Best Ways to Save Money Tip #1 — A Calculus of Saving
A recent thread at the Vanguard Diehards discussion board explored the question of whether those who save more than most might end up regretting the choice.
Posters participating in the thread argued that:
1) You’re only young once. So, if you put money aside instead of doing fun stuff, you might not have another chance;
2) It’s possible by saving effectively to retire early. It might be the best of all worlds to attain financial freedom while you are still young enough to do a lot of fun stuff;
3) Opportunities to have fun are not necessarily gone at age 30. There are some ways in which those who are in their 50s are capable of having more fun than those in their 20s;
4) Fun stuff needn’t cost much. How much does it cost to go bike riding?;
5) The feeling of security and freedom that comes with saving makes everything you do in life more fun than it would otherwise be;
6) The most important factor in determining your long-term financial health is how much you earn. So it can be a mistake to focus when you are young on saving and investing over career growth;
7) If travel is important to you, you need to keep in mind that it is easier to travel before you have kids;
8) The things you save for might not prove as beneficial as you hoped. You might save to send a child to college and he might not apply himself to his studies;
9) You generally have the least amount of money coming in when you are young and when you are old. So it makes sense to save the most in the years in-between those two extremes; and
10) You might die young.
Best Ways to Save Money Tip #2 — How to Say “No” to Requests to Contribute Money
When you feel uncomfortable saying “no” to a request to contribute money that you don’t want to say “yes” to, describe a specific alternate purpose to which you must direct the money at stake. For example, say “I can’t give now because I am trying to put together $1,000 to pay for a family reunion that my spouse and I will be attending out of town in about two months.”
The reason why it is hard to say “no” to requests to contribute money is that the requests are specific while the alternative to giving is presumed to be a general desire to save money. Specific claims always appear more pressing than general ones. This is why journalists often open newspaper or magazine articles with anecdotes illustrating the point made in the article. Specifics have an emotional pull that abstractions lack.
When someone who wants to say “no” to a request to give describes a specific alternate use to which the money will be put, there is no lack of feeling towards the object of the contribution implicit in the rejection of the contribution request. In these circumstances, the person being asked genuinely “cannot afford” to make the contribution.
Of course, there is always a good reason why one cannot afford to make a contribution that one does not want to make. The key to rejecting the request diplomatically is focusing on the alternate use of the funds rather than on the rejection of the use of the funds being promoted by the person requesting the contribution.
Best Ways to Save Money Tip #3 — Are Product Add-Ons Worth the Money?
More and more products today are sold with add-ons that the salesman tries to entice you to buy after obtaining your agreement to the core transaction. The add-on concept takes advantage of the approach that consumers generally take to determining whether to go along with an enticement to spend or not. We all spend more on restaurants and entertainment when we are on vacation because we justify higher levels of spending with the reasoning that “I’ve already spent x amount on the plane fare and on the room, so spending y amount more is not that big a deal and is worth it if it insures that I have fun.” We often apply this sort of reasoning (rightly or wrongly) when the price of the add-on is small relative to the amount spent on the core transaction.
Add-ons usually provide high mark-ups to the seller. Thus, they are often criticized as “not worth it.” The reality, though, is that whether the add-on provides a good value proposition or not depends on the desire felt by the purchaser for the benefits of the add-on, not on the mark-up obtained by the seller. The Apple Care service, in which Apple Computer helps me with problems with my computer, no doubt provides a high profit margin to Apple. But it is worth the price to me because of the combined effect of the great frustration I feel when things go wrong with my computer and my seemingly impenetrable inability to figure out what to do about it.
What’s really going on with add-ons is that sellers of goods and services are finding a way around the resistance that many consumers feel to the idea of spending money on many services that offer good value propositions to them. Attempts to sell an Apple Care service to people who were not buying computers would no doubt fall flat. At the moment at which a computer is being purchased, however, people who would ordinarily reject the idea of making such a purchase instead say “yes” because they can justify in their minds paying a small additional expense to insure they receive value from the far larger dollar amount directed to the purchase of the computer itself. Everybody wins when that sort of add-on is purchased.
Best Ways to Save Money Tip #4 — Your Kids — A Profit Center
It is a mistake to view a child solely as an additional expense. There are of course costs involved in raising a child. But there are also a number of ways in which having a child causes the parent’s income to increase. In many cases, having a child is more a financial plus than a financial minus.
