The other day my seven month old picked up a toy key ring and keys to play with. A few seconds later I heard "Smack! Smack! Smack!" as he started hitting himself in the face with his toy keys. After a brief moment of amusement, I took the keys away. Then he started to cry. I gave the keys back. He proceeded with hitting himself in the face again. After doing this for a while, he decided he would rather chew on the keys. Satisfied with his new decision, I let him be.
The way many people treat their finances remind me of my seven month old, smacking himself in the face with his keys. Instead, they smack themselves in the face with high interest credit cards, car loans, and mortgages they can never afford. Then they take what little money they have left, and over pay for their food, clothes, and entertainment. Then, at the end of the month, they wonder where all their money went. Next month they repeat the process, without thinking twice about it.
When talking to people about saving money, I always get the same response. "I can't! I can't!" as though their very life depended on some name brand detergent. All the while they continue to be stressed out from working two jobs, working paycheck to paycheck, and giving thousands of dollars to the banks in the form of interest charges, late payments, and overdraft fees. All I can do is walk away shaking my head.
We live in a world of materialistic addiction. We have to have the best of everything, and we have to have it right when we want it. If we run out of things to buy, we'll even go out looking for new things that we can salivate over. People all too often forget about the true price that they have to pay for something. The stress created by their jobs. Their time and energy. The interest charges on the credit card. The price they pay for a brand name. The financial risk they are subjecting themselves to by living paycheck to paycheck. The stress it puts on their relationships.
The hardest part of being frugal is learning how to let go of this addiction. Learning the true price of things, and learning how to say no when you aren't willing to pay that price. Unfortunately, this is also the part that can't be taught in a course. People learn this in real life. Usually, they learn it the hard way. The bank repossesses their vehicles, and forecloses on their home. Their landlord kicks them out of the apartment for failing to pay the rent. Again. They wind up working three jobs in order to maintain their lifestyle.
Instead of the tropical paradise that they once imagined, their life slowly turns into a living hell. They're so busy trying to make it through today, that they never think about tomorrow. They never realize the slow downward spiral they are in. The financial hardship begins to accelerate. Eventually it begins to take a toll on other parts of their life as well. The stress begins to eat away at their body. Their relationships suffer. Their satisfaction with life goes down the drain. Eventually they reach rock bottom, and the house of cards collapses in on itself.
At any moment, they are free to save themselves. Even in the most hopeless of situations, people always have options. Options which they may have forgotten about, or which they have deliberately swept under the rug. When financial difficulties occur, this course represents that other option. An option which all to often gets swept under the rug. But why?
What do you need to survive? The typical answer to this question includes housing, clothing, and food. For many people, a more realistic answer might also include a car, washing machine, dryer, microwave, refrigerator, freezer, stove, bed, television set, computer, Internet, phone, cell phone, cable or satellite, Wal-Mart, McDonald's, the movie theater, video games, cheap whiskey, an mp3 player, a digital camera, various things to hang on the wall, a dresser, silverware, a blender, a toaster, a mixer, pots and pans, a comb (or brush), a vacuum cleaner, broom and dust pan, various power tools, and the occasional bar of soap. And this doesn't even include luxury items.
These things all have two things in common. First, they all cost money. Second, none of them are required for physical survival. The body only needs three things to survive. Food, water, and air. That's all. If housing were required to survive, there wouldn't be such a thing as homeless people. Homeless people would be dead people. We wouldn't have a homeless problem. We would have a "what the fuck are all these dead people doing lying on the street" problem. Likewise for clothes. If clothing were required for physical survival, nudism wouldn't exist. The nude girls down at the beach would be no more. Having sex would suddenly become very difficult, and a certain multi-billion dollar industry geared toward adults would all but vanish into thin air.
Many times people think they need something when in reality they are just unwilling to give it up. This puts them into a position of helplessness, where they believe that buying it is the only option they have. They use any and all means available to them to buy it, because they absolutely have to have it no matter what it costs. It turns into a life or death situation. Their decision making process is skewed because they never factor in the true price that they have to pay in order to have something, because they feel they must have it at any cost. Instead of looking at how much it costs to buy it, they are only interested in how it will benefit them once they have it. Given this line of thinking, someone can justify buying anything.
The way you get out of this trap is by admitting that you don't actually need things. This puts you into a position where you can consider the alternative of not buying it, and you can make a more rationale decision, which may or may not be a decision to buy the thing in question.
Being frugal does not necessarily entail sacrifice. It involves making sound and educated financial decisions, and determining what is really important to you. It's completely possible to be frugal without making any real sacrifices. In fact, many people can save thousands a year simply by making better decisions about who they do business with. This doesn't involve sacrifice at all, because many companies offer identical products or services.
Being frugal isn't about being cheap. It is about making intelligent decisions that are in your own best interest. Someone who spends too much is often just giving away money. Someone who spends too little may get burned by the cheap products or services he or she purchases. There is a certain point where you get the best possible value at the best possible price. The job of a frugal person is to find that point.
