13 Tips from guest author Josh Patoka:
Frugality gets a bad rap; it can be perceived that you don’t have fun, or just live on ramen noodles forever. (Mmmm, ramen noodles.) But frugality is simply using your money efficiently, without waste. Because of it, I was able to switch careers and improve my quality of life. Thanks frugality!
My old job was the proverbial “golden handcuffs”; I was working approximately 70-80 stressful hours a week, but it paid awfully well. I started getting the hint that my quality of life wasn’t going to improve when my bosses said they would have switched careers if they didn’t have families. (But they’d also told me they’d already missed much of their children’s lives…) Yikes. When my wife got pregnant, I knew my family was more important than a big paycheck, and…
I jumped. Yes, it was scary, and no I didn’t know for sure that it would work out. But I jumped. I took a 50% pay cut to switch careers, but not having the stress of long and unpredictable hours seemed like a worthy tradeoff. And, though my wife and I are self-employed now and make less money, we haven’t missed a meal or a bill payment yet.
So how could we afford to take a 50% pay cut literally overnight?
Simple: We pursued a frugal lifestyle and were intentional about not spending money whenever possible. Here’s an insider look at how we do it. It’s not American but it’s possible. Listen up.
1. Put at least 10% of our take-home pay in a savings account
2. Save for purchases instead of borrowing money
3. Shop on Craigslist, local thrift stores, or department store clearance racks first
4. Wait for items to completely wear out before replacing them
5. Don’t go on expensive vacations
6. Keep monthly expenses as low as possible
In a nutshell, avoid lifestyle inflation. Spend less than you earn. Not more than you earn. Simple. For us it means we don’t have to work long hours to earn a large paycheck just to pay our oversized monthly bills. You could also:
7. Pay cash for a car you can afford instead of borrowing money for one you can’t
8. Repay your loans as quickly as possible
9. Be diligent about saving any pay increases, bonuses, or windfalls you receive
10. Wait 48 hours before making ANY large purchase (you might change your mind)
11. Pay your bills in full, on-time, every month
12. Don’t buy something you don’t need just because your friend has one and you want to look cool
Being frugal requires short-term financial sacrifice, as you can see. But man it’s worth it! We do the things above: We don’t drive a vehicle worth more than $10,000. We don’t spend more than $1,000 a year on vacations. And we wait to buy items on clearance instead of having the latest tech or fashion. And one last, big thing we do:
13. We make extra payments on our mortgage so we can, in the long run, save thousands of dollars in interest payments. At our current rate, we’ll be debt-free in five years… and we never plan on going back!
You don’t have to make the same choices we do. The beauty of frugality is that, by making wise money decisions, you can spend more money in areas that are important to you. You might decide to buy a used vehicle so you CAN afford to take a fancy vacation (without borrowing money to do it). Or you might reduce your living expenses so you can max out your retirement savings to retire early.
Being frugal afforded me the opportunity to change careers and be home for my family. (Plus, I also get the fringe benefits of having a slimmer waistline due to less stress, and I’m able to sleep all night!) Frugality doesn’t mean you have to live like a college student or a pauper. With a few simple changes to your daily habits (and now you’ve got 13 of them to think on), you can maximize your paycheck… and your quality of life.
About the Author
Josh blogs about personal finance at Money Buffalo.
Thank you again AW!
I agree with everything except paying extra on your mortgage. You probably have an interest rate around 4% for 30 years. Take a look at the S&P 500 30 year returns. http://awealthofcommonsense.com/2016/05/deconstructing-30-year-stock-market-returns/
If you’re averaging 10% per year in the market and paying out 4%, in theory, you’ll come out ahead. Once your human capital (ability to work) runs out you’ll have to rely on investment capital (your money and investments).
If you pay off your house in 15 years and then begin investing, your investment capital has only been baking for 15 years. What if most of the market growth is in the first 15 years? Better to dollar cost average over 30. I would hate to work that hard at paying off my house only to retire and have to sell it to live off of the investment.
Look at the residential housing performance over 30 years. Think about the tax deduction (which is changing this year). Then think about how much you spend in maintenance. How much to buy/sell your house. Maintenance on your investment account should cost around 1-2%.
Whatever you decide, seek the help of a fiduciary. Do it early. Tune ups every year cost less than waiting until the end.
