When you start your business after being frugal it makes your business frugal which makes it lean, which means that you'll raise (if necessary) on much better terms.
Caesar:
Let me have men about me that are fat,
Sleek-headed men and such as sleep a-nights.
Yond Cassius has a lean and hungry look,
He thinks too much; such men are dangerous.
I disagree with the general sentiment of the article, but this comment rings true. If you are aware of how to survive on a limited budget, that could give you the strength, knowledge, and confidence to power through a tough financial situation with your startup.
"The only people who are obsessed with food are the anorexic and the morbidly obese" - Stephen Fry
Likewise, it seems to me that misers and spendthrifts are both defined by their obsession with money. This sort of 'frugality' seems a particularly unpleasant fixation.
"This sort of 'frugality' seems a particularly unpleasant fixation."
To some people it is, and to others it's actually fun and rewarding to do more with less and figure out new ways to save money for something more important in the long-term.
If it's not for you, fine, but let's not generalize.
Not really. What is going to help you get rich is to focus on increasing your top-line income. Doubling and tripling and more of your income is going to make whatever bottom line improvements described in this article irrelevant.
Not to mention that you should be enjoying the money you make, not constantly worrying about whether you should brown bag it or eat $5 crappy street meat.
I don't think your idea and the OP's are at odds. Abundant wealth growth comes from reinvestment of capital- the more capital you have the more you can invest. And cost-cutting, naturally constrained by current top-line revenue, increases earnings to be reinvested.
Two sides of accounting, happening at the same time- cost and revenue.
Median income in the U.S. is $40K. Which is about $110/day. Telling people to cut out some "small thing", a $5 daily expense, is telling them to magically save 5% of their total expenditures. Except he moves quickly to saving $250/month, which is now 10% of their total expenditures. Easy as pie! Just stop eating! Stop renting shelter! Stop purchasing clothes! And then you'll be free to have money to eat, rent shelter, and purchase clothes.
This reminds me of what my mother used to tell us when we were kids. Since we were poor, she used to say that "Rich people are rich because they only eat one item for lunch". Even at an early age, I questioned this logic.
Rich people are people who manage to earn more than they spend on a regular basis. Short of extreme lifestyles, there is a certain amount of money you'll have to spend to be a participant of society. If your income is very close to that number, you are not broke because of your spending habits or because you eat pasta and salad for lunch.
You are broke because you don't earn enough money. The recipe then is to earn more money, which is generally easier said than done when you are dealing with financial difficulties.
But that's where the focus should be, not stressing yourself further in an effort to save $5.
A nice safe retirement costs about 20$ a day if you start at 18. (20$/day * ~6% ROI ~= 1.8million) but many people are dealing with credit card debt all there lives which blows those numbers out of the water. So, yea if your scraping buy try and make more money, but don't think you need to make all that much more money.
PS: When it comes to CC debt spending 1$ more than you make each day will crush most people in around 20 years. (Run the number @20% interest.)
Nice 6% ROI you pulled out of thin air. Where exactly do you find that? It's hard to find a risk-free way that just keeps up with inflation at this point.
With the standard caveat that past performance does not guarantee future results, the historical average real return on the stock market has been >~7% [1, 2, 3, 4]. Assuming someone starts saving for retirement at a young age (say, early 20s), assuming that the average return will be close to the historical average is not unreasonable.
Well, 6% is the historical average including victory in a war that eliminated almost all of the US' global competition, the discovery and near-depletion of easy petrochemical energy resources, and major technological advances driven by the cold war/space race. Plus endless borrowing and debt expansion. It seems unlikely that the resulting 50 yr period of prosperity can and will repeat over the next 25-50 years.
I was going to argue that you can always invest internationally, but even this looks slightly dodgy.
The MSCI world index has had a 3% annualized return after inflation since 2000...which is strange and somewhat hard to explain. Another problem is that for the last 10 years, the best investment opportunities have only been available to rich people, at least in the US - the IPO market doesn't exist anymore and most wealth seems to be created in companies that are privately held.
I'd give my left nut to be able to invest in any company in the world.
I see where you're getting at but I don't think the target audience of this article are people who earns $40k/day.
I've been a long time reader of thesimpledollar and I use to read it back in my college/uni days where money was pretty hard to come by (i worked 2 part time jobs just to pay for my living cost AND tuition). Back then for me, the website had A LOT of useful advice which if I look back in retrospect was pretty obvious now to me.. STuff they say may be obvious to most people here but there are people who aren't as "enlightened".
An analogy will be, the forest and trees may be obvious to you because you seen it many times but there are people that are oblivious to it or find it hard to grasp what forest/tree is and probably just needs to be simply pointed out that those ARE trees/forest.
I haven't brought any new clothing in a long time. The key is to walk into secondhand stores and look around - they usually have some pretty good clothing and the prices are always super low.
But go out and buy them new, damm that cost a fortune.
$40k salary a year actually comes out to ~$154/day. Assuming 2080 hours/year of workable time, this is 40k / 260 "work days".
I get less than this at the moment.
If you can afford to invest 10% of your income for 2 years, then drop to 5% for the rest, in a mutual fund that averages 15%/year (they do exist) you'd have ~$813k after 30 years (at $250 the first two, then $125 the remaining years). At no further investment you'd have $323k after thirty years from the first $6k invested.
This ain't no drop in the bucket, but we post-modernist consumptive Americans aren't interested in self-sacrifice.
I've had recruiters try to sell me on this figure for salary calculations, or even worse, use 2085.7 (=365 * 5/7 * 8). That only works if you don't want a vacation.
I use 2,000 hrs/yr both to factor in some vacation time and also to make the math easier to do in my head.
Sure, this is why the young kids with no family and no life outside work make buckets of money: they spend almost all their time in the office.
A salaried position is nice, but even then some industries put the salary low and give bonuses to "dedicated" people like that.
