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In the first part of this series, we looked at how the rules of the game have changed (U.S. Treasury Bonds are offering paltry returns, making the savings environment tough to navigate). We saw how our world today is drastically different from the one our grandparents grew up in.
In part two, we examined how to play better offense in light of that revelation; how to increase our monthly incomes in order to achieve financial freedom. Now in this final installment, we’re going to dive into some defensive tactics and see how we can spend less money in order to maximize our chances at success. I can’t tell you with 100% certainty what the next great ‘gold rush’ will be, but one thing I know for sure:
The truly wealthy will always spend less than they earn.
Playing offense can be hard. It takes creativity, work ethic, and a little bit of luck to radically increase your income. But the good news is that playing defense is easy! Reducing expenses is more a matter of willpower than anything else. 🙂
4 Basic Principles
Our culture praises the lavish and extravagant. Billions of dollars are spent every year on marketing campaigns trying to convince you to buy the next cool thing. Is your car more than 5 years old? Time for an upgrade. Perfectly working iPhone 7? Can’t possibly keep that old thing since the 8 is coming out!
If you want to truly build lasting wealth, it will require a mental shift.
Being frugal doesn’t suck. Frugality is cool. Repeat it to yourself. Affirm it till you believe it. I love frugality because it’s essentially a giant middle finger to the man. When you live a frugal life, you are rejecting the status quo and joining a counter-cultural minority. My friends make fun of me sometimes because I wear the same pair of Birkenstock slippers almost every day (I love em!). I also tend to keep my wardrobe on a tight rotation.
It’s funny to me because I really don’t care what I wear. And guess what? Neither do my friends. They joke with me about it the same way I bust their chops if they get an ugly haircut. At the end of the day, we’re still friends. The upside is, every dollar I don’t spend on clothes is another I can put towards a rental property, my business, or towards this blog.
(Side Rant: There’s a big difference between being frugal and being cheap. Being frugal is how you treat money in relation to yourself. Being cheap is how you treat money in relation to other people. Please don’t be cheap. You may want to reduce your utility bills, but that doesn’t mean you should charge your house guests for a drink of water. When it comes to myself, I live a minimal lifestyle. But I love taking care of my friends and family. You can be both frugal and generous. I promise people will respect you all the more for it.)
Screw the Joneses
If you’re comparing yourself to your friends, acquaintances, or worse, someone you don’t even know – stop right now. Their life is not your life. Realize there will always be people who are better or worse off, and comparing yourself to anyone is a waste of mental energy. It can get you stuck in a cycle of self-hate if they’re ahead of you or give you an inflated sense of self if you’re ahead of them. Stop worrying about how other people are living and start making the best out of your own situation today.
Many of my friends began working $50k/yr jobs right out of college. I watched in horror as they immediately bought entry-level luxury cars and moved into nicer apartments. They saw one friend do it and post about it on social media, so everyone else followed suit. They were envious of each other and didn’t want to get “left behind”.
Keeping up with the Joneses will lead to financial bleed out. Avoid it at all costs.
Limit Your Liabilities
The middle-class love to buy up liabilities. Sometimes they even trick themselves into thinking they’re assets. As long as something is costing you money – it is a liability. Do you own a house that doesn’t generate rental income? It’s a liability. Do you own a car? Definitely a liability.
I get it, some of this stuff is unavoidable. But the mental shift that needs to happen here is one that looks to limit the liabilities to the absolute bare minimum. I know that brand new Rolex looks so shiny in the display case, but ask yourself, ‘Do I really need it?’.
Always Think In Terms of Value
When you start to reduce expenses it can get addicting. Getting that next SWEET deal on toilet paper… I mean cmon, what else can give you that kinda rush? It’s tempting to spend all day researching deals… but please don’t fall into that trap!
I know people who waste hours upon hours every month clipping coupons and scouring websites in order to save a few dollars. If only they devoted that much time to a side business or starting a blog that generates income. They’d be much better off in the long run. Reducing expenses is important so long as you don’t lose value along the way.
6 Things To Do Right Now
1. Kill or Refinance High Interest Debt
If for some reason you have high-interest debt, do everything in your power to either immediately pay it off or refinance into a lower rate. Nothing soul crushes your dreams of financial independence quite like a mountain of debt.
In 2016, The average U.S. household had: over $16,000 worth of credit card debt, over $29,000 in auto loans and over $50,000 in student loan debt. I love taking advantage of credit cards for travel rewards, but you should never carry a balance on a credit card, period. The interest rates (15-20%+) are ridiculous! If you aren’t disciplined enough to pay off your cards in full every month, you shouldn’t use them.
So if you want to be successful in destroying your debt, come up with a plan of action.
