earthmover. We are going to focus today on being a Dozer, not a Teacup.
Extreme Frugality is not for the faint-hearted.
I must admit that I have not always approached frugality in the unapologetic way I do now. When first starting out, it was easy to be a little embarrassed with my10 year old car and my ‘free with a cheap plan‘ motorola flip-brick, especially when colleagues are zipping around in brand new $60,000 cars, talking on their brand new $500.00 phones. Once my debt was gone and my investments really started to compound the embarrassment gradually morphed into big-headed pride before settling down to a more quiet sense of ease and confidence. I was able to get to work, run my business and talk to my customers with the old car and the old phone just fine. The difference in cost, I found, was staggering.
So why doesn’t everyone do this?
I think there are several reasons most people don’t approach money and belongings this way and are hesitant to change.
Buying used stuff is risky
Especially with cars and as I mention later on, lawn tractors. Furniture on the other-hand, If you work at it, can be almost risk free. A pre-owned leather sofa won’t leave you stranded on the highway. Even with some of the complex things such as vehicles there are ways to lessen the overall risk. Choosing a known reliable model, learning how to inspect the things that matter and getting a vehicle history report are just a few.
Making big changes in our lives is stressful.
Trading down to wealth is hard. You have to believe it will make a difference (it does). You have to be willing to go without something you may have thought you needed (you don’t). We need water, shelter and food (some of us need a lot less food, me included). that’s about it. Everything else is gravy. When you decide replace short term pleasures with long term financial independence, you have more joy in your life, not less. Once the initial stress of change has passed, the benefits of living below our means will start to affect more than just our finances.
Sometimes you need money to save money.
In order to buy pre-owned and invest the difference, you need to be able to buy pre-owned in the first place. Some people are on a treadmill that almost forces them to finance new stuff. I own a big property and unless I get a goat or two it will not mow itself. paying someone to mow it is an option but, at least in my area, a very expensive one. (Don’t tell anyone but I actually like the few hours I spend on the tractor. I listen to podcasts and music off in my own little world)
A new, quality lawn tractor is several thousand dollars. Many people finance it like a car and end up paying even more. I found a nice used one on Craigslist a few years go for less than a quarter of new price. It still runs great, it still cuts grass and it is still 100% paid for.
Thing is, I had to be in a financial situation where I could pay cash for a used tractor. For many people, unfortunately, $80.00 a month is still a better option than $1,000 cash even if they will likely pay just in interest more than I paid total for the used tractor. It may be that you need to start at the beginning and get your contingency fund in place.
Sometimes our need for approval just can’t be swayed.
Especially if we have projected a particular lifestyle out to the world. It is hard to cut the shoes, the dinners out, the BMW or the iPhone from our public persona. It is in precisely these big areas where the equally big savings are to be found. We need shoes, food, transportation and communication in our lives but maybe we can find these things at a fraction of what we are currently shelling out. Remember too that the Joneses don’t concern themselves with what you wear and what you drive, most of them are too broke to care.
Where do I start?
For most people, the three places to look for where to go big are where you live, what you drive and what you do for fun.
The Home category is just where you live and the costs associated with that. You could be an owner or a renter, does not matter. Your Mortgage, utilities, insurance,taxes and upkeep are all in here.
The Auto category is how you get around. If you don’t have a car and take the subway, bus, bike to work then hats off to you. You’re ahead of the game. Most of us have a car(or 2) and pay for fuel, maintenance, insurance, taxes and loan interest.
Entertainment is not so easy to define. There is a line where our needs cross over to wants and therefore become entertainment. Food is one example. When is food not food but entertainment? In my opinion food is only Food when you prepare it yourself in your own home. When you have it delivered to you by another human you are paying for the experience, not the nutrients. Pizza delivery is entertainment. buying the dough mix, sauce and toppings and making a few pies with the kids is food (and fun…and cheap!).
Everyone is in a different stage of life and live in quite different circumstances. I am certain that most of experience category creep: Things that once were frivolous but are now perceived as necessities.
When are shoes entertainment and not clothes?
What gadgets are needs and not wants? (ipad anyone.)
Where do we draw the line between transportation expense and unnecessary opulence in our garage ?
The point is not to bicker over which X fits in Y category but to understand these are places you can attack head on and make a huge financial difference.
The top 5
I think there are 5 places we can focus that will make a huge impact on our net worth.