I'm not going to sugar coat it for myself, or for anyone else either. It's really hard for everyone in this economy, but especially for young folks like me who don't already own (or at least partly own) houses.
Generally cutting small things has too small of an impect. At least if you are young, childless, healthy, and making a software dev salary, there are really only three flexible items that matter:
Rent (huge)
Car
Food (esp. if you eat out all the time)
At least in expensive urban areas (Bay Area, NYC, etc), saving on rent is one of the easiest things for most of the software dev types to do. Dumping a car or getting a cheap used one helps a lot, and eating out can be exceptionally costly everyday.
Once you flush those recurring costs down, you'll have plenty left over to save and/or splurge. Getting good deals on $50 electronic products really isn't worth your time; getting your rent lowered by $300 a month is.
> "cutting small things has too small of an impect"
How small is "small" and how many things of that size are you cutting? What portion of your budget do those things make up? By what percentage could you increase your debt repayment/savings/investment plan by doing those things? Do the math; it might surprise you.
Cutting a single meal out, for a single person, might save 5 or 10 bucks; cutting 20 meals out saves hundreds. Buying cheaper shampoo might save 2 bucks a month; buying cheaper household goods across the board saves hundreds. There are a number of ways the average person can save pretty good chunks of change -- thrift stores, coupons, generics, spending 3 minutes comparing prices on Amazon/Tiger Direct/Newegg, and so on. There's plenty room to splurge on the things you really care about if you save elsewhere.
Save on the big things, and on the small things that add up, and you'll be way ahead.
Perhaps I'm an anomaly, but such a high percent of my budget (over 70% of spending) is consumed by rent, car, and food that other household goods just don't matter relatively speaking. I can't save hundreds on household goods, because I don't spend that much to begin with.
Coupons take a tremendous amount of time and, again if you are a dev who values his time, just aren't worth it.
If you want to devote N hours to cost reduction, the biggest bang for the buck is rent. Saving even $200 a month by searching for a few hours more blows away what is even possible to save on the other items.
People tend to get in debt from having too expensive of a car or house. Not because they have too nice of a toothbrush or use brand-name cereal.
I agree that if you do have a lot of downtime, it's probably worth it.
I'm assuming the audience here is filled with ambitious entrepreneur types who don't have such a luxury. On my end, I can't think of any passive activity I do where my hands and mind are free (I watch no TV, can't multitask reading news/blogs/books with cutting coupons, etc.). Besides, from my experience cutting coupons with my mother as a child, I know how poor the ROI is.
My main original point was simply that all the small things in aggregate are... still small. Looking at my budget (which is probably similar to many on this board), the sum of all expenditures not related to housing, auto, or food are less than rent alone. If I wanted to, I could halve my rent (many of my peers in San Francisco could drop theirs by 70+%) and eliminate the also expensive auto. There is no way I can produce such a bang with the "small things" without significantly sacrificing my lifestyle or consuming tons of time deal hunting.
Cutting coupons or coffee or netflix won't help him. Selling his car and moving to a cheaper (half current price) apartment immediately breaks him out of his financial problems.
The guy you mentioned is hardly frugal. He is whining that he isn't spending anything on luxury - while in truth, EVERYTHING is super luxurious. He treats his whole life as one big luxury experiment. One rents (0% downpayment lease is a rent) non essential resources, especially at the brackets he cites.
In such cases 50% expense could be dropped immediately, with hardly any meaningful impact on quality of life.
> "such a high percent of my budget (over 70% of spending) is consumed by rent, car, and food that other household goods just don't matter relatively speaking."
What percent are you saving? If it's 5%, then the remaining 25% you're spending on everything else is significant -- cut that a little bit and you could double your savings. Cut it by a lot and you could maybe triple or quadruple your savings. That matters, especially if you're paying down debt.
I'm not saying you should neglect the big stuff. If you can cut your rent by a little bit, maybe that will triple your savings too. And if you negotiate a better salary, maybe you could save ten times as much. By all means, do these things!
I'm also not saying you should waste time on low ROI stuff. I'm just saying you should do the math. How much is eating out costing you, and is it worth the savings in time or effort? How much could you save by switching to store brands (which don't take any longer to buy)? Clipping coupons isn't always worth it, but I find I can often save $10 for less than 5 minutes of time by focusing on the good stuff; that's the same rate as if you make a quarter million dollars a year after taxes, which isn't too bad.
Having a sane budget is about the total picture. Too much personal finance advice focuses on the little stuff while ignoring the big stuff, but don't overreact by ignoring the little stuff entirely. Keep perspective.
My after tax historical savings is a comfortable 15% to 20%, while taking a low salary (probably less than most here) and living in an expensive area (San Francisco).
I'm able to save more than most people my age simply by having low rent. I do just as many pricey activities as them, if not more. The only sacrifice I made was living in a slightly older house with some random craigslisters. (and in case you are wondering, I have a shorter commute than most (~5 minutes by car).
The remaining 30% of my expenses? Mostly trips, bars, the occasional high-end restaurant. If I sacrificed those, I'd feel like I was missing out on life. On the other hand, I feel like I lost almost nothing by getting an apartment $500 to $1000 cheaper per month than what my friends live in. That number is huge -- I can buy an ipad every other month and still be saving more money than them.
Once you take the opportunity cost of time into account, cutting the small things may not be worth it. Sure if there are two shampoos next to each other we'd grab the cheaper one. But if you need shampoo and happen to come across a store with overpriced shampoos, grab it anyway to save both the time and mental effort.
Write it on paper, soap it on a window, do it in a spreadsheet, use RoR. Whatever.
Write down your income, your deductions (federal income tax, SSI, healthcare, state, 401k).
Then list your expenses.
Compute them as a percentage of your income.
