Being frugal is back in style
“You’re so cheap” my son would complain to me. This scenario happened every time I refused to buy him movie theater popcorn when he was a young child.
I would explain the enormous mark up in price of the popcorn, “It’s in the 600 percent range”, I would explain.
This did not deter him from pleading for the overpriced treat. The delicious aroma of melting butter permeating the air didn’t help my case. As a single mother and on a tight budget, candy and popcorn were not necessities. Heck, just going to the more affordable matinee performance was a stretch for me. Eventually he’d forget his desperate desire for the popcorn and focus on the movie saving me a small fortune.
My son recently graduated from college and started his first full time job. He actually asked his “cheap” mother for tips on how to save money. With his daunting student loans along with the desire to move to an apartment and buy a new car, he realizes his after tax salary is spread rather thin. He just received his first paycheck and was shocked by how much of his pay went towards taxes. He’ll have another shock in three months when his paycheck is reduced even further once he starts contributing to his 401k (although the 401k contribution will be to his benefit). To save money, he decided to pass on the company’s health insurance and stay on my policy.
To avoid making costly financial mistakes, here are some helpful suggestions:
- (1) Pay down student loan debt ASAP
Your student loan debt was actually good debt because it was used for educational purposes to help your career and future. Whatever you do, make sure you do not defer or put your student loan into forbearance. Most importantly, do not ever default on your loan. Student loans, in most cases, are not dischargeable in bankruptcy. Pay the loan on time each month and if possible, put extra money towards the principal. Call the loan holder and ask what day of the month will be most effective to make the extra payments so it is put towards the principal, not the interest.
Although it may be depressing, paste a note with the total loan balance to your bathroom mirror, fridge, or computer as a constant reminder. Instead of being tempted to splurge on something frivolous, the balance may encourage you to pay it down as fast as possible. As the dollar amount decreases each month, you may be motivated to keep putting extra money towards the principal until it is completely paid off.
When you make the last loan payment, plan a celebration. What a relief!
- (2) Don’t get caught up in the Credit Card trap
One of the worst possible financial mistakes you can make is having credit card debt. Do not, I repeat, do not ever keep a balance on a credit card. The interest rates on certain credit cards are insane with department store credit cards in the high 20 percent range. Paying interest on credit cards is one sure way to see your money vanish and you will end up paying more for any items you purchase.
January 27, 2013 merchants are now permitted to charge YOU up to a 4 percent surcharge fee for using a credit card. Before you commit to the purchase, find out if the store charges this fee. With so much competition, merchants should reward us for purchasing items in their store, not add additional charges to our purchase.
Another important point to note with credit cards is the fact that anytime you are late or fail to pay, these missteps are reported to the three credit bureau agencies.
Today, many employers use credit reports to check on the reliability of a potential new employee. When looking for a job, you cannot jeopardize having any negative marks on your credit report. Late payments can lower your credit score. Other companies also look at your credit report, such as car and home insurance companies, especially mortgage companies. The better the credit score, the better the rate you should receive. If you plan to rent an apartment, the landlord may also ask for your credit score. If it’s low, you’ll probably be rejected.
- (3) Expect the unexpected
One thing is certain, unexpected problems will happen so you might as well be financially prepared for them. Build up a 6 to 8 month emergency fund and never touch the money unless you have an actual emergency. The amount of money you save should be based on your monthly living expenses. If you spend $2,500 a month on your rent, car loan, student loan, food, gas, utilities, etc. then you should have at least $15,000 up to $20,000 in a fund that is readily available to you.
One of the major reasons to have an emergency fund is in case you abruptly lose your job. In general, it may take at least 6 to 8 months to find another job. You won’t be desperate during your job search if you have an emergency fund to hold you over.
A few years ago, on the coldest day of the year during a snow storm, our furnace imploded. When we bought the house, we knew the furnace was nearing the end of its life, but we gambled hoping it would last one winter. We lost the bet. Since it was cold in the house and we were afraid our pipes would freeze, we had to come up with $6,000 immediately to have the new furnace installed. We learned several lessons that day (1) fix problems before than turn into bigger problems, (2) don’t bet that an old appliance is going to last longer than it should and (3) have an emergency fund.
Plus, won’t it help you sleep better at night knowing you have an emergency fund?
- (4) You come first
Before you spend money in bars, over priced restaurants and unnecessary items, make sure you are fully funded up to the company match in your 401k.
You may have to wait until your student loan is paid off in full, but if possible open an IRA or ROTH IRA and contribute the maximum amount each year. The earlier you start funding these accounts, the wealthier you will be when it’s time to retire.
- (5) We want, want, want
We are constantly bombarded by advertisers wanting us to purchase the latest and greatest items. Let’s admit it, it feels good to have new things. But what happens the day after you purchase something? It’s not new anymore. If you have student loan debt and/or any kind of debt, before you purchase an item ask yourself “is this a need or a want”? If it’s a want, then pass on the item. If you have a tough time walking away from the item then give yourself one day to think about it. Usually by the next day, you’ll be glad you passed on the item and saved the money. Don’t be impulsive because that’s when financial mistakes happen.
- (6) Living by a budget will keep you honest
While in school, you were disciplined. You were able to hand in papers on time and studied for exams. Now that you have graduated, creating and living by a monthly budget should be easy. It’s certainly not rocket science. To create a budget, you simply write down how much is coming in each month from your paycheck and then how much is going out each month, make sure you included your emergency fund and savings accounts. After doing this and you have excess money, than you are in good shape. Put the excess to pay down debt. If you have a negative number, then you will need to cut back in some areas, perhaps such as cable or going out to dinner. If you’ve cut back every way possible but are still in the red, then you may want to decide to do one of the following: (1) look for a better paying job, (2) ask for a raise, (3) take on a part time job or (4) sell items you don’t need. Refer to the budget often and adjust it as needed.
- (7) Be true to yourself and your future
Don’t worry or be concerned about what people may think about your frugal ways. Just think how much sooner you paid off your student loan and how much more money is in your retirement fund. Your first priority is to yourself and your future.
Starting out with good financial habits, in your younger years, will help you live a stress free and comfortable life all the way into your retirement. Here are additional tips:
- · To avoid temptation, set up automatic payments to go directly into your emergency fund and savings accounts.
- · Any bills that you pay on a monthly basis, like a car loan, always pay one month ahead so you will never be late.
- · Think of your FICO score like it’s your GPA, you want it to be as high as possible.
- · Always pay your credit card bills at least 15 days early.
- · If were late paying a bill, call the company to explain what happened and kindly request that they waive the late fee. Be honest about what happened. Do it right away so the late charge isn’t reported to the credit agencies.
- · If you are paying cash for a large item, ask if you can get a discount.
- · Don’t cheap out on your car, make sure it is regularly maintained.
- · Remind yourself that many people are asset rich, cash poor. They may look wealthy but in reality it’s only an illusion.
- · Brown bag your lunch every day, you’ll save a fortune.
- · Always live below your means.
- · Find joy in saving your money.