Three examples:
1) Many people do not keep budgets until they have children. Thinking about financing a child’s college education forces a parent to begin looking far into the future, often for the first time in his or her life. The benefits of budgeting are so great than the long-term benefit of keeping a budget as a first step to financing a college education may be enough to cover much of the financial loss associated with paying the tuition expense;
2) Having a child provides a new source of powerful motivation. Many of us are highly motivated in our jobs in the early years of our careers, but are beginning to see our work as “the same old thing” by the time that a child enters the picture. Having to make money to support the child and help the child be all that he or she can be can re-ignite our ambitions;
3) Interaction with a child can cause an adult worker to get out of a rut and form new ideas as to what work he or she really was put on earth to do. A parent teaching a child how to draw may recall how excited she once was about drawing, seek a change to a career that takes greater advantage of her drawing talent, and end up in better financial shape for the long term as a result.
Best Ways to Save Money Tip #5 — Good Debt, Bad Debt
Good debt is debt that is being incurred for the purpose of generating future income. All other debt is bad debt.
Thus, it makes sense to incur debt to obtain a college education (but only if the education is pursued in a serious way, so that it is likely to generate income down the road). And it makes sense to incur debt to purchase equipment needed to launch a start-up business that one has prepared for adequately. And it makes sense to incur debt to purchase a home if the home is purchased at a price that will not cause long-term financial strain and that justifies expectations of long-term capital gains.
It is not a good idea to incur debt to go on a vacation or to buy a new car or to replace the dining room furniture. Incurring debt for these sorts of purposes adds a new item to the cost of living–the cost of paying off unnecessary debt.
There are some items that are in a middle-ground. For example, it could be argued that incurring debt to have one’s teeth straightened could generate income down the road because it would make one more successful in job interviews. There is a danger of one’s mental energies being put to use forming rationalizations justifying debt in these sorts of circumstances. The best rule is to avoid debt in these sorts of circumstances unless the case in favor of it appears compelling.
Best Ways to Save Money Tip #6 — Spending on Birthday Celebrations
Parents can save money by electing not to celebrate their child’s birthdays with event-type parties (hiring a clown to come to the house, etc.). Instead, they can make the day special by allowing the child to do something that he or she has not done before on the grounds that he or she is now “old enough.”
One birthday could be celebrated by permitting the child his or her first sleepover. Another could be celebrated by taking out a library card in the child’s name. Another could be celebrated by taking the child into the city on a Saturday to ride the subway train, look at the tall buildings, and visit mommy’s or daddy’s office. Another could be celebrated by taking the child to a “real” restaurant for the first time.The child will likely end up with plenty of presents from relatives even if the parents only buy one or two. And the child will remember the day as one having had special significance.
Best Ways to Save Money Tip #7 — An Out-Of-Fashion Saving Tip — Say Grace Before Meals
You overspend because you are dissatisfied.
So the way not to overspend is to become satisfied.
You often can’t get there by spending more. Spending more in circumstances in which a lack of things isn’t the real problem often just exacerbates the feeling of dissatisfaction. You’ve heard about those mice that get so mixed up by the experiments run on them by scientists that they end up pushing those pellet-levers like crazy? The Consumer Wonderland can make us experience those sorts of feelings, except that it is our credit card we hand over mechanically rather than a pellet-lever we push mechanically.
Having things doesn’t necessarily cause the feelings of dissatisfaction to go away. You need to appreciate the things you have. You need to let in the awareness that you have it pretty darn good.
You need to call things to a stop several times each day and focus on the good stuff that’s coming in to you on a regular basis. A good number of us were taught to do that by saying grace at meals. A good number of us got out of the habit. A good number of us would benefit from giving the idea another try.
Food is not an automatic. We tend not to worry about where our next meal is coming from because there have been so many meals that have come in on a regular basis that we have come to take it for granted that we will always have something to eat. It’s nice that the meals are always there. It’s not so nice that we don’t get a flash of good feeling anymore from seeing a meal show up at the table.
Having another meal show up really should be a cause for a small celebration. Having a meal means you get to go on living another day. And food tastes good. Eating food inspires conversation. Eating is one of the joys of life.
Express gratitude and you will begin to feel the gratitude you really should feel. Feel gratitude and feelings of dissatisfaction will dissipate. As feelings of dissatisfaction dissipate, you will find yourself less frequently tempted to overspend.
You will save more. You will invest the money you save and earn nice returns on it. You will find that more and more your money is working for you instead of it always being you working for money. You will be on your way to becoming rich!
Saying grace is so easy. It costs nothing. It takes no skill. It uses up very little time.
It changes how you think about things. It leads to other positive changes in outlook.
