Forget the coupon clipping. A straightforward, realistic budget is the best deal you'll ever find.
Why is a budget the best deal? Because, just like your childhood puppy your budget will always be there for you, no expiration dates, no fine print to yank away the savings after you've already been whipped into a furry of consumerism. If you care for your budget it will take care of you so that "saving" isn't just not unnecessarily spending an extra $5 at the grocery store this week; but actually saving money in a high yield savings account. Another great thing about a budget is that, again like your puppy, it will take you back even if you screw up.
Think outside the sale. For years I chased after deals and discounts like they were the oxygen keeping me alive. It didn't matter if I needed an item or not -- if there was a sticker advertising 60, 70, 80 or 90% off a gadget, I wanted to buy it. How could I pass up the savings?
It wasn't until recently that I realized a budget is the best deal you can find. After taking a few minutes to look at how to put together a budget I realized that it takes less time to set up and follow a budget than it does to look for deals every day of the week.
Thanks to great free personal finance management (PFM) tools from sites such as like Mint.com, Rudder and others you can easily create a budget and track how well you are following it each day. These tools will even send you a notification when you go outside of your budget so you aren't shocked at the end of the month. If you don't already have a successful budget don't start creating one yet. First go read these tips for setting realistic budget.
Advice on Budgeting
- Reverse Budget - A savings first solution from FiveCentNickel
- Budgeting basics - a Budget primer from Consumerism Commentary including suggestions on how to get started.
My personal favorite and current method of budgeting isn't so much a budget as it is smart spending. Ramit Sethi explains the model in his book I Will Teach You to Be Rich, calling it, "Conscious Spending." Instead of focusing on the minutia Sethi concedes that it is in fact OK to, "Spend extravagantly on the things you love, and cut costs mercilessly on the things you don't."
A budget may be the best deal, but that doesn't mean you need to give up on coupon clipping and bargain hunting; just make these tools that support your plan instead of the main focus. If you plan for your purchases, by saving up at SmartyPig or setting a goal in Rudder, you can still go looking for a deal on your next purchase and pay in cash. Trust me, there's something really incredible about paying in cash for the new camera that you've researched and found the best deal on.Thanks to great free personal finance management (PFM) tools from sites such as like Mint.com, Rudder and others you can easily create a budget and track how well you are following it each day. These tools will even send you a notification when you go outside of your budget so you aren't shocked at the end of the month. If you don't already have a successful budget don't start creating one yet. First go read these tips for setting realistic budget.
Advice on Budgeting
- Reverse Budget - A savings first solution from FiveCentNickel
- Budgeting basics - a Budget primer from Consumerism Commentary including suggestions on how to get started.
My personal favorite and current method of budgeting isn't so much a budget as it is smart spending. Ramit Sethi explains the model in his book, I Will Teach You to Be Rich, calling it, "conscious spending." Instead of focusing on the minutia Sethi concedes that it is in fact wise to "spend extravagantly on the things you love, and cut costs mercilessly on the things you don't."
A budget may be the best deal, but that doesn't mean you need to give up on coupon clipping and bargain hunting; just make these tools that support your plan instead of the main focus. If you plan for your purchases, by saving up at SmartyPig or setting a goal in Rudder, you can still go looking for a deal on your next purchase and pay in cash. Trust me, there's something really incredible about paying in cash for the new camera that you've researched and found the best deal on.
J.D.’s equation is correct, but it’s only part of the story. cash flow is in fact income minus expenses like the article states. However, cash flow does not correlate directly to wealth. You would naively think that wealth is the integral of cash flow with respect to time. It isn’t.
Suppose you earn $50,000. You immediately spend this money on building supplies and build a house with it. Your net cash flow is $0, but you now have a house that’s worth more than what you paid for it. You’ve got a property with a value of, say, $60,000. This is investment. Certainly you needed some cash flow to start the investing process, but cash flow itself is not wealth. Also, you now have the ability to generate $60,000 new dollars in positive cash flow by selling the house you built, in which case you can invest in something new.
