Hello everyone! I have an article to share with you today from a fellow blogger. This article was written by Graham from moneystepper.com.
Moneystepper provides advice on taking small steps every day, which have a much bigger impact over the long-term. Daily posts cover every aspect of money, investing, saving, real estate, taxes & the economy: everything you need to increase your net wealth in the short, medium and long term.
When I first started taking more interest in personal finance, the learning was very theoretical. I used it all: personal finance blogs, money websites, podcasts, mainstream financial media, books, magazines, etc. Everything I read taught me something new.
All of my learning came down to two main ideas:
For the second part, I was provided with many practical techniques to increase my return. Whether in investments in property, shares, or many other asset classes, I discovered many ways to improve my ROI by 1% or 2%. I understood the massive impact that a 1% improvement could have. All good stuff, but something was missing.
What I was lacking was actionable advice related to saving more money. I knew from my research that it was integral to reduce spending. However, the advice which followed was either overly generic, or overly specific:
Therefore, I would like to share with you three simple tips that I actually use to reduce spending on things that I don’t actually NEED. You can start using all of these tips right now, and they apply to all forms of spending.
The first cheat I use is to understand the cost of spending (and earning) in terms of how long I will have to work based on my current wage to afford a certain item. For example, let’s imagine that you are considering going out for a meal tonight, which will cost you £40. How many hours do you need to work to pay for this meal?
1.1 Calculate your hourly take home pay
Your annual wage is currently £26,500.
The first part of this technique is to calculate your hourly take home pay. You may get paid hourly, which makes this easier. If you get paid annually, then you will have to calculate this figure.
For example, perhaps you contribute 5% to an employer pension and you are repaying your student loan.
Your annual take home pay is therefore approximately £18,230.
Assuming we work 230 days in the year, which is approximately the average in the UK, and we work 8 hours per working day (probably an underestimate for most), t our hourly wage is £10 per hour.
You only have to work this out each time that your salary or working hours change.
1.2 How many hours do you have to work to pay for the item
This is the easy part. Simply divide the cost by the hourly wage.
Before: £40 for the meal, why not?
After: £40 for the meal. I’m not working 4 whole hours (an entire morning at work) to pay for that meal. Get the oven on!!
Voilà, £40 saved!
In my opinion, the second strategy is slightly more complicated, but even more effective.
The idea is to calculate the cost of something now not at its current price, but instead at its future cost.
Let’s use the meal example again. Again, we have two choices.
2.1 Calculate your investment returns
I want the calculation to be easy to perform on the spot. Therefore, I use the rule of 72.
-The rule of 72 says that if you divide your annual interest rate into 72, this is the number of years it will take to double your money.
Based on the historical returns of financial markets, I’m going to assume that I can earn 9% on my investments. If we then consider average inflation of 4% in the long-term, we would obtain a 5% net return.
Therefore, I calculate 72 / 5 to determine that it will take approximately 14 to double my money.
2.2 Work out the number years until a significant date in the future
The most commonly used date (and the data I would suggest using) is a retirement date. I currently use the period between now and my state retirement age (which I estimate will be 70 years old when I reach retirement). Personally, this is 42 years.
I will, therefore, double my money three times before retirement. So, £1 invested today with double three times when I retire – £1 x 2 x 2 x 2 = £8.
2.3 Work out your future cost
When I calculate the cost of something now in future terms, based on my prior calculation, I need to multiply its cost now by 8 (2 x 2 x 2).
Instead of the fancy meal costing £40, the true future cost of that meal is £320!
Suddenly, I’m not so keen to go out tonight!
I said in the title that I used this technique when I wrote this post. Whilst writing this post, I was tempted by some expenditure. We were thinking about ordering a take away curry. It was Sunday night, I was pretty tired, I was VERY hungry. It had seemed that the stars had aligned. I went online and the takeaway special was £25. Not too bad. However, when I then applied this strategy and remembered that this was costing my future self £200, I couldn’t justify spending £200 on a takeaway.
If you use this on every purchase, you suddenly stop spending money on everything other than those things that you really need.
This strategy is slightly more common, but it is incredibly effective.
For any major expenditure (my limit is £30), I will not allow myself to purchase an item immediately. Instead, I always wait 30 days.
3.1 Write down your items on a list
Keep one single list. Each time you want to buy something major (whether it is home improvement, a new TV or some new clothing), write it down on the list with 3 things:
So, today, I wrote down “New shoes – £40 – 24/02/2014” on the list.