Rent and food are about 50% of my net expenses (including savings). Even my $100+ mobile bill is barely 1% of my budget. As with the Federal budget -- if you've got 15% of everything else (after entitlements, defense, and interest), then if you have a 30% budget shortfall (about the size of the current US federal deficit), there's simply no way you can cut yourself out of the problem through "discretionary" spending alone.
I can look to spend $200 less in rent. Or try to cut that same $200 from each of my cell, food, and incidentals budgets. Odds are I'll have an easier time finding a cheaper place to live (and the discount pays forward as it's a fixed payment each month).
Look to the big-ticket items first. It's a more efficient use of your time.
I'm sorry, this is just loser talk. If you put enough effort into your skill set you should be able to make enough to afford goods and services in moderation. Middle class, in other words. If you can't, then you're doing something wrong.
The top 5% have captured 82% of all economic growth since 1983. That economic growth has been to a great extent the result of the productivity gains of the other 95% working harder and longer and more efficiently (with better technology). The bottom 60% have actually lost, on the whole, from their additional striving. Their return on additional labor has been negative.
It's irrational, given that state of affairs, to strive. It's exactly akin to the arguments people raise when you talk about 90% marginal tax rates --- who would rationally work more when most of their gains go to the government? Well, who would rationally work more when most of the gains go to the rich? We keep people working more through cultural influence, but that doesn't make it rational.
>The top 5% have captured 82% of all economic growth since 1983.
Lots of people convinced themselves credit is the same as cash. As long as that's true they will have no wealth. I know single people who make over six figures and have a negative net worth. Saying xx% of people haven't saved any money is not the same thing as saying that same percentage of people couldn't save money. They just didn't. That's the point of the article, and no matter how trite it seems, it's true.
>The bottom 60% have actually lost, on the whole, from their additional striving. Their return on additional labor has been negative.
You have to pick your time frame very carefully for that to be true. It's definitely the case the rich have been getting richer. The poor have been getting richer as well: http://blogs.dailymail.com/donsurber/archives/42130
Realize that the people in the bottom quartile are not the same people who were in the bottom quartile twenty years ago. Between 1985 and 2010 we had over ten million people immigrate to this country with no ability to speak English and no marketable skills. You can hardly blame the economy for not lifting them out of poverty yet.
>It's irrational, given that state of affairs, to strive.
Complete, unadulterated BS. It's not irrational at all. Even today, with the deleveraging that's going on, you can make a comfortable life for yourself if you're willing to "strive".
Or, I guess, you can stay at your mom's place, drink beer, and play video games. But you'll have to pardon the rest of us for not having much sympathy when you complain the man is keeping you down.
When I started my corporate job - there were a lot of people around me with similar attitude.
They would refuse to go an extra mile, saying: Somebody else will benefit from this more than I do, fuck this.
I used different strategy, I hopped at every opportunity I got. Eventually (pretty goddamn scary fast TBH) it started paying off. I got salary increases, advancements, etc... By the time I left the company I was best paid member of the original team (while being the youngest and with least original experience), I also got to enjoy some really cool perks (how many of you were offered a position of "free electron"?).
It was possible to do - not because I worked so hard ( well I did work hard, tbh) - but mostly because my competition set the bar so low. When people think the way you do, it really doesn't take an "extra mile", an "extra step" will do a lot of the time.
Don't get me wrong, I knew that the environment I was in was shitty and hopeless. But I would not let that destroy my odds. And after 5 years I loaded up on network, experience, opportunity.
I also managed to save a bunch of money.
And my parents are both blue collar people, without connections in high places, but they had some connections in the department of rationality that I am grateful they passed my way.
If you live life thinking you're some type of helpless victim who can't do anything to save money or improve their situation in life, you're not going to be successful. Excuses aren't helpful.
$5 a day adds up to $150 a month. Some people--enough to support entire industries--spend that much on things that make their lives measurably worse, like cigarettes and satellite TV.
Virtually everyone in the US can safely reduce consumption.
I live in India. India is vastly poorer than the US - the upper middle class over here has a standard of living comparable to the bottom 10% of the US [1]. The savings rate is in the neighborhood of 20-30%.
This is true. The problem is that middle-class Americans don't _really_ want to save. You can always live in a tiny, crappy house, drive around in an old beat-up car and never go on a holiday that requires you to fly. But if you do this, you will look like a freak to your peers. So practically all middle-class Americans do, in fact, live just within their means. The entire culture is just different in India.
I live in Norway and currently save about 20% of what I earn. I get away with this since I just finished studying and still living the student lifestyle doesn't look so weird. But if I was 32 instead of 25, this might start questions from friends and family about how I'm not doing something with my life. Of course, even with this approach there is the question of how to invest your money in a way that it doesn't fall in value.
Actually, it is going to be interesting to see how this plays out these days when most of the Western world seems to be in a huge debt crisis. This is a more complex question than you can probably solve with armchair economics, because saving money at a rate of interest higher than inflation requires that someone is willing to borrow your money. In the end, you might have to end up buying stocks.
You can never earn so little that you can't save anything.
On the other hand you can never earn so much to not be able to spend everything.
A person making a million dollars a month and spending a million and a dollar is a poor person.
You are only as wealthy as long as you can live without working.
See the above sayings? All of them imply that wealth is a function of income and frugality. And whether you believe it or not - self made wealthy people come in various packages: Shrewd and inethical, frugal and hard working, smart and risk-tolerant or any mix of those qualities.
Or to put it into a different perspective: Jesse Livermore explained difference between a speculator and an investor on a investor he knew.
This said investor went to see two company managers he was either holding stock of or thinking about buying it. Both were happy to present the guest with any information he wanted to see. The difference was that first manager wrote calculations on beautiful (expensive!) embroidered paper, which he would throw into thrash one by one mostly empty.
The other manager wrote calculations and numbers onto cut envelope paper. This manager supposedly ordered all the envelopes from the office be brought to him daily and the first thing he did in the morning was to cut all the envelopes into small sheets of paper and have them distributed throughout the office for taking notes.