The average American household income is about $3,000/month, after taxes. If you spend *all* of that on living expenses, you will never save your $50,000 to build your house. If you manage to cut your living expenses by half, you can now save your $50k in about three years. However, if instead you were able to double your income, you could save your $50k in half that time. If you take this even further and double your income again (to $12k/month) you could save you $50k in only 6 months. However, if instead you cut your living expenses by half a second time (to $750/month) it would still take you 22 months to save $50k.
You quickly hit a point of diminishing returns with cutting expenses, where each additional percent cut from your budget buys you less and less. The opposite is true for increasing your income. There is absolutely no way to save $50k in less than 16 months on $3,000/month. However, if you’re making enough money, there’s no limit to how fast you can do it.
Here’s one more example that’s not so extreme:
Set a goal to save $250,000. Pretend you want to buy a house in cash.
Start off with the same $3,000/month salary.
Start with the same $3,000/month living expenses.
Scenario 1: Your living expenses never change, but each year, you manage to increase your income 7% over the previous year. This seems feasible, it’s not a “get rich quick” scheme, you can probably find some way to improve your performance in whatever business you’re in by about this much.
You save your $250,000 in a bit over 12 years. At the end of the 12 years, you make about $120k/year. This is definitely a good salary, but it’s not ridiculously, infeasibly high.
Scenario 2:
You keep the same salary every year, but cut your expenses by 7%.
You save your $250k in 17 years, which is significantly longer. You’re also living on $920/month at the end of this, which is probably infeasible in real life. You just can’t keep cutting and cutting and cutting to this degree.
Scenario 3:
You combine both 1 and 2, both increasing your income by 7% every year, and cutting expenses the same amount. You’d think this would make a huge difference, right?
You’ll save your $250k in 10 years. This is definitely an improvement over either one of the other scenarios, but it’s not nearly the same sort of improvement you see if you solely increase income instead of solely decreasing spending. It also requires you to live on $1500/month at the end, which is certainly a lot more feasible that $920, but you still may think that’s a bit low.
This whole calculation ignores inflation (meaning, your 7% raise per year is probably more like 10% in absolute terms). It also means that at the end, when I say you’re living on $920/month, that’s $920 dollars at 2010 value, not 2027 value.
This is essentially the same concept that J.D. likes to call ‘the power of compound interest’, except applied in a slightly different way.
One other note on this example: selling your ’stuff’ makes almost no difference here. Even assuming you had $10k worth of stuff to get rid of at the beginning of this, it only buys you a few extra months in any of these scenarios. This is because a single, one-time influx of $10k is small in a scenario that takes 10-17 years to play out. At the end of these scenarios, you’re saving in the ballpark of $2000-$5000 every month. The extra $10k just isn’t that big of a deal any more. Selling ’stuff’ can help you reduce debts and stop paying interest to other parties if you can do it all at once, but it really doesn’t help you build long-term savings very well.
I know the site is called “get rich slowly”, but I like to think that is meant to convey an idea of perseverance and the fact that “get rick quick” schemes don’t work. It’s not meant to imply you should go artificially slower than you have to, just because.
In short: ask for a raise every year, even if you don’t always get it. Don’t be afraid to take a job at a competing company if they’ll offer you a better salary (assuming the job is otherwise similar). You don’t need to start your own company to make a few more percent every year. Just be valuable in your industry, show that to your employers, and don’t be afraid to ask for raises.
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Forget the coupon clipping. A straightforward, realistic budget is the best deal you'll ever find.
Why is a budget the best deal? Because, just like your childhood puppy your budget will always be there for you, no expiration dates, no fine print to yank away the savings after you've already been whipped into a furry of consumerism. If you care for your budget it will take care of you so that "saving" isn't just not unnecessarily spending an extra $5 at the grocery store this week; but actually saving money in a high yield savings account. Another great thing about a budget is that, again like your puppy, it will take you back even if you screw up.
