By just cutting out those little things here and there, you can make a big difference to your future savings or your past debt. Either way you'll be much better off. Also, by starting now you can help reduce both the time you'll need to pay off your mortgage and the time you have to wait to retire. Sounds good doesn't it and in all honesty, it almost sounds too good to be true.
ECRD - Or "Little Sacrifice" to You and Me
So what's an "ECRD?" I hear you say. Well, it stands for Expensive Coffee-Related Drink. What it means is those habits for which there are easy but cheap substitutes or which you can cut out entirely. You know what I mean, that takeaway coffee you get from the cafe mid-morning. That chocolate bar you buy on the way home from work. That magazine you really just don't need (and contains no redeemable information in it anyway). It turns out for each of these things, you are paying exorbitant amounts of money for something you can conjure up yourself for pennies.
As for the acronym, ECRD, I think it's a terrible phrase so instead I shall call these new habits "Little Sacrifices". Why? Because it fully describes what you're doing, rather than what they are. It also keeps them in perspective a bit more in your head; they are both a sacrifice but in reality they are only little.
My 10 Little Sacrifices
This is a copy of my list which I drew up a couple of weeks ago. It might be a good starting point for yours:
- Takeaway Coffees: at $4 or $5 a time, these babies can add up to something over $1,000 a year
- Fast/Takeaway Food: at $6-12 a pop the cumulative amount adds up real soon
- Magazines/Newspapers: which you can probably read on-line anyway
- Chocolate Treats: already expensive at $1.50-$2.00 a go, a snack each workday afternoon adds up to over $400 a year
- Breakfast on the Go: buying on the go eats into your paycheck
And possibly some more controversial ones:
- Going to the Cinema: adds up over time, especially with added snacks
- CDs/DVDs: think about renting rather than buying
- Books: these too can be gotten at the library
- Satellite/Cable TV: think about how many channels you actually watch and then how many you actually need
- The Car: I'm not (yet) saying do without but consider walking or riding for those little journeys
All For the Win
I'm sure you don't agree with my list above, after all it is quite specific to my circumstances but this is what I recently came up with to stop me spending all those extra dollars every day.
My typical day used to go something like this...
Get up late and grab breakfast on the way into work ($3). Takeaway coffee mid-morning ($4.50). Eat out lunch ($8-15). Chocolate in the afternoon ($1.60). Supermarket or take-out for evening meal ($5-$15). That's about $30 spent, every single day, excluding anything else. How does $7,500 a year sound?
And add in the odd purchase of a DVD, CD or book on the way home, watching a film on TV in the evening and maybe a beer or two at night (oh right, I didn't mention alcohol!) and it all adds up.
Zero Dollar Days
The best thing about all of these Little Sacrifices is that none of them are too big to say that you can't do them. Since I started my plan to Retire at 40 I have gone without (or substituted) a number of these things for other, cheaper options.
I always eat a healthy and filling breakfast at home. I have Milo or coffee in the office mid-morning. I've been walking home to have lunch (double benefit of exercise too), no afternoon snack and instead of paying lots for cable, I have joined an all you can eat DVD service to get films sent to my house. I've also been making healthier - and cheaper - evening meals.
This leads me on to my next plan, which is to have more Zero Dollar Days. So far, I have had three of them and the first time I had one I couldn't believe that I had gone through the entire day without spending any money whatsoever. It didn't feel real. Now that I've had three, I want more. It feels a lot more real now.
My challenge to you is to go and make your own list of Little Sacrifices and see how many you can stick to over the next two weeks. You'll probably realise as I have, how much you've already saved in just two weeks. It shall be my two week anniversary tomorrow and already I can see a healthier me and a healthier bank balance.
Let us know some of those "Little Sacrifices" you have also made in your life.
Posted: 23 September 2008
A few days ago, SingleGuyMoney asked if anyone would like to do a guest post. I duly responded and today my guest post has appeared.
It's called Being Green and How it Saves You Money. I hope you guys enjoy it and be sure to leave a comment either over there or over here with other tips on how being green can save you money.
Posted: 23 September 2008
You have read about your Emergency Fund, you started it or you might already have enough stashed away for those times in need. "Surely that's enough" you might think, but why not think further down the line.
What if you're unable to work for much longer than 3 months? What if you're stuck at home for 6 months, a year perhaps. If it was longer than this, would you be able to cope?
As always, it depends on your circumstances. I know a lot of people where this wouldn't be a problem. Granted, they would have to live on one salary and would obviously have to make adjustments to their expenditure but it's definitely possible.