The investor sold all his holdings in first company and increased them in the second. His decision payed off massively. His rationale being that wasteful attitude of the first manager and the frugal attitude of the second manager. Trickle down to the rest of the company. Thus influencing the way business operates.
Frugality is all about eliminating waste, tiny bits at a time. And in hierarchy the whole organization takes some of the character of its founder/leader. Thus one could infer that for a long term business success its founders/leaders absolutely must be frugal.
My father works training a lot of entry-level blue-collar types. They can barely make rent each month, but they always have the latest smartphone.
If saving money is the goal, it's amazing how one can continuously optimize the process, and it doesn't require one to live in an unhealthy (e.g. malnourished) manner.
I've seen a lot of people who are penny-wise pound-foolish, and I think that's actually a lot more damaging then not being frugal overall. Wasting $8/mo on Netflix doesn't matter that much, but having a habit of saying "screw it" and dropping $500 on a night out for no reason can be a much more damaging habit and much more cost-effective to stop.
Also it's hard to write an article about smart money and not point out that some people simply do not know when to negotiate. You could spend all year depriving yourself of coffee or decent food to save $10,000, or you could spend 5 minutes remembering to make a counter offer on your salary or your next car purchase.
You're right but take it further. Willpower is a muscle. It gets fatigued on any particular day, but as it is exercised over time it becomes stronger. A daily practitioner of frugality is able to choose the right thing nearly effortlessly compared to someone just beginning to try to save money.
From experience, that doesn't seem to be the case. If you worry about spending money at a certain level, you've defined the battle lines, and splurging desperately on the other side is utterly unthinkable.
If $10 for a day's worth of food seems lavish to you, something like even setting foot in a decent restaurant becomes unthinkable. You start to lose the ability to even imagine splurging, because to you spending $15-20 on pizza is splurging. You understand from an intellectual perspective that you can easily spend over $100 at a good restaurant ordering dinner for two, but you don't consider it as a possibility for your own life.
For those that wrote negative comments about this article, imagine for a minute you weren't such a hotshot and couldn't negotiate a $10,000 increase in salary at your minimum wage job as a ticket taker at the movie theater. Imagine you were one of those mechanical turk workers that you use in your shiny web application being paid next to nothing for your time. Then shut the hell up. This article isn't for you.
Taken within the context of HN audience, this is generally poor advice. I'm not sure why it is being upvoted other than for the discussion itself. Don't scrounge those $9 Netflix dollars, and don't skip your coffee. Don't even spend countless hours lurking on SlickDeals to save twenty bucks here and there. Your time would much, much better spent if you work on increasing your income stream. Work harder and ship your darn iPhone/Android/web/whatever app.
It occurred to me a long time ago that as an absolute maximum, I couldn't reduce my expenses below $0 no matter what I do. But there is no preset ceiling on how much income I can have.
But it's also partly to do with the kinds of businesses that the HN crowd are setting up.
If your business is a plain old-style cash-flow business, rather than having a fast-growth trajectory, it does much sense to optimize for the cents, since they turn into dollars because of the repetition.
When first-mover advantage is important, don't let the small stuff get in the way of getting your product out ASAP.
> Joe Average has $80,000 in student loan debt, $25,000 in credit card debt, and a $10,000 car loan. His total monthly debt payment is about $1,200 and he’s going to be making those payments for the next, say, ten years.
Okay, I'll just go ahead and ask: why?
Why are so many young people so heavily in debt? Is this an American thing? Or a Western thing in general?
I see people like this in every online community. They barely make enough money to pay for housing, food and utilities, yet they use credit cards to purchase Xboxes, e-readers, smartphones, expensive computers, Netflix, Pandora/Last.fm/GrooveShark/whatever, iPods, tablets, games off Steam and FSM knows what else[1]. And then they go eat at the local fast-food chain because it's cheaper than eating real food. Sometimes I have serious doubts about the sanity of these people.
Why are young people who don't make money being given credit cards? Why are they purchasing cars with money they don't have?
I'm curious. This cultural phenomenon of spending more than you make is completely foreign to me.
A big part of it (I think) is the student loan debt. 80,000 is huge, and can lead to just giving up and spiraling(I already owe 80k, what's another 2?)
The car loan is really low, 10k is just about as cheap as you can get a new car for, and you'll never get a loan for a used car (so if you don't have 2-5k in savings to buy it used...you're SOL) Biking/walking is only really feasible in certain cities.
And if you really want to know why young people are being given credit cards...it's because they don't make money! No, really. Not a conspiracy, but without a steady income they can only make the minimum payments for a while, which gives the card issuers more money than someone who has a job. Plus, they get to charge higher interest on it.
and you'll never get a loan for a used car (so if you don't have 2-5k in savings to buy it used...you're SOL)
This isn't true at all. You might not be able to get a car loan in the 2-5k range, but for a used car, especially a certified used car in the 10k range, those are almost always financed. One also makes a down payment on a car, so a 10K car loan may be for a car that's up to $15k. $15k is plenty for a decent used car.
I've found the interest rate on outstanding debt to be a tremendous motivation to try and limit the number of frivolous things I buy.
For example, our interest rate is 5.5% and we're not due to pay off our mortgage for 28 years. That means (more or less) that for every dollar I spend, I could have put that on my mortgage and saved 5.5% interest (compounded) over 28 years. Another way of looking at it is that I'm going to be paying 5.5% interest (tax-deductible) on anything I buy instead of putting the money in an extra payment on my mortgage.
Given the terms of my mortgage, that makes an $500 iPad actually cost about $500 now and another $481.06 in interest over the next 28 years. My $2300 MacBook Pro will actually end up costing me $4512.88.
The great thing about this approach is that it doesn't discourage me from buying nice things that are actually worth their value. The MacBook Pro for example produces incredible value, much more than I paid for it.
