Personal finance tips that don’t require frugality – The Startup – Medium
Practical tips you can implement right now
In personal finance, using frugality to save money is an obvious option. The less money you spend, the more money you save. You can find thousands of blogs with tips on not buying your espresso at a coffee shop, making your own soap or thrift shopping.
Frugality certainly has its place when managing our money. It is always possible to spend more than we earn, regardless of how high our income. We have seen countless multi-millionaire celebrities go broke because of their insane spending habits.
Nevertheless, frugality cannot be the sole cornerstone of our personal finance strategy. Relying on limiting our expense alone can be problematic.
The first issue is that there is a cap on what we can save. We simply cannot save more than what we earn. The financial goals that we can realistically achieve will be limited by our income.
The second issue is that if we only save, our funds will be reduced when we decide to spend the savings. Due to inflation, the value of money will be lessened when we spend it in the future.
Maybe I have a tendency to be greedy. Or maybe I lack discipline when it comes to money. I admit that I like to have my cake and eat it too.
I constantly experiment with concepts on how to be financially wise without being extremely frugal. I want to have a comfortable financial future. But I also hate the feeling of depriving myself too much of worldly pleasures now.
To make sound financial decisions, we need both the mindset and the tactics. The following concepts will be illuminated from both aspects.
Automation is easier than discipline
One easy “hack” that exist in personal finance is automation.
To explain the benefits of automation, let us use a simple example of automating savings: instructing your bank to transfer a fixed amount of money from your income account to separate savings account on a monthly basis.
With automation, you do not have to remember to save money every month. The money automatically gets transferred without you thinking about it.
In a way, automation can replace discipline. When the sum of money is transferred automatically to a separate savings account, you simply cannot spend the money you do not have. Even if we are extremely disciplined, there will be times when we will be weak-willed.
I have noticed that at the beginning of automating my savings, it felt uncomfortable because there is less money to spend. But as time goes by, I got used to it.
Growing personal wealth involves 3 phases, you can automate all of them:
Saving: instructing the bank to transfer a fixed amount of money every month from your income account into a separate savings account. One extra thing you can do is to increase the savings amount when your pay increases. This is an effective way to deal with lifestyle creep: the phenomenon unconsciously increasing our spending as we earn more.
Investing: set up your stock trading account to automatically buy stocks, ETFs, bonds or mutual funds for a fixed amount of money every month. Investing using this way is also known as “dollar-cost averaging”. The pros and cons of this approach are beyond the scope of this article, but you can easily find information about this topic online.
Reinvesting: reinvest the interest and dividends from your investments by instructing your bank or broker to buy stocks with the money. By doing this, you are using the “compound interest” effect. You can’t spend the reinvested money because is not easily accessible to you. Certainly, you can sell the investments and use that money, but it is an extra psychological barrier for you to cross.
Setting up these steps takes minimal effort. More importantly, they require only one-time effort.
Automating aspects of your personal finance can afford you more time and mental capacity to focus on other aspects of life. There are certainly more fun things to do than clicking on online money transfer forms or using willpower not to buy new toys.
Reduce recurring expenses
One way to save money is to cut down on recurring expenses. A recurring expense is a form of automation. Except, in this case, it works against us. Money automatically gets taken out of our pockets on a regular basis without us giving it any thought.
If the recurring expense brings value to your life, that’s great! Keep it. There are more important things in life than money. You can always make more money.
On the other hand, we often have recurring expenses that are just chipping away at our finances without offering any value. Needless to say, whether or not a recurring expense has value to us differs from person to person.
Take the obvious example of a gym membership. If you love working out in the gym, pay it every month! It is making you healthier and looking damn fine. Those benefits fall in the “priceless” category. On the other hand, if you prefer working out outdoors in nature and hate the gym, canceling the gym membership is the way to go.
The key here is to go through your expenses and make obvious choices. If it is something you might want to use “someday”, cancel it.
Getting a list of our recurring expenses is pretty easy. We can go through our bank account, PayPal and credit card history. We might find surprises that we have completely forgotten about.
For me personally, software and app subscriptions are the usual culprits of recurring expenses to cut. As a software developer, I love to play around with fun apps. Sometimes, I sign up, use an app for a few months then forget to cancel after I get bored with it.
Even if the recurring expense offers you value, you can investigate how you can reduce it without sacrificing any comfort in your daily life.
I asked for a mobile phone at work. Because of this, I could cancel my personal mobile contract. As a cherry on top, the phone gets replaced every 3 years.
Recurring expenses of financial fees
A particular category of recurring expenses that could hurt our finances is financial fees.
