I am not a frugal person. Sometimes I wish I were more frugal, but I am happy with how things have been going. My grandmother is frugal: she buys everything on sale and can make $200 cash last 6 months. I spend all of the money allotted in my budget for flexible spending every two weeks. And maybe one day, I’ll get better with that kind of spending. But one thing I don’t do, is making a habit of spending money on something I don’t really need. When I was a kid, my parents taught me to quantify everything in a larger time frame. As I alluded in my last blog post, of course I can spend $5 or $10 bucks on something! However, if I do that regularly, I am making a habit of it and am probably wasting money.
Beware of little expenses; a small leak will sink a large ship. -Benjamin Franklin
For the millennial generation, Starbucks coffee (or something like it) is our Achilles tendon. We grew up with it, we love it, and we need it every day. It’s delicious and the cups sometimes have inspirational quotes on them, and it’s just so charming how the barista never spells our name correctly. It’ not very expensive if you think about it — just $4 for a delicious pick-me-up. It’s so true that $4 is not that much money. But $4 three times a week brings us to spending $12 on coffee. I can buy Folger’s or Maxwell big can of coffee for $8 at Giant Eagle and brew it at home. That big can will last me 4 – 6 weeks. So in a month, we could spend $48 on coffee drinks, and in a year $576. And this is all being very conservative. You or someone you know buys coffee at a coffee shop every day of the week! Many drinks, especially in the bigger cities, cost more than $4.
Save Save Save
If you want to save more money, start with the simplest stuff first and cut out the things you don’t need. Remember, you want Starbucks coffee, you don’t need it. You can brew coffee at home for 10% of the cost. So let’s assume you take action and stop your coffee buying habit. Over ten years, that money diverted away from coffee could be worth $9011 if you invested it into your 401(k) or your own brokerage account. This model assumes an 8% growth rate. My next few posts will be about savings accounts and investments. The bottom line here is: would you rather have your expensive coffee habit with nothing to show for it or the nine grand 10 years from now that could be put toward buying a house, or a pre-owned car, a vacation, or opening your own business. Think of all you could do with $9000 and you need to decide if your coffee habit is worth sacrificing that opportunity. If it were $5 drinks 5 days a week, you’d be cutting out $100 a month of spending, which means you’re investing $1200 a year. In ten years, your investment will be worth $18,774.
Now, obviously not everyone drinks coffee. For some people, this is craft beer bought out at the brewery, or it’s Subway sandwiches, or it’s video games and their consoles. Whatever it is that you have a habit of spending on it, ask your self if it’s worth it. You should definitely enjoy your life, but make sure you’re spending on what adds value to your life. And always quantify everything on the larger scale. Think “it costs $X now, but it costs $5X for the work week, meaning it costs $52X for the year. Is there something I’d rather buy with that $260X?” If you are currently not saving any money or saving very little, you need to cut down your spending habits immediately. Remember, you should be using 20% of your take home pay for financial goals, which includes saving for an emergency fund. Don’t let a latte sink your financial ship before you even get going on it. You probably have a good 50 – 60 years left to live your life. How do you want to do it?
Easier said than done
I know. If you’ve built up a habit over 5 years, it is all but impossible to break it. This is why I have started doing targeted spending diets. I stole the idea from a friend who does different (literal) diets to work on her health and wellness. My vice is pizza. I didn’t buy much pizza for the few years after I graduated college. But this awesome pizza shop opened right down the street from me. $6.95 for a smaller 8-slice pie. It’s larger than a personal pizza but it’s not quite a medium. It takes 3 minutes to cook. One of my student’s families owns it so I justified my spending as supporting their family. Midway through November, I looked at my debit card statement and just thought “oh my goodness, how much money am I spending on pizza while I have good food in my fridge?!” So December’s diet became no spending money on any pizza. I’ve heard of people doing a no-spend month, during which they only buy the essentials. I tried that and it was too difficult to just stop my entire current life. The pizza diet has been working out great because I am focused on avoiding just one thing, and it happens to be the thing I was more frequently spending money on. So in addition to not spending money 4-6 times in a month on pizza, I am eating out less because pizza was my go-to for about 4 months.
Just commit for one month to cutting out one thing, even if it is very small. Send that money back in to your savings account or send it to an investment account.You’ll thank yourself one day.