However, knowing that for every $5 smoothie I buy now, I'll be paying another $4.81 for it in 28 years? I don't buy $5 smoothies 2-3 times a week anymore. Instead I go to Rita's when they're doing $1 kids cones on Monday and I go again on Wednesday for the $1 Italian Ice.
Anyways, I found this so helpful in curbing frivolous spending that I created a small iPhone app to help folks do the calculation on the fly. http://whatll-it-cost.limelightapp.com/ . I'd be happy to give a promo code to anyone who thinks it'll be helpful. (After all, that $0.99 would actually be $1.94 after 28 years at 5.5%. :p)
Author makes some good points but comes to an incorrect conclusion. It is very important to live within your means (income + some delta > expenses). I don't think anyone would disagree with that statement. There is some debate how big that delta should but that isn't the root of the issue.
But then concluding being frutal will provide opportunities is false. All frugality enables is the ability for one to take advantage of opportunities that someone that is in a lesser financial situation could not.
There are three major and important reasons: for retirement, to provide a cushion, and to be able to capitalize on opportunity. If you save more now, you can retire earlier or maintain a higher quality of life. If you save enough to provide a nice cushion, you can ride out the bad times or worse (child sick, lose job, car falls apart...). Again, and perhaps most excitingly, being able to draw on a reserve lets you leverage opportunity.
This is not about debt. It's about making sure you have the ability and the freedom to live beyond the day to day.
Real frugality starts when you've over with the fact that you don't really need most of that stuff you think you needed anyway. And, further, those things you do need you choose because you like them, not because what you think others will like--and thus, think they like you too.
However, there's an interesting issue there. Having little income but consuming even less approaches a certain point--a point that is the same point as consuming a lot but yet having even more income.
Either way, at this point you consume less than you earn. And this point happens to be the one that calls you to think what is it that you're here, in life, for. The "what would you do if you had a million dollars question", but just in reality. You don't need millions; to reach this point you just need more income than you spend.
This calling is always there but you really start hearing it louder as soon as you don't have to be so busy merely making a living. And that is a dreadful point for it takes away all excuses you're used to, and makes you either a weasel or someone who will begins to think hard, really hard.
My effective income is $17,280, pre-tax. Even pared back to that, I've accumulated about $3,000 in savings over a year. It helps not to buy stuff. Like, at all. I have only 14 major physical possessions, including where I live and "clothing" and "tools" as single objects. I have much more software, most of it purchased at steep discounts through Steam or the App Store/Market. Spotify provides music.
Surplus monthly income is roughly $500. It's been a pretty successful experiment. So saving at low incomes is very possible. What I think bears mention is that this is mostly possible because of my age and disposition; I'm young and I'm picky, so I neither pile up expenses nor have a burning desire to possess most things.
Do you still live at home with your parents? If not where do you live? I saved a ton of money back when I had a low income but very little expenses because I lived with my parents.
While frugality is important I think mental effort effort is too. You can only focus on so much and sometimes its better to have that attention focused elsewhere.
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[ 4.6 ms ] story [ 131 ms ] threadWhen you start your business after being frugal it makes your business frugal which makes it lean, which means that you'll raise (if necessary) on much better terms.
And much of what he suggest takes so much more time that you still couldn't make a business.
Negative actions include not spending as much money on the car, or the house, and skipping the starbucks. Negative actions are half the battle.
Likewise, it seems to me that misers and spendthrifts are both defined by their obsession with money. This sort of 'frugality' seems a particularly unpleasant fixation.
To some people it is, and to others it's actually fun and rewarding to do more with less and figure out new ways to save money for something more important in the long-term.
If it's not for you, fine, but let's not generalize.
Not to mention that you should be enjoying the money you make, not constantly worrying about whether you should brown bag it or eat $5 crappy street meat.
Two sides of accounting, happening at the same time- cost and revenue.
Project not going well? Work harder.
Not enough money? Save more.
Not attractive enough? Be more attractive.
I know I'm enlightened. Sigh.
Median income in the U.S. is $40K. Which is about $110/day. Telling people to cut out some "small thing", a $5 daily expense, is telling them to magically save 5% of their total expenditures. Except he moves quickly to saving $250/month, which is now 10% of their total expenditures. Easy as pie! Just stop eating! Stop renting shelter! Stop purchasing clothes! And then you'll be free to have money to eat, rent shelter, and purchase clothes.
Utter brilliance.
Rich people are people who manage to earn more than they spend on a regular basis. Short of extreme lifestyles, there is a certain amount of money you'll have to spend to be a participant of society. If your income is very close to that number, you are not broke because of your spending habits or because you eat pasta and salad for lunch.
You are broke because you don't earn enough money. The recipe then is to earn more money, which is generally easier said than done when you are dealing with financial difficulties.
But that's where the focus should be, not stressing yourself further in an effort to save $5.
PS: When it comes to CC debt spending 1$ more than you make each day will crush most people in around 20 years. (Run the number @20% interest.)
[1] http://www.simplestockinvesting.com/SP500-historical-real-to...
[2] http://www.istockanalyst.com/article/viewarticle/articleid/2...
[3] http://www.getrichslowly.org/blog/2008/12/16/how-much-does-t...
[4] www.ssab.gov/publications/financing/estimated%20rate%20of%20return.pdf
The MSCI world index has had a 3% annualized return after inflation since 2000...which is strange and somewhat hard to explain. Another problem is that for the last 10 years, the best investment opportunities have only been available to rich people, at least in the US - the IPO market doesn't exist anymore and most wealth seems to be created in companies that are privately held.
I'd give my left nut to be able to invest in any company in the world.
I've been a long time reader of thesimpledollar and I use to read it back in my college/uni days where money was pretty hard to come by (i worked 2 part time jobs just to pay for my living cost AND tuition). Back then for me, the website had A LOT of useful advice which if I look back in retrospect was pretty obvious now to me.. STuff they say may be obvious to most people here but there are people who aren't as "enlightened".