Notice in the above paragraph that I was referring to 'them'. In the majority of couples I know, both of them work. But I don't have that privilege since I am single. Therefore, I have to take out extra insurance. For that, I have Income Protection.
Have you heard of it? Me neither until a few years ago. Only when I bought the house did getting this type of protection made sense but in reality it's important no matter what your circumstance.
Asking the Family for Help
It turns out that you pay extra for Income Protection to kick in immediately but you pay less if it only kicks in after a certain amount of time, say three months. The bank asked if I had family that could support me in the case of not being able to work until the Income Protection kicked in. I said "Yes" but actually, I wouldn't want ask them for help since they do enough for me already. Of course I will ask for help in extreme circumstances but not if I don't have to.
If you do as I have, you should be covered no matter what the circumstance. If for example I was diagnosed with a long term illness - one in which I couldn't work anymore - three things would kick in:
- my emergency fund would keep me going for the first three months
- I would be paid a lump sum from my insurance, to help with medical bills
- my Income Protection would pay me a percentage of my salary from 3 months ongoing until the illness cleared up
As you can see, my plan should work out okay and let's face it, if something were to happen to you, organising and figuring out your finances will probably be the least of your worries. Income Protection is not necessarily for everyone but for me it is pretty much essential, so yes, I do need it.
Do you have Income Protection? Do you have another form of insurance which can help you out in the case of illness? Let us know.
Posted: 21 September 2008
If the answer is yes, then this post is probably not for you. If the answer is no, then you probably want to continue reading. If the mere thought of losing your job (whether being sacked, made redundant, becoming ill or something else entirely) makes you a little queasy, then this is the first step on the road to being able to answer "Yes, I'll be fine."
But who is it, I can hear you cry, who can answer yes to such a question? The answer is simply those who have already thought about this question and taken steps to prepare for such an event. It is those who have foreseen that sometimes life doesn't quite go according to plan. It is those who have made plans in the recent past to help out if such an event occurs.
It's as simple as that. No fanfare, no trumpets, no ticker-tape parade, no nothing. It's not a very exciting answer I'll give you that but it is an important one. Have you ever heard of such a thing? Maybe, maybe not but you have now. Here's a quick run down of what an emergency fund is.
Essentially, it's a savings account. An account from which you can draw money relatively easily since if something were to go wrong, you'd want to be able to get your hands on such an asset as quickly as possible. It's liquid and it's close to hand. Not too close mind, otherwise you might be tempted to spend it but far enough away to be an inconvenience to get your hands on it. Certainly not something you can draw from with a plastic card of any description.
And this is where I own up. I don't actually have an emergency fund. Well, at least I didn't until last week. I opened an online savings account last week and actually started it off by putting in the minimum amount required to open it. That's the first step in the ladder to having an all-singing, all-dancing (but still tearfully dull) emergency fund. Granted, I'd never thought much about this before but as part of my recent monetary review I decided that this kind of fund was something of utmost importance.
As always with saving, the hardest part is actually starting off. Once you've gotten over that hurdle, the rest comes easy. Siphoning off some of your paycheck just as soon as it enters your main account is probably the best way to do it and making it automatic makes it 100 times easier. That way, you just don't think about it and then learn to live and survive with whatever you have left in your account until the next paycheck.
My plan started well with opening the account. I put the required minimum in to the account and then a few days later received all the information I needed to log on. A day or so after that, I received my paycheck this month and immediately transferred 10% of my net salary straight into my emergency fund.
How much is enough?
This question is in two parts:
- how much should I transfer each paycheck?
- how much should I save up in my fund?
As always with such questions, the answer very much depends on your own circumstances. Also, different people have different opinions so you should (as always) sit down and have a think about what is important to you, both in everyday life and in the situation whereby you find yourself without a job. Some people may be able to scrimp and save more if they are not earning an income whereas others may not want to save as much in normal circumstances.
For example, my plan is to siphon off just over 10% of my net pay each month and I shall keep going until I have 3 months worth of net pay in my account. Yes, I know this will take a while and I might try for more than 10% but that is my initial aim.
Other figures to consider range from saving 5% to 20% net pay each paycheck. Or maybe a percentage of your gross pay. In some cases, people recommend 3 months of expenses, others 6 to 9 months of gross pay. Whatever you decide, the important thing is to do something. Figure out what you can afford, figure out what you will need in such emergency situations and go from there. You can always adjust these figures as you learn more about your finances.
