Save saving

Everyone knows one way to become rich is business, or special skills. Since I started reading the Mr money mustache blog I realized having a lot of money can be achieved another way, one we all can do without needing any special skills, luck, or starting capital, is saving.

Recently I had a talk with a co-worker, who is fairly young, a year my junior, about “getting rich”. He’s thinking about buying a condo in the near future, and was wondering about ways to get enough for a downpayment. The obvious thing, to me anyway, would be to save up, it is what I did to purchase my first home. However it’s not something my colleague has even considered, he said something along the lines of “sure I can save, but I’m talking about making a shitload of money fast”.

I was always brought up not spending every cent I made and try to save as much as possible. Spending all of my income seems like building a financial prison for myself, living paycheque to paycheque despite having the ability not to. I’ve always budgeted my life to use about 50% to 70% of what I make, build an emergency fund, save to purchase a home and for retirement.

A bit surprised by my co-worker’s reluctance to save I asked him why was saving not something he feel like would be the best way to reach his goals. “It takes too long, I want to make a lot of money right now”. Short of winning the lottery and some “spend a while in jail” type of things not many paths lead to “make a lot of money right now”.

It got me thinking, how slow is saving? I know saving isn’t fast, but over time it builds up, like a snowball, the more it builds up the fast it builds. Also maybe he wasn’t thinking about investing the saved up money instead of just letting the money sit and gather 0.2% interest from the bank.

Assuming a modest deposit of $500 a month with initial money of $1,000, easily doable on a middle class income, and assuming a modest investment return of 6% a year, in 5 years, our saving would have gone from $1,000 to around $37,000 dollars. A sizable amount but we can do better. Instead of saving $500 per month let’s do $250 bi-weekly, all of the sudden, everything being the same you’d end up with around $40,000 by the end of the same 5 years. Decent change for almost no perceivable difference to us. We can do even better, increase $250 bi-weekly to $500 would result in almost $80,000 dollars, now we are talking. This a very very simplistic representation to investing savings, a increase of 4% on the return would net you another $10,000 dollars. All of these things add up.

I started saving up soon as I started making money, thanks to my upbringing and a constant nagging from my parents “don’t spend everything you got!”. After building up a decent emergency fund (around $5,000) I give the rest of my money to my parents to help them pay down their mortgage and in turn they would give me the interest they would have paid to the bank ( about 2.25%, much better than savings accounts). I would also buy RRSP to reduce my income and get some money back from the government. After working away from home for two years,I moved back home, paying $600 a month in rent and very little other than that since I ate at home and took the bus to work. 3 years of doing that I saved up around $70,000 to $80,000 dollars (if I had invested my savings according to the above paragraph i’d end up something close to $136,000(10%) or $120,000(6%)), with that and some help from my parents I purchased my first home. After living in the home for about a year and half I got married and purchased another home with my wife, renting out my old home.

This brings me to where i am currently, with almost all the big expenses behind me i have decided to get serious about investing and enriching my future. I think i did well financially with my life, not the best i could have done but i’m happy with what i was able to achieve, now that i’ve gotten more serious about what i want and learning much about investing i hope to snowball what i have.

A few things helpful to me in saving is ALWAYS pay your credit or any debt that is not a house as soon as possible. Credit card debts will bankrupt you, 20% a year is not something you want to ignore, if our investment grew at that rate, $500 bi-weekly would become $125,000 in 5 years. Your interest could easily have gone that high as well.

Assume what you make is the money left over after you saved, don’t even think about spending the part designated for saving. Say $1,000 per month is what you want to save, and you make $3,500 a month, then $2,500 is what you have to budget everything for. It’s not an option or “if I go over I still have some”, don’t even think about it. Make a habit out of it. First thing you do when you get paid is put the money in a saving account or investment account, do not touch it. It’s a very addictive thing once you start seeing the number grow.

Another thing is simply for every dollar spent, save a dollar. You want that nice camera? Sure, you can buy it, as long as same amount go to saving/investing. All of a sudden a lot more thought is required to buy something, that $1,500 camera just became a $3,000 one.

I base my grocery shopping on what is on sale. From what I gather it would be at least $150 to $250 reduction on your grocery bill. Not only do you save money from this, it’s a great habit building exercise, it gets you in the mindset of thinking how you can optimize your money, it could take some work in the beginning but it’s hugely beneficial to build a more financially responsible thinking. I am however in the process of trying to buy less but “better” hoping to reduce the amount of food I eat but keep cost the same.

I hope to also use this blog to document my journey and collect my thoughts, ideas and knowledge about achieving financial snowball.

Cheap Thrill

“Cheap thrill” is such a bad name for something so sinister, maybe it should really be called something-that-won’t-last-so-i-can-keep-buying-and-feel-happy-for-a-fleeting-moment.

I’m not saying you shouldn’t buy things, but consider instead of constantly buying cheap things you may only use once or twice then be discarded or stashed away never to see the light of day again, take a serious look at your needs and buy something that fits your need and will be as useful to you in 15 years as it would today.

To me, cheap thrill is a terrible slop to slide on, it’s not just about buying things you don’t actually need, it’s about buying things you don’t need and won’t last and probably won’t have much of a purpose beyond a few minutes of “well that’s interesting”, and making a habit out of it.

“Is it such a bad thing? I mean it is only 20 dollars!”

Perhaps if you got more money than you know what to do with. That’s not the case for most of us regular folks who work for a living. Have you ever wonder after checking out at costco what could possibly have costed you 200 dollars? All you got some some chocolate bars, a roast chicken and some frozen food. Upon closer inspection of the receipt you have came to realized all it took was a few double digit items and probably nothing too far north of 25 dollars for a single item.

How quickly it adds up! Imagine each one of those is one of the “cheap thrills”. 20 dollars here, 50 dollars there, by the end of the month it could be 300 or more dollars. The money also isn’t the worst problem here, it’s reinforcing a habit. You’ve already spent 50 bucks on some stuff, might as well throw in a few more things. Few days later, thinking another 20 or 30 dollars wouldn’t hurt much because you’ve already went over the budget for this week/month anyway.

If it’s so bad what could be done about it? I can’t tell you what you should do but here are a few things I did to help me.

Let the idea of purchase sit for a while, at least a couple of hours, leave your computer or store, go for a walk or eat something. It gives you time to reflect and think, usually I end up realizing I have no use for it, and the dire need to buy subsides. Personally I do this all the time with watches, I enjoy looking at the watches around 100 to 250 dollar range (cheap enough to make my brain go “let’s buy it now!”), but I have virtually no use for any of them other than when I attend weddings or something fancy, but those occasions doesn’t happen often enough to justify the purchase of such items.

I also try to research similar items that are much more expensive (not overly so, but just something you’d expect from a higher quality product, watches I tend to go around one to three thousand dollar range) than the cheap thrill but would be of much higher quality and would last me forever, or at least many years to come. Usually so doing would result in a huge decline in willingness to purchase the cheap thrill, either realizing perhaps it’s not what I wanted or now I want to buy the more expensive thing, not the ideal outcome, but usually the price is enough to stop me.

Another thing is I would send the cheap thrill to a friend who is knowledgeable, if I lack a friend with the required expertise I would run it by my wife or any friend. The maven friend would usually recommend something else and overload you with information, at which point it becomes too much trouble so the purchase is off. The normal friends and my wife would usually say “sure, but do you really need it?” most of the time if I answered yes I’d be lying, that would normally stop me.

After a while of doing this it has become easier and easier not to buy something, it literally requires less things to be done, and less things to do in life makes for a better life. Next time the credit card bill comes you’d be delighted at how small the number is.