An analogy will be, the forest and trees may be obvious to you because you seen it many times but there are people that are oblivious to it or find it hard to grasp what forest/tree is and probably just needs to be simply pointed out that those ARE trees/forest.
Just saying.
But go out and buy them new, damm that cost a fortune.
$40k salary a year actually comes out to ~$154/day. Assuming 2080 hours/year of workable time, this is 40k / 260 "work days".
I get less than this at the moment.
If you can afford to invest 10% of your income for 2 years, then drop to 5% for the rest, in a mutual fund that averages 15%/year (they do exist) you'd have ~$813k after 30 years (at $250 the first two, then $125 the remaining years). At no further investment you'd have $323k after thirty years from the first $6k invested.
This ain't no drop in the bucket, but we post-modernist consumptive Americans aren't interested in self-sacrifice.
I use 2,000 hrs/yr both to factor in some vacation time and also to make the math easier to do in my head.
A salaried position is nice, but even then some industries put the salary low and give bonuses to "dedicated" people like that.
I'm not going to sugar coat it for myself, or for anyone else either. It's really hard for everyone in this economy, but especially for young folks like me who don't already own (or at least partly own) houses.
Rent (huge)
Car
Food (esp. if you eat out all the time)
At least in expensive urban areas (Bay Area, NYC, etc), saving on rent is one of the easiest things for most of the software dev types to do. Dumping a car or getting a cheap used one helps a lot, and eating out can be exceptionally costly everyday.
Once you flush those recurring costs down, you'll have plenty left over to save and/or splurge. Getting good deals on $50 electronic products really isn't worth your time; getting your rent lowered by $300 a month is.
How small is "small" and how many things of that size are you cutting? What portion of your budget do those things make up? By what percentage could you increase your debt repayment/savings/investment plan by doing those things? Do the math; it might surprise you.
Cutting a single meal out, for a single person, might save 5 or 10 bucks; cutting 20 meals out saves hundreds. Buying cheaper shampoo might save 2 bucks a month; buying cheaper household goods across the board saves hundreds. There are a number of ways the average person can save pretty good chunks of change -- thrift stores, coupons, generics, spending 3 minutes comparing prices on Amazon/Tiger Direct/Newegg, and so on. There's plenty room to splurge on the things you really care about if you save elsewhere.
Save on the big things, and on the small things that add up, and you'll be way ahead.
Coupons take a tremendous amount of time and, again if you are a dev who values his time, just aren't worth it.
If you want to devote N hours to cost reduction, the biggest bang for the buck is rent. Saving even $200 a month by searching for a few hours more blows away what is even possible to save on the other items.
People tend to get in debt from having too expensive of a car or house. Not because they have too nice of a toothbrush or use brand-name cereal.
You can cut coupons while watching TV. You can also do other menial stuff that "would otherwise not be worthing" while doing such passive activities.
That is a trick of old that probably most of our grandmothers used.
And such stuff adds up with time.
I'm assuming the audience here is filled with ambitious entrepreneur types who don't have such a luxury. On my end, I can't think of any passive activity I do where my hands and mind are free (I watch no TV, can't multitask reading news/blogs/books with cutting coupons, etc.). Besides, from my experience cutting coupons with my mother as a child, I know how poor the ROI is.
My main original point was simply that all the small things in aggregate are... still small. Looking at my budget (which is probably similar to many on this board), the sum of all expenditures not related to housing, auto, or food are less than rent alone. If I wanted to, I could halve my rent (many of my peers in San Francisco could drop theirs by 70+%) and eliminate the also expensive auto. There is no way I can produce such a bang with the "small things" without significantly sacrificing my lifestyle or consuming tons of time deal hunting.
Case in point is this reddit post I saw awhile back: http://www.reddit.com/r/AskReddit/comments/jelt1/dear_anonlu...
Cutting coupons or coffee or netflix won't help him. Selling his car and moving to a cheaper (half current price) apartment immediately breaks him out of his financial problems.
In such cases 50% expense could be dropped immediately, with hardly any meaningful impact on quality of life.
And lifestyle is hardly a quality of life item.
What percent are you saving? If it's 5%, then the remaining 25% you're spending on everything else is significant -- cut that a little bit and you could double your savings. Cut it by a lot and you could maybe triple or quadruple your savings. That matters, especially if you're paying down debt.
I'm not saying you should neglect the big stuff. If you can cut your rent by a little bit, maybe that will triple your savings too. And if you negotiate a better salary, maybe you could save ten times as much. By all means, do these things!
I'm also not saying you should waste time on low ROI stuff. I'm just saying you should do the math. How much is eating out costing you, and is it worth the savings in time or effort? How much could you save by switching to store brands (which don't take any longer to buy)? Clipping coupons isn't always worth it, but I find I can often save $10 for less than 5 minutes of time by focusing on the good stuff; that's the same rate as if you make a quarter million dollars a year after taxes, which isn't too bad.
Having a sane budget is about the total picture. Too much personal finance advice focuses on the little stuff while ignoring the big stuff, but don't overreact by ignoring the little stuff entirely. Keep perspective.
I'm able to save more than most people my age simply by having low rent. I do just as many pricey activities as them, if not more. The only sacrifice I made was living in a slightly older house with some random craigslisters. (and in case you are wondering, I have a shorter commute than most (~5 minutes by car).
The remaining 30% of my expenses? Mostly trips, bars, the occasional high-end restaurant. If I sacrificed those, I'd feel like I was missing out on life. On the other hand, I feel like I lost almost nothing by getting an apartment $500 to $1000 cheaper per month than what my friends live in. That number is huge -- I can buy an ipad every other month and still be saving more money than them.
Write it on paper, soap it on a window, do it in a spreadsheet, use RoR. Whatever.