I can't force anyone to adopt a frugal lifestyle. Usually people adopt a frugal lifestyle because they've been burnt by their unhealthy financial habits, or because they're consciously thinking about their finances for the future. What follows is a list of frugal principles to live by. Each one of these principles can save you thousands of dollars a year, or more. When combined, the savings are enormous.
Marketers and advertisers are very good at what they do. And they get paid well for it. Ultimately, their salary comes from the hype and glamor they can tack onto a product or service. What does this hype and glamor do for you? Nothing. It just increases the price you have to pay.
I call this extra hype and glamor the wow-factor of a product. You can tell when someone has been fooled by the wow-factor of a product because they become like little children. They have to have it. Not because they need it, but because it's cool. It's pretty. It's new. And it's fast. It turns into a new obsession. They run to the store, they buy it, and they are extremely happy for the rest of the day.
The next day they realize they didn't actually need the product or service. They could've bought a different model for half the price, that still fulfills all of their needs. After the initial high of the purchase subsides, they realize their mistake and regret their purchase decision. At best, the extra features are never used. At worst, the whole product gets put on a shelf or stuffed into a drawer. It collects dust for years before it's finally thrown out or sold for pennies on the dollar.
Buying something you don't need is the equivalent of throwing your money into a trash can. It doesn't matter if it's 50% off. If you don't actually need it, you're just throwing away your money. Most of the time, this little fact goes unnoticed by consumers. Since it usually goes unnoticed, they never realize just how much money they're throwing away every year. If you really do feel the need to throw your money away, at least put it into something useful, such as the Simple Philosopher Charity Fund.
For a real world example of this, I'm currently considering the purchase of a new laptop. I have two different laptops in mind. One of them is a high end Dell Studio laptop with all the bells and whistles. The other is a low end Dell Inspiron laptop. The Dell Studio would be nice. It has a high end graphics card, a cutting edge processor that just came out, fast memory, and a fast hard drive.
The Inspiron, however, does everything I need it to do. It can play all the games I have, and it can run all the programs I need it to run. The real difference, for me, comes down to speed. The Studio would be slightly faster, but it would also cost twice as much. Even though the decked out Studio has a wow-factor, and I wouldn't mind having it, paying double for a little extra speed just isn't worth it. I have to go with the choice that is more aligned with what I actually need.
There are several factors that determine the price you pay for a product or service. The overhead of the company making the product. The efficiency of the manufacturing processes that are used to make the product. How much the company pays for raw materials. The profit margin the company is shooting for. How much the company can charge for the product before consumers switch to cheaper alternatives. Brand perception. Etc. Etc. Etc.
Because of these factors, it's not unheard of for the products that one company produces to simply beat out the competition in not only price, but quality also. Just because something is expensive doesn't mean it is of good quality. It's also not unheard of for an identical product to cost half as much at one store as it costs at another.
The only way to make sure that you're getting a good deal is to compare the price to the competition. How much does it cost elsewhere? Many people get attached to a certain brand, store, or company, and refuse to look elsewhere. As a result, they get screwed over and over again. They overpay for products that in many cases are of low quality anyway. Making a simple decision, such as changing the store that you buy your groceries at, or buying used instead of new, can equate to thousands of dollars of savings a year.
Always be aware of your options. Can you buy this product used? Will another store give you a better price? How about alternatives. Can you buy something else that will fulfill the same function for less? Whenever you make a purchase, for food, clothing, cars, houses, insurance, or even a massage, always compare what you're getting to what you could get elsewhere. Are you really getting a good deal? If not, adjust accordingly.
Everything has a sticker price attached to it. This includes your efforts to save money. If you drive all over town to get the best possible price for a gallon of milk, you've likely wasted more money on gas and wear and tear on your vehicle than you've saved by finding the best price for the milk. Not to mention you've just wasted a lot of your time. I mean, think of all the other things you could be doing besides driving around looking for the best price on milk. You could probably make a lot more money working than trying to find the best price for milk.
The same argument applies to coupon clippers. How much money do you really save? How much time do you have to spend on the activity? When you run the calculations, you might be saving money by using coupons vs not using coupons. But how much time do you spend on this activity? If you spend any significant amount of time running store to store, or clipping coupons, you've effectively just taken a job that pays less than minimum wage. And who wants to do that? Your time is valuable. Always factor it into your money saving activities.
There are many other situations where you may not be taking into account the true cost of something. For example, what is the true cost of ownership of a vehicle? You have to include not only the purchase price, but the cost of insurance, the efficiency of the vehicle, the reliability of the vehicle, how much it costs you to finance your purchase, how long the vehicle lasts, what the resale value of the vehicle is, etc. It's not a simple matter of finding the cheapest car on the lot.