Let me just re-iterate that again. No matter how much you siphon off, no matter how much you save you'll be in a massively better position than you were before if you had answered no (or worse) to the earlier question. Until you can say "Yes" to "If you lost your job, would you be okay?" then you probably need to save a little more.
I have my fund, what now?
If you've been saving little by little to get your emergency fund, don't stop there. Don't then start leaving that in your normal account for it to sit there saying "Spend Me". That would be like starting a hobby and giving it up the next day. Instead, keep on shaving off that percentage of your income and keep building up your savings with it. Since you've taken that amount of money out of your regular lifestyle there is no need to put it back in. You can survive without it so keep taking it out just as soon as your paycheck hits your account.
What you do with it then is, of course, up to you. Once you are at this stage, you'll be able to answer - with one hand on your heart and the other on your wallet - a wholehearted and resounding "Yes, I'll be completely fine."
Posted: 20 September 2008
Would you just love to get rid of yours?
Well, that's pretty much what I'm going to be doing later this year. I am living in town now, I walk everywhere (and I mean, pretty much everywhere) and have used the car just a handful of times in the past four months or so. Could I do without the car completely?
Absolutely, yes. I might still have to hire one every now and again but let's look at the list of things I won't be paying for:
- the car itself
- road tax
- Warrant of Fitness
- repair and maintenance
- breakdown cover
- Christmas Tree air-fresheners
(Okay, I've never bought one of those Christmas Tree air-fresheners but you get my gist.)
That's a lot of things to be paying for when you really don't use the car much. As I said, I've been thinking about getting rid of it for a while but the past three days have pretty much confirmed to me that I'm done with cars. I never really liked them in the first place (I only learnt to drive when I was 28) and I'm pretty convinced I'll be better off without one. Here's why.
Three days ago, I got my car back off a friend of mine who had been borrowing it (better someone's using it than no-one). It was probably about time I filled it up so I whacked a full tank of petrol in.
Not much compared to some people, but it is a small car after all.
The back brake had been rubbing slightly and of course, since I now live in a narrow street in town, someone had knocked and shattered the driver's wing mirror (why do people do this and not leave a note). So I took it in to the garage yesterday. "Nothing wrong with the brake " I was told, "But we got the wing mirror done."
I had a quick chat with the guy. I wondered how he liked Japanese cars compared to European. Then he came out with it "I took it for a test drive, the brake was fine as I said, but you need a new clutch."
Woah there. What? Right, well you better keep the key then. "Just do it" I muttered. About $400 he reckons.
Got there tonight to pick my wonderful Latoya up. Straight away, took him longer than expected, blah blah, I'm a mechanic (actually, he's a pretty nice guy and I like to think I trust him) this, that and the other.
"I'm sorry. Baking powder. Come again! Just once more for me. I'm not sure I heard you right. I'm afraid I have poor hearing these days, you know, being almost 33."
In just three short days I have spent almost $900 on a car I hardly ever use. My friends who tell me I might need the car in the future are wrong. She's getting sold. I shall keep her a little while longer but really I no longer need a car and I hope that whatever I do in the future, that will still hold true. Once sold I shall be buying a pedal bike and the accessories I need to go with it. At least if something goes wrong with the bike, the most you're ever going to pay to fix it is to buy a whole new bike (which in itself is unrealistic in the short term).
And when I need to hire a car those few times a year, it won't bother me that I'll have to pay slightly more to get all the above things included since I know I'll still be saving money over the space of a year compared to owning one.
Could you do without your car? On what occasions would you need to hire one?
Posted: 19 September 2008
I've never figured this out in all of the 6 years I've been in New Zealand. This is the latest in the craziness of pricing in supermarkets.
In the UK, if you bought more of something it would cost less per item. New Zealand has a different take on this. In a hell of a lot of cases, if you buy more of something, it actually costs proportionately more! I've seen this happen on cereal quite a lot such that the larger box is pro-rata more expensive than the smaller one.
I saw another example of this earlier today. A sachet of cat food is 59c. A box of 6 sachets is $4.03! Not just a little over $3 which you might expect but 49c more than six individual sachets! But wait, it gets worse. A box of 12 sachets is not a little under twice the price of the box of six but actually $8.10! Which is not only worse than buying two boxes of six but even worse still than buying a load of singles.
This makes no sense to me. Can anyone please explain to me the logic here? The only thing I can come up with in the case of the cat food is that the extra box around the sachets mean more manufacturing cost. However, this wouldn't be the case with cereal.
