“31 Days to Financial Independence” is an ongoing series that appears every Thursday on The Simple Dollar. You might want to start this series from the beginning!
Last time, we finished up our deep look at the average American family budget, going through each category and examining how one could trim the cost of typical expenses in that category. Here’s the “average American family budget” that we’re looking at, along with links back to the earlier entries on those specific areas:
Housing – $10,080
Transportation – $9,004
Taxes – $7,432
Utilities – $7,068
Food – $6,602
Insurance (including things like pensions) – $5,528
Debt Payments – $5,252
Healthcare – $3,631
Entertainment – $2,564
Cash Contributions – $1,834
Apparel and Services – $1,604
Education – $1,138
Vices – $775
Miscellaneous – $664
Personal Care – $608
TOTAL – $63,784
While this cruise through the average American budget produced a ton of specific money-saving tips, what it doesn’t cover is how to really use those hundreds of tips in any sort of meaningful and coherent way. Obviously, you can use a specific tip and it will reduce your spending a little, but how does that little change impact your finances in any meaningful way.
Today, we’re going to talk about how exactly to use many of those frugal tips – there are literally hundreds in the links above – to enact meaningful long-term financial change in your life.
The valuable part of this type of financial change is that virtually anyone who isn’t already pinching every single penny can do this. It doesn’t require a high-salary career or something like that as many other pieces of financial advice require.
Let’s dig in.
Exercise #18 – Turning Frugality Tips Into Real Financial Change
This exercise isn’t something you can do in a single day; instead, it’s something that you’ll have to spread across a month or two in order to really see the benefits of how it works. It involves what I like to call “practical frugality” – making frugal choices, seeing how they add up, and then using that net benefit for something financially positive.
Step One – Try Lots of Frugality Tactics
This is where it all starts. It begins with actually trying money-saving strategies in your day to day life.
At the top of this article are links to a ton of different tips that I’ve shared over the last few weeks, sorted by category. Although it’s not a “be-all-end-all” guide to frugality, almost everyone should be able to find dozens of tips and strategies from that article that could theoretically apply to their life.
Try them all. Give every single one that could remotely apply to your life a sincere try. Even if the tip seems strange or a little outside of your comfort zone, give it a shot. There are going to be quite a few that fall into that “little bit outside of your comfort zone” area, and that’s okay. Human beings are creatures of habit, and many of those tips tweak a habit that we’ve established in our lives.
Make a conscious effort each day to try out at least one new frugality tactic and to try to repeat a tactic or two that worked from a previous day. It can be anything – buying store brand items at the store, installing a weather strip, replacing a normal light bulb with an LED bulb, making supper at home instead of getting takeout or eating out. As I said earlier, if you’re out of ideas, hit the links at the start of this article. You’ll find literally hundreds of ideas.
Step Two – Estimate and Record How Much Each One Saves You
Whenever you do something frugal take note of it, and when you have a free minute estimate how much that frugal tactic is actually saving you. Pull out that grocery receipt and estimate how much you saved by buying store brands. Figure out the energy savings of an LED bulb over the course of its life. Calculate the savings from making a crock pot of chili at home rather than eating out.
You don’t have to be perfect here – a rough estimate is good enough. Just try to get a rough sense on how much you saved thanks to that frugal move and how much it will save you going forward in terms of permanent changes like weatherstripping.
My recommendation is to try to figure out how much it will save you over the course of a month. If it’s a one-off change, just focus on how much that one action saved you. If it’s a permanent change, like installing weatherstripping, try to estimate on the low end how much it will save you per month going forward.
I keep track of these things myself using Evernote, as I like to keep tabs on my money-saving efforts (in part for articles like these, but also in part because I simply want to know what works). I take pictures and little text notes of the things that I do, and then about once a week I spend time figuring out what these things actually saved me (and whether they’re worth writing about on The Simple Dollar). Honestly, this is a routine I would continue even without writing, simply because I find it useful to know whether something is really worthwhile or not so that I know if I should try to change my routines and make them better.
Step Three – Discard the Ones That Don’t Work; Keep All of the Ones That Do
The reality is that some tactics you try won’t work very well, while others will make a ton of sense for you.
Some tactics simply won’t save much money at all for you compared to the effort. You have to spend significant time doing something you don’t enjoy and you’re barely saving anything at all, so it’s not worth it.
Other tactics have outcomes that you simply don’t want. You buy a store brand, for example, and you find that the specific item you bought isn’t good (though you should make absolutely sure that it’s the product and not your sense of brand loyalty at work). In those cases, the new way of doing things has a real drawback that you’re not going to repeat.
Discard those things! Don’t do them again!
The thing to always remember about a big list of frugal ideas is that everyone’s life is a little different. Different people have different preferences about, well, everything in life. What you’re going to find when you start experimenting with frugal strategies is that some of them are going to fit right into your life perfectly and other ones aren’t going to fit well at all – and that’s okay. Remember that the set of strategies that works well for you is going to be different than the set that works well for someone else.
Also, remember that just because a tip feels a little unnatural at first doesn’t mean it’s not a positive move for you. It’s very likely that you’re going to feel like you’re giving up something important to make some of these tips happen, but keep in mind that it’s often much more about losing a routine than it is about the actual thing that you’re changing. I find that a lot of frugal changes initially seem like a bigger change than they actually turn out to be; I do it a few times and it quickly begins to feel like the new way is the norm, even if it felt odd at first.