Write down your income, your deductions (federal income tax, SSI, healthcare, state, 401k).
Then list your expenses.
Compute them as a percentage of your income.
Rent and food are about 50% of my net expenses (including savings). Even my $100+ mobile bill is barely 1% of my budget. As with the Federal budget -- if you've got 15% of everything else (after entitlements, defense, and interest), then if you have a 30% budget shortfall (about the size of the current US federal deficit), there's simply no way you can cut yourself out of the problem through "discretionary" spending alone.
I can look to spend $200 less in rent. Or try to cut that same $200 from each of my cell, food, and incidentals budgets. Odds are I'll have an easier time finding a cheaper place to live (and the discount pays forward as it's a fixed payment each month).
Look to the big-ticket items first. It's a more efficient use of your time.
I cou
"Work harder" so you can get 1% of the fruits of your labor while enriching shareholders with the other 99%.
"Save more" so Wall Street bankers can earn billions with your retirement savings while paying you token interest.
What you need to do is work less and save less. There isn't anything in it for you.
The top 5% have captured 82% of all economic growth since 1983. That economic growth has been to a great extent the result of the productivity gains of the other 95% working harder and longer and more efficiently (with better technology). The bottom 60% have actually lost, on the whole, from their additional striving. Their return on additional labor has been negative.
It's irrational, given that state of affairs, to strive. It's exactly akin to the arguments people raise when you talk about 90% marginal tax rates --- who would rationally work more when most of their gains go to the government? Well, who would rationally work more when most of the gains go to the rich? We keep people working more through cultural influence, but that doesn't make it rational.
Lots of people convinced themselves credit is the same as cash. As long as that's true they will have no wealth. I know single people who make over six figures and have a negative net worth. Saying xx% of people haven't saved any money is not the same thing as saying that same percentage of people couldn't save money. They just didn't. That's the point of the article, and no matter how trite it seems, it's true.
>The bottom 60% have actually lost, on the whole, from their additional striving. Their return on additional labor has been negative.
You have to pick your time frame very carefully for that to be true. It's definitely the case the rich have been getting richer. The poor have been getting richer as well: http://blogs.dailymail.com/donsurber/archives/42130
Realize that the people in the bottom quartile are not the same people who were in the bottom quartile twenty years ago. Between 1985 and 2010 we had over ten million people immigrate to this country with no ability to speak English and no marketable skills. You can hardly blame the economy for not lifting them out of poverty yet.
>It's irrational, given that state of affairs, to strive.
Complete, unadulterated BS. It's not irrational at all. Even today, with the deleveraging that's going on, you can make a comfortable life for yourself if you're willing to "strive".
Or, I guess, you can stay at your mom's place, drink beer, and play video games. But you'll have to pardon the rest of us for not having much sympathy when you complain the man is keeping you down.
They would refuse to go an extra mile, saying: Somebody else will benefit from this more than I do, fuck this.
I used different strategy, I hopped at every opportunity I got. Eventually (pretty goddamn scary fast TBH) it started paying off. I got salary increases, advancements, etc... By the time I left the company I was best paid member of the original team (while being the youngest and with least original experience), I also got to enjoy some really cool perks (how many of you were offered a position of "free electron"?).
It was possible to do - not because I worked so hard ( well I did work hard, tbh) - but mostly because my competition set the bar so low. When people think the way you do, it really doesn't take an "extra mile", an "extra step" will do a lot of the time.
Don't get me wrong, I knew that the environment I was in was shitty and hopeless. But I would not let that destroy my odds. And after 5 years I loaded up on network, experience, opportunity.
I also managed to save a bunch of money.
And my parents are both blue collar people, without connections in high places, but they had some connections in the department of rationality that I am grateful they passed my way.
$5 a day adds up to $150 a month. Some people--enough to support entire industries--spend that much on things that make their lives measurably worse, like cigarettes and satellite TV.
Just curious, do you have a source for the satellite tv claim? Why satellite, not cable?
For some people satellite TVs improves their quality of life.
I'm not some spoiled rich kid either; I grew up on potato soup and old cloth in poverty.
I live in India. India is vastly poorer than the US - the upper middle class over here has a standard of living comparable to the bottom 10% of the US [1]. The savings rate is in the neighborhood of 20-30%.
If India can do it, the US can do it.
[1] http://economix.blogs.nytimes.com/2011/01/31/the-haves-and-t...
I live in Norway and currently save about 20% of what I earn. I get away with this since I just finished studying and still living the student lifestyle doesn't look so weird. But if I was 32 instead of 25, this might start questions from friends and family about how I'm not doing something with my life. Of course, even with this approach there is the question of how to invest your money in a way that it doesn't fall in value.
Actually, it is going to be interesting to see how this plays out these days when most of the Western world seems to be in a huge debt crisis. This is a more complex question than you can probably solve with armchair economics, because saving money at a rate of interest higher than inflation requires that someone is willing to borrow your money. In the end, you might have to end up buying stocks.
On the other hand you can never earn so much to not be able to spend everything.
A person making a million dollars a month and spending a million and a dollar is a poor person.
You are only as wealthy as long as you can live without working.
See the above sayings? All of them imply that wealth is a function of income and frugality. And whether you believe it or not - self made wealthy people come in various packages: Shrewd and inethical, frugal and hard working, smart and risk-tolerant or any mix of those qualities.
Or to put it into a different perspective: Jesse Livermore explained difference between a speculator and an investor on a investor he knew.
This said investor went to see two company managers he was either holding stock of or thinking about buying it. Both were happy to present the guest with any information he wanted to see. The difference was that first manager wrote calculations on beautiful (expensive!) embroidered paper, which he would throw into thrash one by one mostly empty.
The other manager wrote calculations and numbers onto cut envelope paper. This manager supposedly ordered all the envelopes from the office be brought to him daily and the first thing he did in the morning was to cut all the envelopes into small sheets of paper and have them distributed throughout the office for taking notes.