Of course, the other alternative is that people in general don't check which size is cheaper. If that is the case then that's very bad since it's forcing all of us to pay over the odds for larger items.
Posted: 17 September 2008
At the start and at the end of the movie Pretty Woman, there's a guy who walks along the street and shouts "Hey, what's your dream?" Similarly, when I used to walk down the street, I used to look at the people passing me and wonder what their story was. You know, the history that got that particular person into that very spot on that very day.
I still find things like that interesting but I guess I now look to the future more than I do the past. I too wonder what people's dreams are. The past is interesting but what is done is done. I now think it's more exciting thinking about the future and how you can influence it.
Which is why I have a goal; a dream even. I didn't know this before I started (and named) this blog but a number of things I have read about Personal Finance revolve around having a goal to head towards. Here's a list of a few things which crop up in people's PF blogs again and again:
- getting out of debt
- paying for a wedding
- saving for a house deposit
- paying through education
- becoming better with money
- attaining financial independence
- paying off a house
- retiring early
I'm lucky in the fact that I have no debt - apart from the mortgage - and currently I am not planning a wedding :-) However, I am interested in the last 4 items from the above list. Especially the last two which are my current goals - to pay off the house and become financially independent.
It turns out that having a goal is the best way to keep on track. If you don't have a goal then I'd suggest that you have less inclination to go through with the things you need to do. These are the things that everyone who practices sensible spending and saving should be doing and happily the things I am currently learning about.
So if you're thinking of spending less and saving more, figure out a goal you can head towards to help that dream come true. If you don't have a dream then you're less inclined to make it that far.
So what's your dream?
P.S. I think I'm going to coin the acronym 'Sx3' which stands for "Sensible Spending and Saving". I like that much better than phrases like "Become a Millionaire", "I'll make you Rich" or even "Get Wealthy with my 10 Step Plan"! Ahh, it's nice being down-to-earth :-)
Posted: 16 September 2008
I'd like to tackle the subject of credit cards and tell you why I think they are a good thing. I read a lot of articles which say things like "You don't need credit cards at all". Whilst I agree that a lot of people don't want credit cards, I also tend to believe that they can be used to your advantage.
Let me give you the example of how I use my credit card. Please note, I'm not saying everyone should use theirs this way, I'm not even saying that everyone should have one, I'm just relating how I use mine. But first, here's a little background information.
Part of my mortgage is in one of those 'revolving' type mortgages, the ones where you have a fairly large negative balance on which you pay interest. This can put some people off, but it means you get the chance of paying off more of your mortgage each month and you're not locked in to any particular amount. You pay back what you can afford. It's good for those of us who are on top of our spending.
When my income goes into my revolving account my balance goes up (as is normal) and every time I spend money from my current account, the balance (as usual) goes down. However since the account is largely in the negative, it seems slightly strange. As is usual on a debt, I am of course paying interest on it for the privilege. The aim of the game is that the longer you keep your paycheck in there the less interest you pay which is definitely is a good move. And, like all the other savers out there, the less I spend from this account the better off I am. To put it another way the more and longer I can keep money in my account the less interest I'll have to pay on it.
This is where my credit card comes into play.
Each month I use my card for a number of purchases. Purchases that I shall be doing anyway and also purchases for which I know I will be able to pay off - in full - next month. Examples of these standard purchases are: my electricity bill, my phone bill and my mobile bill. No matter what I do every month, I shall be living in a house and I shall need to pay these things. Therefore I choose to get them automatically deducted from my credit card. This helps in three ways:
1) I need to do nothing to pay the bills. No matter what I do, they'll be paid. I never forget to pay, therefore I get a prompt payment discount for paying on time and I'll never have late fees.
2) The money I would anyway have given to the utility bills stays in my revolving account for around about an extra 4-6 weeks. This means that I pay less interest in my revolving account since my balance is less in the negative.
3) Each and every year I manage to rack up around $120 on my 'Reward Points' which I can spend, as cash, in a number of shops. For the privilege of owning the card, I pay around $44 a year. That seems like a good bargain to me. In the past I have bought myself pairs of trainers with the balance but since my current ones are still going I haven't needed another pair. Currently I have $192.29 dollars sitting on it (if only I could exchange it for cash). My last pair of trainers lasted me four years so that could be almost twelve years where I don't have to purchase any footware. (I did have a pair of Doc Martens once which lasted me 9 years.)