Our parents and our grandparents were right about some of the things they told us. They were right about this one.
The fundamental rules apply as time goes by. Bow your head and thank God for what you have been given today.
Best Ways to Save Money Tip #8 — Savers Notice Taxes More
I became more aware of the effect of taxes when I began saving effectively.
When you are not saving, your money management rule is — spend what you earn, and then stop. Taxes are just one more expense. They are no one’s favorite expense. But the tax factor does not seem like that big a deal because taxes are much like a good number of other expenses that all get mixed together in your mind.
When you are saving effectively, you notice that there are some expenses that can be avoided (like vacations and entertainment) and some that cannot be avoided (like health insurance and electricity). You see that the worst sort of expense is a large unavoidable expense. Taxes are a large unavoidable expense. So you come to see how much more harmful this expense is to your desire to achieve financial freedom that you realized when you were following a different sort of money management rule.
If taxes that could be made optional were made optional (if we could elect to pay them or not with the understanding that we would be denied the service paid for by the tax money if we did not pay), effective savers would pay lower taxes than non-effective savers. The non-effective savers would generally not put much effort into determining which tax-financed programs gave them a good deal and which did not. The effective savers would put more effort into the project of determining which tax-financed programs were worth the expense and would elect to pay less taxes as a result.
Savers notice the effect of taxes more than do non-savers. Saving effectively causes you to look at all sorts of money topics in new ways.
Best Ways to Save Money Tip #9 — Momentum Spending
When there’s a hit movie, it causes the box-office numbers to go up for all of the movies out at that time.
When the weather is bad in July at a beach town, it causes fewer people to visit the beach town in August.
If you haven’t bought a piece of furniture for some time, you are less likely to buy a piece of furniture than is someone who recently bought a piece of furniture.
These are counter-intuitive phenomena. Intuitively, you would think that people would have but so much money for movies and a decision to see one would mean that they could not spend as much on the others. Intuitively, you would think that people who missed out on enjoyment of the beach in July would have a greater desire to enjoy it in August. Intuitively, you would think that people only need so much furniture, and that those who have just purchased some would not be in a furniture-purchasing mood for some time.
The reality is that making a purchase of a particular item reminds us of how much we enjoy it (if the experience is a good one). Spending doesn’t generally relieve us of the desire to spend. Spending begets more spending.
Momentum Spending is a good thing. When you enjoy a movie and the experience causes you to fit more movies into your schedule as a result, you are directing your money to something that provided you a strong value proposition. Maximizing the life enhancement obtained from your limited financial resources is what money management is all about.
What you need to look out for is Habitual Spending. Say that you enjoyed one movie enough that you went to the movies the next three weeks in a row and enjoyed those three movies too. That’s a good thing. Now say that you continue going to the movies for the next 20 weeks because it has become a habit and that out of that group only six leave a truly positive impression while another six are so-so and eight are clinkers. Now you’ve put your movie spending on automatic. Now you’re wasting both money and time. Now you’re failing to obtain the greatest possible life enhancement from the dollars available to you.
Momentum can cause you to refrain from spending too. Say that you see four clinkers in a row, get fed up with movies and find a new way to spend your Thursday nights. Time passes, and you take note one day that you haven’t been to the movies in three months. Going to the movies now offers a great value proposition. Chances are that, having been away from the movies for a bit, you will enjoy what you see more than you would have had you been in a habit of going to the movies every week. You also will be able to be more choosey about the movie you see because you won’t have seen anything that is currently making the rounds.
If you’re in a movie groove, ride that wave.
If you’re in a movie rut, try something else this Thursday.
If you haven’t been to the movies in awhile, go check the listings.
Best Ways to Save Money Tip #10 — Five Reasons Not to Buy a Video-Game Player
The video game phenomenon incorporates all of the elements of the worst spending categories. It is a purely discretionary expense. It is an expense that brings on an addiction that needs to be funded for years to come. It is an expense that involves a high one-time expense (for the game player). It is an expense where Keeping-Up-With-the-Joneses social pressures come into play. And it is an expense that involves a regularly occurring expense (for the games). This is an expense that is bad for your financial freedom dreams in five different ways!
Parents are teaching their children bad lessons by giving them easy access to money to be used to finance a video-game habit. And this is not an expense where parents can realistically try to turn the experience into a positive by encouraging their children to finance the habit themselves. The prices are too high for that to work in most cases.
I do let my boys play PacMan when we go to Pizza Hut. That sets us back 50 cents once or twice a month.