Step Four – Total Your Frugal Savings Over the Course of a Month
After you do this for a month or so, sit down and calculate how much you’ve saved over the course of a month. In particular, focus on the changes that you’re pretty confident will stick throughout your life, but you should also add up all of the other changes that were one-time things.
Going forward from here, the amount you saved from the changes that will stick – the ones that are permanent changes and the ones that fit in your life – is an amount of money you can use going forward to elicit financial changes. You can use that money to build an emergency fund or to save for retirement or do whatever it is that your financial goals are centered around.
At the start of this series, we spent some real time focused on figuring out direction and meaning in your life, giving you a sense of what you want to be working for. This is the start of that. This is the seed money you now have each and every month to work toward that goal.
Step Five – Use That Amount for Financially Positive Moves
So, what are you going to do with that money?
The first thing that you should do with it is to build up an emergency fund. This is a small chunk of money that you keep in a savings account to help you deal with life’s emergencies. I usually recommend that a starter emergency fund be around $1,000 and to build it up to a couple of months of living expenses later on when you’ve taken care of a few other things.
Once you have that $1,000 emergency fund, you should be using this monthly frugality savings to tackle your remaining high interest debts. Earlier in the series, we took a long, hard look at your debt situation and took a few quick measures to stop the worst of the financial bleeding. Now, you have some steady money with which to address the remaining high interest debts. In other words, your extra money from being more frugal can be directly put toward an extra debt payment to get rid of debts much faster.
Step Six – Automate Those Moves
One final problem: when you have extra money sitting in your checking account, it can become very tempting to just spend it. You’ll glance at your account balance, think that you have plenty of money for whatever impulse buy you have at the moment, and then go spend it.
A much better approach is to take that money out of sight and out of mind. Once you have a monthly total of how much you’re consistently saving due to frugal moves, set up a weekly automatic transfer from your checking account to your savings account for a quarter of that amount. So, if you’ve found ways to spend $100 a month less without any real life changes, set up a transfer of $25 a week from your checking to your savings. You may even consider opening an account at a completely different bank just to keep this money out of sight and out of mind, as many online savings accounts make this kind of thing very easy.
If you’re building an emergency fund, that’s all you have to do. Don’t touch it until there’s an emergency. If you have other goals, go into that account every once in a while, transfer that money back to your checking, and then immediately use that amount for something financially positive. Pay off a credit card! Have a down payment for a car so you can get a better loan – or, even better, pay for that car out of pocket so you don’t even have a car payment!
The point is to start eroding some of the long term expenses in your life. If you manage to use this to pay off a credit card bill, see how much that credit card bill was in a typical month and add that to your automatic transfer (a quarter of that bill per week). If you manage to pay off a car loan, add a quarter of that monthly bill to your weekly automatic transfer.
What’s going to happen before long is that your weekly transfer is going to get nice and fat. You’re going to be putting aside enough money to easily buy your next car without a car loan, which means no new bill and no interest that you have to pay. Instead, you’re earning interest from your savings account. When an emergency happens, it’s not panic mode time; you have money in that savings account to cover whatever happens.
Why Does This Work?
The entire purpose of all of this is to take all of those little savings from frugal moves, like the $5 per month you save on your energy bill from LED light bulbs and the $5 you save each month from installing weatherstripping and the $10 you save each month from switching to store brand laundry detergent, and scoop all of those little bits into one big pile.
It’s like sweeping the floor – you might notice one or two little things out on the floor, but when you start sweeping, you collect all of those little things and lots of other little things that you didn’t even notice at all and suddenly it becomes this surprisingly big pile.
Those little bits on their own seem tiny and unimportant, but when you’re doing a lot of them all at once, they start to really add up. One thing that will save you $5 a month seems tiny, but if you’re doing twenty such things, it’s $100 a month. If you’re consciously keeping track of those savings and then doing something smart with that money, it’s going to start making a big difference in your life surprisingly fast.
More than anything, the power of frugality begins to appear when you buy less stuff on credit and more stuff out of pocket. Let’s say, for example, that you need to make a $1,000 purchase but you don’t have the money on hand. Ordinarily, you might put that expense on a credit card and then make minimum payments to pay it off, but if you did that on a typical credit card with a 19.9% interest rate and 4% minimum payments, you would end up paying $555.93 in interest. On the other hand, let’s say you were able to save up to that $1,000 over the course of several months. Not only would you be able to pay that out of pocket, thus saving you the $555.93 in interest, you would have also earned some interest over the time that money was in your savings account. That’s a swing of $600 in your favor just by being a little more financially responsible.
If you start looking at those kinds of swings on every one of your debts, you start to get the picture: freedom from debt, particularly high interest debt, is how you get ahead, and you can start to free yourself from that grip by taking lots of little frugal actions, sweeping them together into a pile, and then using that pile to hammer down that debt.
Debt repayment isn’t the only useful thing you can do, either. This “swept together frugality” money can be used for retirement savings, for child education savings, and, more importantly, for “personal goal” savings.
It’s those “personal goals” that often have the greatest impact because you can look at your current life when you’re in the process of saving for and working for those personal goals that can give you the motivation you need to keep going. You can see that your life really is headed for that big dream.
Next time, we’re going to start taking a look at increasing the “earning” side of the “spend less than you earn” equation.