On first glance, it is easy to excuse fees we pay to banks and brokers as a necessary evil. After all, we need to spend money to manage money right? That is true, but we certainly can cut down on those expenses.
For your bank account, two common fees to watch out for are monthly account charges and overdraft fees.
Banks bill us account charges for having accounts with them. Check how much your bank is charging you. You might think it is just a few bucks, but it quickly adds up if you have multiple accounts.
Consider negotiating them with your banker or moving to another bank. Weigh this against the service and convenience the bank is offering you. In certain cases, it makes sense to pay more if you are saving time and hassle.
Interest for short-term debt is another area to watch out for. Different banks charge us different overdraft fees and credit card interest. The best advice here is to avoid short-term debt. But if you cannot avoid it completely, the best next thing is to use a bank that charges less interest.
Costs that incur during investment can also have a detrimental impact on our wealth.
An obvious one is our stocks brokerage account. We are usually charged with monthly account fees and trading fees. The good news is the brokerage space is fairly competitive. Brokers offer discounts on account fees and trading fees to attract new customers.
Consider moving to another broker if there is a significant saving. Moving your stocks portfolio to another broker is usually pretty easy.
Choosing your investment vehicles also have a heavy impact on your expense.
Be aware when investment advisors at your bank make recommendations of mutual funds to buy. They will sell you on the point that your money will be managed by professionals. They might be earning sales commission when selling you mutual funds, making their opinions biased.
When you buy mutual funds, you are charged a purchase fee upfront. This is a one-time payment to the fund management institution. Annually, you will be charged with a percentage of management fees, commonly known as “expense ratio”.
Typical expense ratios are around 1 to 2%. It could be much higher than that. 2% might not sound like a big deal but that is the amount of money skimmed off your investment annually. That amount could be used to make more money.
The selling point of mutual funds, at least according to the institutions that offer them, is that they are actively managed by professionals. There are conflicting views on whether the management fees are worth it since many mutual funds actually underperform the passive funds, such as ETFs. Passive funds are pegged to a market index and have much lower costs compared to mutual funds.
The point here is to investigate for yourself. Weigh the pros and cons of each financial instrument you choose consciously. Relying solely on recommendations from your bank or other financial institutions is a mistake, especially when their opinions are biased.
Our decision will depend on individual factors like our financial goals, risk tolerance, and level of understanding.
Using creativity to afford what you want
Creativity is a powerful tool in personal finance.
If we are not creative, we will live our personal finance journey according to the typical “script”:
- get a good degree
- get a good paying job
- save money and invest
- if you want to make a purchase you cannot afford, get a loan
Following the “script” is boring. More importantly, it limits us from achieving our true potential. By potential I do no only mean material wealth, I also refer to our ability to express ourselves creatively when earning, saving and investing our money.
Creativity is a muscle. If we exercise it, it will grow stronger. If we do not, it will waste away. In the context of personal finance, this too holds true.
I have to remind myself of the importance of creativity constantly. To do this, I give myself constraints in certain situations to flex my creative muscles.
One of my favorite ways to practice this is when I want to make purchases of toys I do not “need”. I give myself a few constraints:
- I cannot buy the item using money from my paycheck
- I cannot buy the item using my savings
- I cannot take up another job to exchange time for money
At the beginning of this year, I wanted to buy a paddle board. As I was brainstorming for ideas on how to get money, I was in the midst of spring cleaning. I sold a bunch of items that I do not use anymore. The sales fetched 3000 bucks. I bought that paddle board I wanted so badly, with money to spare.
I could have taken the easy way out by chalking it up as something I do not need to buy. Or I could have dipped into my savings. I am glad that I challenged myself.
When I was a student, I wanted extra pocket money. At that time, I was an avid guitarist and was knowledgeable about electric guitars. I combed internet forums to buy used guitar parts. I sold them for profit on eBay. Because of my knowledge and passion, I could differentiate between valuable components and junk.
Could I have gotten a job somewhere to get money? Sure. But I wanted to earn money on my own terms. I found a way to do that.
“It’s not about your resources,
it’s about your resourcefulness”
— Tony Robbins
If you want something, go for it. If you snuff out the desire by simply saying it is something you do not need, you might lose out on a chance to practice your creativity.
You always find a way. Play mental games with yourself to squeeze your creative juices. Use your unique personality, experience, and passions to guide you. And remember to have fun!
Forging our own path
Certainly, we can benefit from not overextending our expenses. Nevertheless, it is not necessary to ride extreme frugality train just because we are told that we “have to”.
Like any area in life, the possibilities of managing our personal finance is limitless. We are all unique in our own ways. It is very fulfilling to reflect this in our personal finance.
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