3.2 Choose one thing from your list
Then, after 30 days, if you still really want the item, then buy it. No more instant gratification. You will save money and you will appreciate the product that you have bought so much more.
3.3 Reset your list
This is the part of this technique that I use, that I have never seen written elsewhere. You may have noticed that in 3.1, I said “keep one single list”. This is because I add everything I want onto one single list. Then, when I am about to buy something, I have to choose the item which has been on the list for over 30 days, and I cross everything else off.
I then restart my list.
Therefore, I buy the new shoes, but I don’t buy the ipad and new coat that are also on the list. I decided that the shoes were the most important purchase and the others will have to wait.
I then start a new list and add the ipad back on (but not the coat as I have decided that I don’t really need it after all).
This part of the technique stops me writing down everything I want and giving myself the permission to buy everything 30 days after I have written it down.
I hope these methods help you. Let me know what you think of these methods? Do you already use any of them? What other methods do you use to help you restrict discretionary spending?
I will tell all of you my story now. I’m probably one of the worst people in the personal finance blogosphere when it comes to cars because of what I’m going to tell you below, but oh well!
If you are new here, we have a Camaro 2SS that we bought last year.
We also have a Jeep Wrangler that we bought around 1.5 years ago as well.
We also used to have a 1961 Chevy Apache (click here to see the pretty picture of it – I miss it a lot), but we sold it two months ago because of a lack of garage space.
We spend a lot of money on our cars, and I know that. It’s okay though, we love them We are car fanatics, and it is one of the things that we work on making extra money for so that we can afford them.
We truly do love our cars and we get a lot of joy out of them. We DO NOT have them so that we can keep up with the Joneses. In fact, I actually dislike talking about our cars because of the judgmental looks/thoughts that we usually get. Wes is a car guy, and it’s a hobby for him. I love my Jeep because WHO DOESN’T LOVE JEEPS?
Everyone has something that they enjoy spending their money on, and cars just so happens to be our enjoyment. Just like if you are a stamp or coin collector, spend money on clothes, spend money on traveling, spend money on eating out, etc., cars are our thing (but we like traveling too ).
I don’t think there is any “right” or “wrong” hobby for a single person, because no two people are exactly alike. If you can afford it, then why not?
However, cars are expensive, and I do realize that!
ANYWAY, to get back on topic, according to a survey done by AAA, the average annual car costs are around $7,000 to over $11,000 (depending on your car – for example, if you pick something in the Volvo car range then you will probably be spending less than an expensive sports car that gets 11 miles to the gallon).
Below are some of the common costs of owning a car.
Usually buying the actual car is the most expensive category when it comes to your car costs. You can buy a car for something such as $500 cash (you can’t guarantee that it will work for a long time – however, we did buy a car for $500 once and it lasted us for quite some time, and we were then even able to sell it to another person for $500), or you could buy a brand new car where the price can vary greatly.
Not all cars are equal, and this is where you researching different cars that you are interested in comes in.
Certain cars have higher fuel costs than others. Your car may take only premium gas or it may take unleaded. Your car may run on grease (I have seen this happen with a few older cars), and then your gas costs are very low since you can usually get free grease from restaurants.
Then there is also the associated cost when it comes to fuel mileage. Not all cars get the same fuel mileage, and this is something that you may want to look at when you are trying to determine which car is for you. Some cars may get less than 10 miles per gallon, and others may receive over 50 miles per gallon.
Lastly, when it comes to fuel costs, it also depends on how much you are driving. If you are driving 100 miles roundtrip each day, then your fuel costs will be much more than someone who drives one mile away to their job down the street.
We don’t spend much on our fuel costs anymore, since we are both working from home. However, we do like to leave every now and then, with our favorite being to drive to Forest Park (around a 30 mile roundtrip drive).
We spend around $150 to $200 a month on gas. We could definitely be spending less though.
This is one area that we don’t spend a lot in, even though we have expensive cars. Your car insurance could be something such as $30 a month, or it could be something like $500 a month. It depends on your car, your driving history and so on.
For us, we spend around $50 for each car, or $100 altogether each month for both of us to be fully insured on both cars. Definitely not bad, especially since others have similar cars to us and they are spending somewhere in the $250 to $500 range each month in car insurance.
We did have to shop around for car insurance though. I don’t remember the exact amount, but if we would have stayed with our original car insurance company, I believe we would have been spending around $400 to $450 a month to fully insure our two cars.