Think outside the sale. For years I chased after deals and discounts like they were the oxygen keeping me alive. It didn't matter if I needed an item or not -- if there was a sticker advertising 60, 70, 80 or 90% off a gadget, I wanted to buy it. How could I pass up the savings?
It wasn't until recently that I realized a budget is the best deal you can find. After taking a few minutes to look at how to put together a budget I realized that it takes less time to set up and follow a budget than it does to look for deals every day of the week.
Thanks to great free personal finance management (PFM) tools from sites such as like Mint.com, Rudder and others you can easily create a budget and track how well you are following it each day. These tools will even send you a notification when you go outside of your budget so you aren't shocked at the end of the month. If you don't already have a successful budget don't start creating one yet. First go read these tips for setting realistic budget.
Advice on Budgeting
- Reverse Budget - A savings first solution from FiveCentNickel
- Budgeting basics - a Budget primer from Consumerism Commentary including suggestions on how to get started.
My personal favorite and current method of budgeting isn't so much a budget as it is smart spending. Ramit Sethi explains the model in his book I Will Teach You to Be Rich, calling it, "Conscious Spending." Instead of focusing on the minutia Sethi concedes that it is in fact OK to, "Spend extravagantly on the things you love, and cut costs mercilessly on the things you don't."
A budget may be the best deal, but that doesn't mean you need to give up on coupon clipping and bargain hunting; just make these tools that support your plan instead of the main focus. If you plan for your purchases, by saving up at SmartyPig or setting a goal in Rudder, you can still go looking for a deal on your next purchase and pay in cash. Trust me, there's something really incredible about paying in cash for the new camera that you've researched and found the best deal on.Thanks to great free personal finance management (PFM) tools from sites such as like Mint.com, Rudder and others you can easily create a budget and track how well you are following it each day. These tools will even send you a notification when you go outside of your budget so you aren't shocked at the end of the month. If you don't already have a successful budget don't start creating one yet. First go read these tips for setting realistic budget.
Advice on Budgeting
- Reverse Budget - A savings first solution from FiveCentNickel
- Budgeting basics - a Budget primer from Consumerism Commentary including suggestions on how to get started.
My personal favorite and current method of budgeting isn't so much a budget as it is smart spending. Ramit Sethi explains the model in his book, I Will Teach You to Be Rich, calling it, "conscious spending." Instead of focusing on the minutia Sethi concedes that it is in fact wise to "spend extravagantly on the things you love, and cut costs mercilessly on the things you don't."
A budget may be the best deal, but that doesn't mean you need to give up on coupon clipping and bargain hunting; just make these tools that support your plan instead of the main focus. If you plan for your purchases, by saving up at SmartyPig or setting a goal in Rudder, you can still go looking for a deal on your next purchase and pay in cash. Trust me, there's something really incredible about paying in cash for the new camera that you've researched and found the best deal on.
J.D.’s equation is correct, but it’s only part of the story. cash flow is in fact income minus expenses like the article states. However, cash flow does not correlate directly to wealth. You would naively think that wealth is the integral of cash flow with respect to time. It isn’t.
Suppose you earn $50,000. You immediately spend this money on building supplies and build a house with it. Your net cash flow is $0, but you now have a house that’s worth more than what you paid for it. You’ve got a property with a value of, say, $60,000. This is investment. Certainly you needed some cash flow to start the investing process, but cash flow itself is not wealth. Also, you now have the ability to generate $60,000 new dollars in positive cash flow by selling the house you built, in which case you can invest in something new.
The average American household income is about $3,000/month, after taxes. If you spend *all* of that on living expenses, you will never save your $50,000 to build your house. If you manage to cut your living expenses by half, you can now save your $50k in about three years. However, if instead you were able to double your income, you could save your $50k in half that time. If you take this even further and double your income again (to $12k/month) you could save you $50k in only 6 months. However, if instead you cut your living expenses by half a second time (to $750/month) it would still take you 22 months to save $50k.