1. The Housing Factor
Are you in a house that is less than 2X your annual income? How much house do you really need? When was the last time you shopped for the best insurance rate? If you rent, are you really using the accoutrements and space that got you to sign the lease in the first place? The pool & the fancy business center for example. If not maybe a cheaper apartment or rental home is in order. Seth Godin wrote an excellent piece on How to think about buying a house. If you are in the market to buy a house, Go read it now. (It is a better article than this one). Favorite line from Seth’s post: “When you buy a big house or an expensive house, you are making a statement to your in-laws, your family, your neighbors and yourself. Nothing wrong with that, but the question you must ask yourself is, “how big a statement can I afford?“
2. The Chariot
What percentage of your annual income makes up the total cost of your car? 50%? 60%? How much interest are you paying over the life of the loan? Does your luxury ride need expensive dealer servicing, high octane fuel and synthetic oil? The ongoing maintenance cost of some high end cars can average to hundreds per month. Get a copy of consumer reports and go pay cash for a reliable used car. You can find some nice ones that you will fall in love with. This is more closely linked with your home than you think. The social pressure to upgrade the family ride is much higher when you live is a neighborhood with a Rover or a Ranger in every third driveway.
3. The Gadgets
How much do you pay for subscriptions that you don’t even use? Do you watch all 400 satellite channels? Do you need all 3 Videogame Consoles? Is Blu-ray that much better? (alright, I have to admit here that I am kinda sold on the home theater thing. but there is a way to get a great result without breaking the bank. Remind me to tell you about the Onkyo 7.1 Surround HT system I found on craigslist.) One way to avoid spending to much in this area is to ask yourself “What service or subscription can this one replace?”. If I sign up for Netflix can I then go to basic cable? Can I get rid of cable/ satellite altogether and get an HD Antenna? For a single $40.00 one time cost, you could save thousands of dollars in just a few years. (a $60.00/month cable bill = $3,600 every 5 years)
I am a computer person. I have always put together my PC myself and am due for one soon. I take the time to find the price/performance sweet spot for each of the major components. Having said that, I have found that adding some memory and a nicer monitor can make more difference than you think. You can get a highly rated, 24″ widescreen HD LCD for about $220.00. This will change the whole experience of an older PC.
Oh, and before you buy HDMI cables or the Antenna I linked to on Amazon, check out monoprice. (no affiliation. i.e I don’t get paid if you buy stuff, they just have the highest quality, lowest cost cabling and wire I have found)
4. The Tax Factor
I think everyone should run their own business. There are several reasons for this. Entrepreneurship is part of the American Dream. Being the captain of your destiny brings more than money. Running your own enterprise can also a represent an enormous tax savings for you. Your business activities are taxed after expenses. These expenses can be applied to your entire income picture and effectively reduce your overall tax exposure. A business should not be considered soley for this purpose but this is a nice benefit.
Starting an enterprise should be lined up with your talents, passion and bliss. How can I do what I am is an appropriate question here..
Even if you decide to not go into business for yourself, there are tremendous ways to save money on taxes. Tax credits, 401(k), IRA plans. 529 college savings plans for the kids. Energy Credits and education credits are all available. Also, keep track of your charitable contributions. Get a receipt from goodwill and track your church offerings as all of these are tax deductible.
5. Make More and be a Lifelong Student
I will attempt to combine these seemingly unrelated ideas.
Make more money.
Sell your stuff. Sell your service. Sell your ideas. One surefire way to make more money is to pay off your debt
“You want 21 percent risk free? Pay off your credit cards.” -Andrew Tobias
Aside from the tax advantages of entrepreneurship, you can actually make real money! What service can you provide to people? What are you good at? Do you like to create things, write things, build things, fix things or even destroy things? Successful businesses have been built doing all of these. (I am wholeheartedly better at ‘destroy’ than ‘create’, it just comes natural…)
Be a lifelong student.
Take classes at your local college. Study your interests and follow your bliss. Most of us can squeeze in 1 or 2 nights a week to attend class and study. As a side item: Does being a student there give you access to the Gym? The Pool? A Student Discount on Software? Bonus!
There is actually a number 6 in this top 5 list. Evan over a My Journey to Millions just knocked out a post called Regardless of your Financial Situation Don’t Forget to be Happy! Worth reading. Change can be exhilarating and stressful. Sometimes we need to slough off the serious stuff and dance like no one’s watching.
To sum it all up: Discover where the big money is to be saved in your life. Some of these changes can be drastic but the payoff will be huge. Make sure you are also looking for ways to become more valuable in the marketplace. Spend less, earn more!
For some of my favorite ideas on money, investing and frugality, check out Andrew Tobias’ book The Only Investment Guide You’ll Ever Need
I noticed that Jim over at Bargaineering has a similar post. Worth a read.
Where can you go big? Drop us a comment.