The investor sold all his holdings in first company and increased them in the second. His decision payed off massively. His rationale being that wasteful attitude of the first manager and the frugal attitude of the second manager. Trickle down to the rest of the company. Thus influencing the way business operates.
Frugality is all about eliminating waste, tiny bits at a time. And in hierarchy the whole organization takes some of the character of its founder/leader. Thus one could infer that for a long term business success its founders/leaders absolutely must be frugal.
If saving money is the goal, it's amazing how one can continuously optimize the process, and it doesn't require one to live in an unhealthy (e.g. malnourished) manner.
Also it's hard to write an article about smart money and not point out that some people simply do not know when to negotiate. You could spend all year depriving yourself of coffee or decent food to save $10,000, or you could spend 5 minutes remembering to make a counter offer on your salary or your next car purchase.
> On the other hand, a daily habit of frugality makes it easier to not splurge.
My response: that might not be true based on the recent information about decision fatigue[1].
[1] http://www.nytimes.com/2011/08/21/magazine/do-you-suffer-fro...
If $10 for a day's worth of food seems lavish to you, something like even setting foot in a decent restaurant becomes unthinkable. You start to lose the ability to even imagine splurging, because to you spending $15-20 on pizza is splurging. You understand from an intellectual perspective that you can easily spend over $100 at a good restaurant ordering dinner for two, but you don't consider it as a possibility for your own life.
It occurred to me a long time ago that as an absolute maximum, I couldn't reduce my expenses below $0 no matter what I do. But there is no preset ceiling on how much income I can have.
Focus on increasing income, not cutting expenses.
If your business is a plain old-style cash-flow business, rather than having a fast-growth trajectory, it does much sense to optimize for the cents, since they turn into dollars because of the repetition.
When first-mover advantage is important, don't let the small stuff get in the way of getting your product out ASAP.
There is a saying which says: Don't waste your time thinking about how to spend money, think about how to make money.
Okay, I'll just go ahead and ask: why?
Why are so many young people so heavily in debt? Is this an American thing? Or a Western thing in general?
I see people like this in every online community. They barely make enough money to pay for housing, food and utilities, yet they use credit cards to purchase Xboxes, e-readers, smartphones, expensive computers, Netflix, Pandora/Last.fm/GrooveShark/whatever, iPods, tablets, games off Steam and FSM knows what else[1]. And then they go eat at the local fast-food chain because it's cheaper than eating real food. Sometimes I have serious doubts about the sanity of these people.
Why are young people who don't make money being given credit cards? Why are they purchasing cars with money they don't have?
I'm curious. This cultural phenomenon of spending more than you make is completely foreign to me.
---
[1] List not limited to technology, of course.
The car loan is really low, 10k is just about as cheap as you can get a new car for, and you'll never get a loan for a used car (so if you don't have 2-5k in savings to buy it used...you're SOL) Biking/walking is only really feasible in certain cities.
And if you really want to know why young people are being given credit cards...it's because they don't make money! No, really. Not a conspiracy, but without a steady income they can only make the minimum payments for a while, which gives the card issuers more money than someone who has a job. Plus, they get to charge higher interest on it.
This isn't true at all. You might not be able to get a car loan in the 2-5k range, but for a used car, especially a certified used car in the 10k range, those are almost always financed. One also makes a down payment on a car, so a 10K car loan may be for a car that's up to $15k. $15k is plenty for a decent used car.
For example, our interest rate is 5.5% and we're not due to pay off our mortgage for 28 years. That means (more or less) that for every dollar I spend, I could have put that on my mortgage and saved 5.5% interest (compounded) over 28 years. Another way of looking at it is that I'm going to be paying 5.5% interest (tax-deductible) on anything I buy instead of putting the money in an extra payment on my mortgage.
Given the terms of my mortgage, that makes an $500 iPad actually cost about $500 now and another $481.06 in interest over the next 28 years. My $2300 MacBook Pro will actually end up costing me $4512.88.
The great thing about this approach is that it doesn't discourage me from buying nice things that are actually worth their value. The MacBook Pro for example produces incredible value, much more than I paid for it.
However, knowing that for every $5 smoothie I buy now, I'll be paying another $4.81 for it in 28 years? I don't buy $5 smoothies 2-3 times a week anymore. Instead I go to Rita's when they're doing $1 kids cones on Monday and I go again on Wednesday for the $1 Italian Ice.
Anyways, I found this so helpful in curbing frivolous spending that I created a small iPhone app to help folks do the calculation on the fly. http://whatll-it-cost.limelightapp.com/ . I'd be happy to give a promo code to anyone who thinks it'll be helpful. (After all, that $0.99 would actually be $1.94 after 28 years at 5.5%. :p)
But then concluding being frutal will provide opportunities is false. All frugality enables is the ability for one to take advantage of opportunities that someone that is in a lesser financial situation could not.
This is not about debt. It's about making sure you have the ability and the freedom to live beyond the day to day.
However, there's an interesting issue there. Having little income but consuming even less approaches a certain point--a point that is the same point as consuming a lot but yet having even more income.
Either way, at this point you consume less than you earn. And this point happens to be the one that calls you to think what is it that you're here, in life, for. The "what would you do if you had a million dollars question", but just in reality. You don't need millions; to reach this point you just need more income than you spend.
This calling is always there but you really start hearing it louder as soon as you don't have to be so busy merely making a living. And that is a dreadful point for it takes away all excuses you're used to, and makes you either a weasel or someone who will begins to think hard, really hard.
Surplus monthly income is roughly $500. It's been a pretty successful experiment. So saving at low incomes is very possible. What I think bears mention is that this is mostly possible because of my age and disposition; I'm young and I'm picky, so I neither pile up expenses nor have a burning desire to possess most things.