You quickly hit a point of diminishing returns with cutting expenses, where each additional percent cut from your budget buys you less and less. The opposite is true for increasing your income. There is absolutely no way to save $50k in less than 16 months on $3,000/month. However, if you’re making enough money, there’s no limit to how fast you can do it.
Here’s one more example that’s not so extreme:
Set a goal to save $250,000. Pretend you want to buy a house in cash.
Start off with the same $3,000/month salary.
Start with the same $3,000/month living expenses.
Scenario 1: Your living expenses never change, but each year, you manage to increase your income 7% over the previous year. This seems feasible, it’s not a “get rich quick” scheme, you can probably find some way to improve your performance in whatever business you’re in by about this much.
You save your $250,000 in a bit over 12 years. At the end of the 12 years, you make about $120k/year. This is definitely a good salary, but it’s not ridiculously, infeasibly high.
Scenario 2:
You keep the same salary every year, but cut your expenses by 7%.
You save your $250k in 17 years, which is significantly longer. You’re also living on $920/month at the end of this, which is probably infeasible in real life. You just can’t keep cutting and cutting and cutting to this degree.
Scenario 3:
You combine both 1 and 2, both increasing your income by 7% every year, and cutting expenses the same amount. You’d think this would make a huge difference, right?
You’ll save your $250k in 10 years. This is definitely an improvement over either one of the other scenarios, but it’s not nearly the same sort of improvement you see if you solely increase income instead of solely decreasing spending. It also requires you to live on $1500/month at the end, which is certainly a lot more feasible that $920, but you still may think that’s a bit low.
This whole calculation ignores inflation (meaning, your 7% raise per year is probably more like 10% in absolute terms). It also means that at the end, when I say you’re living on $920/month, that’s $920 dollars at 2010 value, not 2027 value.
This is essentially the same concept that J.D. likes to call ‘the power of compound interest’, except applied in a slightly different way.
One other note on this example: selling your ’stuff’ makes almost no difference here. Even assuming you had $10k worth of stuff to get rid of at the beginning of this, it only buys you a few extra months in any of these scenarios. This is because a single, one-time influx of $10k is small in a scenario that takes 10-17 years to play out. At the end of these scenarios, you’re saving in the ballpark of $2000-$5000 every month. The extra $10k just isn’t that big of a deal any more. Selling ’stuff’ can help you reduce debts and stop paying interest to other parties if you can do it all at once, but it really doesn’t help you build long-term savings very well.
I know the site is called “get rich slowly”, but I like to think that is meant to convey an idea of perseverance and the fact that “get rick quick” schemes don’t work. It’s not meant to imply you should go artificially slower than you have to, just because.
In short: ask for a raise every year, even if you don’t always get it. Don’t be afraid to take a job at a competing company if they’ll offer you a better salary (assuming the job is otherwise similar). You don’t need to start your own company to make a few more percent every year. Just be valuable in your industry, show that to your employers, and don’t be afraid to ask for raises.
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Brad Friedman and Desi Doyen: Green <b>News</b> Report: August 5, 2010 <b>...</b>
IN 'GREEN NEWS EXTRA' (see links below): Why 2 million (promised) green jobs couldn't sell a climate bill; When religious beliefs become dangerous; New state surveys affirm Americans' belief in global warming, gov't action; Fossil fuels ...
F. B. Purity Hides Annoying Facebook Applications and <b>News</b> Feed <b>...</b>
Most Browsers (Greasemonkey): If your Facebook News Feed is still clogged with annoying applications and unimportant updates, simple user script FB Purity can seriously narrow it down to just the important stuff.
Spectroscopic science <b>news</b>
These are my links for July 30th from 18:21 to 18:27: Space balls redux - I've reported on this ...
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