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When it comes to the way we think about money, I’ve noticed there are two kinds of people: those who think $1,000 is a lot of money, and those who think $10 is a lot of money.
I fall into the second category. But I’m not especially frugal. I have a fairly nice car, I take a vacation every year, and it isn’t too hard to convince me to drop a few hundred dollars on a great pair of shoes now and then. I’ve never even clipped a coupon. But I’ve also maxed out my retirement savings, bought a house, and live without debt – all on an average salary for where I live.
What I’ve done isn’t extraordinary, but it does seem somewhat rare. That said, I think most people can accomplish this fairly easily. All you have to do is live and die by two simple rules…
1. Pay yourself first: the best kind of cliche
“Pay yourself first” is a very common piece of financial advice. It’s simple enough to follow, but that doesn’t make it easy.
If you can save $200 per month at a 6-percent interest rate, you’ll have more than $200,000 in 30 years. At the very least, you’ll have a great savings fund at the ready for whatever life may bring. But how can you come up with that cash when you barely have any money left between paychecks?
The answer is to take that money off the top. And yes, it’ll sting a bit at first.
I’ve made a habit of taking contributions to my retirement and savings account right off the top of each paycheck on the very day it hits my bank account. I try to cut pretty deep too, leaving myself just a little more than I need to pay for expenses.
This works on two levels: It forces me to really budget to meet my basic expenses while keeping extra cash out of easy reach. I can still retrieve the money from my savings account if I happen to need it, but because I have to make a decision to transfer funds, they usually stay put. I allow myself to spend whatever I don’t need for expenses on whatever I like – if I don’t spend it by the time my next paycheck comes, I roll that into savings too.
I also save any additional money I get. I think a raise, tax return, or bonus can go two ways. It can raise your standard of living, or it can raise your standards. Rather than creating more expenses to suck up these extra dollars, I live the same way day to day and tuck the extra money away for something better.
2. Practice mindful spending
Having some leeway in your paycheck isn’t a given, but I think many people have more wiggle room than they realize.
This is what I mean when I say that I think $10 is a lot of money. When I decide to buy something, it’s a decision, not an impulse buy. I want to spend my money on things that really have value for me, not just things that are convenient or appealing at the moment. So while I can buy something nice once in a while – without guilt – I have a hard time going out for lunch or buying (you guessed it) a latte.
Less expensive purchases are an easy mental hurdle to get over because they’re so small it seems that they could hardly amount to anything. The truth is, these seemingly insignificant purchases can easily amount to, or exceed, that $200 you may be aiming to save.
If you spend $4 every morning on a latte, and $12 each work day for lunch, this adds up to $80 per week – for a grand total of $4,160 per year. If you earn $50,000 per year, that’s a full month of your salary. Do you really want all that money to amount to a bunch of coffee and Subway sandwiches?
This isn’t to say that no one should ever buy a latte. But if I spend this kind of money every week, I don’t have anything to devote to my savings. That’s a sign that these seemingly small indulgences just aren’t affordable, at least for me.
This is why I’ve also decided not to opt for cable TV or an extensive cell phone plan. I don’t feel that I live like a pauper. After all, I have money saved that I can turn to not only in an emergency, but also to pay for things that I feel really add enjoyment to my life, rather than just distracting me for a few hours or days – and steadily subtracting dollars from my bank account.
What are your rules?
Over time, I’ve learned to save money as diligently as I pay my bills. I also try to spend what’s left as mindfully as I can. I can’t say I always succeed, that I never overspend or that I’m not often tempted to break my rules.
Nevertheless, I’m sticking to the strategy that has kept me out of debt, and helped me save enough to meet some key financial goals – and still have some fun. I know of other people who’ve done even better by employing these rules much more stringently than I do. As for me, I’ll keep saving up for my next big purchase by keeping all the little ones in check.