Certain cars cost more to maintain than other cars. It’s that plain and simple. One car may only take the best oil out there, which may come out to $100 and over for just one oil change. Other cars do just fine with cheaper oil changes, and you may be able to spend a cheap $20 changing your oil yourself.
Also, certain cars are built to last longer than others. Others are made very cheaply and something may break every few months.
Enjoy this post from my blog friend Natalie. Emergency funds are extremely important, especially in the case of a medical emergency where you have to pay a large amount out of pocket.
A few weeks ago, I had one of the scariest things happen to me.
My long-time partner and boyfriend began to start getting really sick. This wasn’t just a case of a fever and the sniffles.
The symptoms were a little bit more serious than that. He began to get severe stomach pains along with a completely loss of interest of eating or drinking.
I will spare you the more gruesome details but it got really bad. It finally ended with his fever spiking to almost 103 degrees and me rushing him to the emergency room of the hospital.
My boyfriend is one of these people who you would never consider being sick. He is one of these people who barely gets a cold. In his work, he works with carpentry materials to help repair homes in the area. This line of work also requires him to lift heavy materials and do lots of physical work. His physical health was so good that it knocked us all by surprise.
Suddenly he was extremely lethargic and could not even get out of bed. The once fun-loving person that I knew was being taken over by some invisible and frightening ailment.
The night I finally took him to the emergency room, my boyfriend was in a state of panic.
His fever was out of control and he could barely stand up. He was also in a state of panic because of the costs that would be incurred from all the emergency room bills. I told him to basically shut his mouth up over those types of thoughts as his first priority should be his health.
I didn’t fault him for having thoughts like these.
We just happen to be a couple that care a lot about money and we both work hard to be financially stable. When something like this happens, many would feel unsure about how they will pay such medical costs. This is certainly true in the United States.
My boyfriend was lucky enough to be immediately seen by the medical staff. They ran a series of tests and discovered that his colon was very inflamed. Under the doctor’s orders, his health had been deteriorating to the point where it was decided that being hospitalized was the only option.
My boyfriend’s reaction went into further panic as he realized what this meant especially for the finances.
I tried to convince him of otherwise as I knew stressing out could only make his condition worse. He was placed in a hospital room where he could be monitored by the professional staff.
For the next couple of days, my boyfriend was given several procedures and medications that at first did nothing. I went to the hospital every day and tried to console my boyfriend through this difficult time.
He once again expressed his fears of the cost of being in the hospital. I let him know that there is not enough money out there to replace someone’s health. I also reminded him that we had an emergency fund that was precisely for occasion like this as this was a bona fide emergency.
You just never know when the proverbial crap will hit the fan and require you to have liquid assets available.
We had absolutely zero notice that something like this would happen. Medical situations are one of those things that usually pop out of nowhere and can be very destructive if you are living on the financial edge.
The truth is there are too many people out there that are living paycheck to paycheck. Too many people do not think of having a form of savings as a priority and nothing could be further from the truth.
I once had a friend that had some major complications due to her high-risk pregnancy. She never took the time to save as she felt it more important to buy nicer handbags and other pricey things.
As a result of no savings or health insurance, she winded up with over $15,000 in medical bills.
The resulting stress on her psyche and family caused her even more health problems and later more health bills. She applied for government assistance and was given some help after a big battle with paperwork and authorizations. She could have avoided a lot of stress if she had saved something in advance.
As I write this, my boyfriend is still recovering from the hospital and will hopefully be home soon. He finally accepts the fact that it will not destroy us financially since we have a savings fund and health insurance that has a set limit on what we are liable to pay.
Being able to concentrate on what is important is such a relief in times like these. It has literally helped me sleep at night. I can’t imagine what we would be doing without it.
Having an emergency savings account (Do you know how much you should have? – I have a related post on this on Diversified Finances) is of utmost importance especially in a world that guarantees nothing.
Taking the initiative to do something for your financial future is crucial. Learn from my own story because you just never know when you will need money now. My boyfriend and I are able to focus on plans to get him back to normal health and that is what is important. Please take the time to prepare for life’s unexpected pitfalls so that you don’t end up in the financial hole.
This is a post by Natalie over at Everything Finance. Everything Finance is a site about just that, everything related to finance. You can get information about investing, saving money, insurance, shopping, blogging, CD rates, and making money online.