So the upshot of all this is that my credit card is not only saving me money but actually giving me money too. I never pay interest and I don't have to lift a finger to do any of it. The balance comes out of my revolving account automatically too.
That's what I call a bargain and you can see why I think Credit Cards can have their place.
Final note: I appreciate that Credit Cards aren't for everyone, either because they'll overspend or they don't believe in going into debt. This is just how I use mine. You should decide for yourself what the best way to use them (or not use them) is.
Posted: 15 September 2008
Over the past few years, I've been taking more and more steps to spending less money, though I realise now I can do a lot more. It all started when I bought the house, I guess my spending naturally declined on certain things. Having to pay my mortgage, rates and all the other expenses that go along with that made me think about what I'd been spending my money on.
Whilst I stopped spending on some things, I didn't actually take a step back and take stock of my entire spending habit. As I said earlier, buying the house made me think a lot more even though I didn't action it as much as I could. My plan back then was to pay the house off by the time I was 40 which I now see as step 1 on the road to financial independence.
My ideas have changed somewhat recently in that I've decided that I actually want to both pay the house off by the time I'm 40 and not have to work either. I've recently made this harder on myself by going down to a four day work week instead of the usual five (a story for another time). The funny thing is, it is this decision that has finally made me start to really do something about my spending. Don't get me wrong, my spending isn't out of control ... I am currently debt-free (apart from the obvious mortgage) ... but I'd just like to spend less.
The more I read various Personal Finance blogs, it seems more likely that you can become financially independent by literally spending less. Let's put it this way, it is many times more likely to happen that way than it is to invent a new product, win the lottery or create a massively successful business. And therefore, the most important thing to spending less is to create a budget.
Currently however, I'm not in the position to create a budget since you can't make one if you don't know what your expenses are. Recently I started to use GnuCash to track my expenses. I had spoken to a few people about this and have even played with it in the past. As Stephen says "Gnucash is a very sophisticated double-entry accounting package" which is perfect for this exact cause. The best thing about GnuCash though is that it's free and there's nothing better than free. Not only do I track all my accounts but I also track my cash expenses too however small they are. (Luckily in NZ I rarely have to carry cash.)
That's the expenses sorted so what about the budget? Well, I'm going to give myself about three months before I actually make myself a budget so that I have something to compare it to. I'll then be able to figure out which expenses should be decreased or even cut. By then I'll have at least a little history to make and back up my decisions.
I'd just like to note that already something weird has started to happen. Even though I don't have that budget yet I've already noticed my spending has gone down. I think the act of carefully recording every expense has meant two things: (1) that I think more about it and whether I actually need it, and (2) the more I spend, the more admin I have to do inside GnuCash each evening. I know you can automate some things but the act of balancing the books is quite a relaxing and happy one. Thanks to Donovan for suggesting that one to me.
Note: in my first few posts I'm going to be giving background on why I'm doing all this. In future posts I shall be giving information on how I'm doing it. I'm sure my tactics will change over the years after learning more things about PF and about how other people do it but that's no different to all areas of life.
To help me along (and other reading this blog), tell me in the comments some good PF blogs that you read and that we can all learn from.
Posted: 13 September 2008
As stated in the description to this blog:
My plan is to retire at 40. That doesn't mean to stop working, it means to stop working for other people. I want to financially secure so I can do whatever it is that interests me ... which of course may still be to try and earn a decent amount of money at the same time! At least I'll be enjoying whatever it is I choose to do :-) This blog is about my journey towards that goal. Wish me luck!
I wanted to the above description this in the first item since I expect it will change over time and this helps remember what this blog is all about. Not only that but it will keep reminding me why I'm doing what I'm doing ... saving money, being frugal though still enjoying myself ... since in the future I hope to be doing a lot more of that.
This blog also lets other people know what I'm doing, not because they're interested in me but because they're interested in doing the same thing themselves. I mean, who wouldn't want to retire at 40?
Finally, let me just define what I mean by retire since it's probably not what a lot of people think. My plan is to be able to quit my day job by the time I'm 40 and go and do my own thing. I won't be able to live on my savings since it won't be enough but I want to be in a good finacial position whereby I don't need as much income. Whatever I do (future postings to define some possibilites) it'll be a hobby of some sort and something that I entirely enjoy. Also I'll be my own boss which will make a big difference.
I hope you enjoy taking this journey with me and maybe you can let me know how you're getting on too.
Posted: 11 September 2008