Start by attacking the highest interest rates first (these are typically your cards). Aim to pay them off in under a year. If you crunch the numbers and you can’t realistically pay off your high-interest debt within a year, I suggest either:
1.) balance transferring into a 0% interest card; or
2.) finding a lender and consolidating into a short (1-3 yr) repayment plan.
Once your cards are done, look into your student loans if you have any. If you haven’t looked in a while, chances are good that you can refinance them to a lower rate. For student loans, aim for a 5 year (or less if you can swing it) repayment plan.
I highly recommend SoFi for both student loan refinancing as well as debt consolidation. I personally used them to take my student loans from a 6.5% rate down to 4.5%. It saved me a ton of money on interest and was super simple to do.
Don’t even worry about your low-interest rate debt (4% or lower) until you take care of the other stuff first.
Too much personal finance advice is focused on reducing tiny expenses. Bloggers will tell you to stop ordering Starbucks and avocado toast or else you’re doomed to a life of poverty. It’s not terrible advice, but it’s like focusing on a paper cut when you have a gunshot wound. When playing defense, start with your biggest expenses first!
Most Americans spend anywhere from 30-50% of their monthly income on housing/rent. That’s a ton of money.
The best financial decision I’ve made so far is purchasing investment real estate. I did it in such a way that I’m essentially living for free (more on that later). Investment real estate is my absolute favorite asset class – and I think it should be a part of every investor’s portfolio. Once you obliterate your rent costs, the amount of freedom you will feel is tremendous.
Maybe you’re not in a position to purchase real estate right now, but there are still ways you can drastically reduce your living expenses. Finding roommates instead of living alone, hosting through Airbnb, yes – even moving back in with your parents. These are not comfortable choices, but like I said earlier, playing defense is a matter of willpower. How badly do you want to improve your financial life?
3. Find A Cheaper Alternative
I recently switched from Verizon to T-Mobile for my cell phone service. I researched and compared the monthly cost of both and found that T-Mobile was literally half the price of what I was paying for Verizon. To be fair, it’s been a few months and Verizon does get better phone signal/internet speeds in my city… but was their service twice as good as T-Mobile? Was it worth double the price? Definitely not. I am happy with my switch.
This all goes back to the 4th principle. Make a list of all the things you spend money on – and wherever possible look to switch to a cheaper alternative without losing too much value.
E.g. – I’m frugal, but I still buy ‘nice’ floss. It may be double the price of the cheap alternative, but using the generic brand is like trying to floss with shoelaces for me. It’s not twice as good, it’s literally 10x better in my mind.
Some products/services have few alternatives. Whenever you find this to be true, start negotiating. Cable internet providers are a huge example. In many cities, they hold an effective monopoly. In the neighborhood where I live we only have 2 providers and their prices are near identical. How do you reduce expenses in a situation like that? You pick up the phone.
It takes a little bit of time and practice, but once you get good at it you’ll be surprised at how much of your expenses are negotiable. It’s a high upside/low-risk move because the worst thing that can happen, is they say no. But I’ve found my success rate at negotiating to be near 100%. The biggest downside is the amount of time it takes (no one likes to be on the phone w/ customer service for an hour). I’ve found it’s best to call to negotiate prices when eating dinner or on a long drive to be most efficient with my time.
Some things you should negotiate: car/home insurance, cable service, cellphone service, credit card interest rates
5. Track Everything
Before I embraced frugality, if you asked me where my money was going I’d have no idea. I would say things like: “Most of it is probably spent on food, etc”. But I wasn’t really sure. I’d be hazy on the exact dollar amount. If you had asked me for my net worth, I would be even more clueless. Thank god for technology.
I use Personal Capital to track all my spending and net worth now. I highly recommend it for anyone who is serious about getting their finances together. I’ve used other apps like Mint in the past, but Personal Capital blows the competition out of the water. I use the app almost daily to know exactly where my money is going, along with my investment performance. Best part? It’s completely free.
Net worth is everything. It is a full picture of your financial health; your income, assets, and liabilities. Once you know where you’re at you can do a better job figuring out where you want to go and how you can get there. Become obsessed with tracking your expenses and net worth. It will keep you in a defensive mindset, which in turn will help keep your living costs in check.
6. View Wasted Time As An Expense
This last tip is huge: Just because you’re spending less money, it doesn’t mean you’re playing good defense. If you trade your weekend bar tab for a weekend of binging on Netflix instead – yes, you saved some money, but you’re still coming out negative.
Time is your most precious asset. It’s more valuable than money; so value every hour appropriately.
It’s the reason I still pay for carwashes. I could save a few bucks if I bought the supplies and did it myself but I’d much rather spend my energy and willpower writing another blog post or working on my business. I’d rather put my effort into things that will pay greater returns in the future.
So the next time you feel tempted to play video games all night, just remember – it’ll come at a steep price.
Mr. Smart Money
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