Thanks for reading Donald! I agree that aggressive mortgage paydown is often the wrong choice for people and you’re usually trading some dollars in for additional freedom by choosing to pay a mortgage down instead of investing and leveraging the ‘arbitrage’. In the FI community, and even amongst the Dave Ramsey loyalists, there seems to be an aversion to learning how to wield the tool of debt well.
That being said, I’ll bite on the spots where we may differ:
1. I think you might be undervaluing the freedom that a lack of debt brings. For someone who has achieved financial independence, having no mortgage does add flexibility to the spending side of the budget. This can be used to all sorts of good ends.
2. I personally don’t use a 10% number for the return you can get in the market – unless you’re talking about money that goes in at year one and out at year 30, with all dividends being reinvested, then 9-10% might be reasonable. Realistically, most of the money you’d invest in place of paying down a mortgage will go in slowly between year 1 and year 30 – so a good deal of it will have a 20, 15, 10, or 5 year investment horizon, and we all know there have been some bloody 5 (or 15) year stints.
3. For folks who only save 10% of their income, the standard wisdom is probably sound advice. But if you’re saving 30-70% of your income, there is room for things like early repayment of one’s mortgage, and I feel like it makes a lot of sense for those who are pursuing FI in this way.
4. I’m going to write my thoughts on investment expenses and financial advisors at some point – as with all things I think the answers aren’t simple! My default is to never pay more than a half of a percent for investment expense – which means I”m an index fund investor. It also means I won’t be paying for a fiduciary unless I’m seeking advice on a fee only basis. That being said, I have advised people in certain situations to seek the help of an advisor who structures things differently so there are no absolutes here.
The early mortgage payoff vs. extra investing is probably an age-old debate.
The math is in favor of investing your extra income when your mortgage rate is less than 5%, and yes we might be underearning long-term because of our decision.
But, I also think it comes down to personal values. For us, one of the verses that has been in mine and my wife’s mind is “the borrower is slave to the lender.” Obviously, we’re not opposed to debt or we wouldn’t have taken a mortgage or student loans, but not being in debt means we aren’t beholden to the bank if and when personal and macro-tough times return.
Another reason we are choosing to make extra mortgage payments is our annual income which is right around $35,000 before taxes. The sooner we repay our mortgage, the sooner we eliminate a monthly payment. When I quit my job, I ended up going eight months without a real income as I learned new skills to enter a new line of work, I couldn’t have done that with a mortgage payment and I would have been “stuck” at my old job. I never want to put myself or my family in that situation again.
I took a 40% pay cut back in 2007. Best move I ever made. But like you, I was able to take a step back because I was in a financially strong place. I really believe that the typical American can dramatically improve his or her finances by being “half normal.” Just spend half or less of what the typical American pays for a good or service. For example, the average price of a new car is $35K. If you just limit your next car purchase to $17.5K or less, you’re on your way to better finances. Love the way your mind works, Josh. Great post.
It’s tough to do at first and I still occassionally struggle with wealth envy, but the thought of struggling to make the monthly payment (or having a monthly payment period) quickly change my feelings.
Excellent article, Josh!! Buying stuff on clearance has been huge for my family. In fact, just this weekend one of my girls was showing off her name-brand boots to a friend. The friend mentioned that she had gotten the same boots and paid $50 for them. We waited until they went on clearance and paid $15,99. My daughter was so proud of our frugality, and the money we saved allowed her to get two additional pairs of boots as well. So, for the same $50 her friend spent, my daughter got three pairs of boots instead of one.
Frugality is a way of focusing on value-based spending, and that really does add a ton of value to one’s life.
We love shopping the clearance section and thrift stores. Although, we have gone to the other extreme because we sometimes find too many good deals. But, if everybody just bought one item on clearance a month those savings add up.
This is a fantastic list! I think one of the most important is limiting lifestyle inflation. It’s easy to feel comfortably buying a nicer house/car, or picking up an extra subscription service, just because your salary has increased a little. Although this isn’t always bad, if you can hold back a few years you’ll be able to save up quite a bit! Great article Josh.
Thanks! I’ll say we do spend a little more on the little things than we did two years ago when we made less, but we still do a good job keeping our spending in check!
Like everything, take it all in moderation.