Many people get trapped into the mindset of simply seeking out the cheapest alternative. This is a mistake. How long do you think that product will last you? The true cost of a higher quality product may actually be cheaper than it's alternative. I would gladly pay a little extra for something that will last twice as long.
In order to calculate the true cost of something, you have to take everything into account. This includes the purchase price, the expected longevity of the product, quality of the product as compared to the alternatives, and any other costs associated with the product such as fuel, ink cartridges, electricity usage, refills, etc. Sometimes the most expensive product winds up being the best deal. It all depends on the true cost of the product.
Have you ever found yourself staring at your checking account balance at the end of the month asking, where did all my money go? You remember putting money into your account. You remember depositing your payroll checks. You know how much you get paid. But where did it all go?
At one point in time, people dealt with this problem by manually keeping logs of how much they spent, where they spent it, and on what they spent it on. Luckily, someone invented the computer and the Internet. Now, virtually anyone with a bank account can go online and see exactly what they spent their money on. Many banks will even let you run detailed reports which break up your expenses from any given period of time into a dozen categories or so. This will give you the 'big picture' of where your money is going.
Knowing where your money is going is only half the battle, however. Once you know where your money is disappearing to, you have to stop it. You need a 'budget'. Yes, that dreaded word that causes everyone to shudder. Budget.
At the end of every month, reflect on how you spent your money, and what you spent it on. Was your purchase decisions worth it? Did you splurge and overspend on certain things? What are the areas that you can cut back on? Are there ways that you can change your spending habits that will result in more savings next month?
The greatest return I've ever gotten from an investment didn't come from the stock market. The most secure investment I've ever made didn't come from the bond market. When you invest money to save money, you don't have to pay taxes on the savings, and the risk involved is almost zero. You get to take all the money you save and feed it to your bank account.
When I installed extra insulation in my house, the insulation paid for itself in a couple of months. Then it paid for itself again. And again. And again. That insulation is still paying me today, in the form of reduced heating and cooling bills.
When I switched my shopping to a certain club that sells heavily discounted items, I had to pay a membership fee. The savings that resulted from shopping there paid the fee on the first day. Since then it has paid for the fee at least a dozen times, and counting.
When I traded in my sports car for a fuel efficient used car, the savings from reduced insurance and fuel costs paid for the vehicle in under a year. Since then, the savings have paid for the vehicle at least 5 times, and counting.
Look at your budget at the end of every month. Are there things that you can invest in today that will save you money 3 months from now? How about 3 years from now? When you invest to save, always calculate how long the pay back period is. If it's under ten years - go for it.
In many cases when you invest to save you get a 100% tax free return on your investment, or more, per year. In addition, there's virtually no risk involved and the investment will likely return even more in the future, thanks to inflation. If investing to save had a ticker symbol, Wall Street would be all over it.
Everything involves a certain amount of risk. People often forget about the risk involved, opting instead to only focus on the potential reward. This is especially prevalent in financial decisions. People all too often are only thinking about the pleasure of having something, and they forget about the cost involved.
There are other, more subtle risks involved in finances as well. The cost of owning expensive things is amplified when you take into account the potential cost to replace those things if they are damaged or lost. This is another reason I enjoy having inexpensive things - I'm not afraid of losing them, or breaking them. Of course, you can mitigate some of this risk with insurance, or extended warranty, both of which cost even more money to have.
There are several other risks involved in finances as well. Today's medical bills are truly out of this world. If you're thinking about going to the hospital without insurance, you might as well buy the hospital first. Not to mention the variety of little things that could go wrong in life. A car that breaks down at the wrong time. A company that suddenly decides to downsize.
Many of these risks can be avoided by having a decent emergency fund - a savings account that can weather the storms in life. Insurance may be expensive, but compared to a medical disaster it's very cheap. The safety nets may be difficult to build and maintain, but living without them is akin to playing Russian roulette with your finances. It's fairly risky and a single shot, such as a medical emergency, could easily wipe out your life's savings.
Everyone has their own reason for adopting a frugal lifestyle. Some people simply don't have many materialistic needs or desires in life. Stuff doesn't make them happy. Other people are looking for a sense of security. They like knowing that they can get laid off tomorrow and be just fine. They like not having to worry about their bills, or whether or not they can afford to make a purchase. They don't have to check their checking account before buying something to make sure they have the money. They know they have the money.
Some people see frugality as sacrifice. They see it as just being cheap, or having some kind of addiction to money. I equate frugality more with being financially conscious. It isn't about sacrificing what you want. It is about making decisions that are in line with your best interests. It isn't about having money. It is about having security, and freedom. It isn't about buying the cheapest product, it's about buying the best product for you, at the best possible price. It is about rewarding companies that make good products and sell them at fair prices.
But most of all, being frugal is about letting go of financial stress and worry. It's not about the money. It's about choosing a life free of financial stress. And that, to me, is worth more than money can buy.