I bring this up from time to time — I feel that as a responsible adult, I should manage my finances in a responsible way. However, there are so many choices, some of them quite sneaky…or enticing… however you want to classify it that it can be way too easy to spend money and get into debt.
I have had to learn financial discipline. That is, I stop and think before I spend money. My spouse is the same way. Here are some of our personal financial discipline principals:
1. We still operate mostly on a cash basis. Sure, we each have credit cards and use them when making big purchases. But we pay cash for groceries, gasoline, and all other small purchases like at the drug store. It is a psychological thing: when you have to open your wallet and fork over green stuff, it makes you think, “do I really need that?” Swiping a debit card makes it far easier to spend on things you don’t really need as you don’t see the money actually leaving your wallet.
2. Think “spend” not “buy.” That is, spending means money leaving your assets. Buying means acquiring something new. Everyone wants new stuff. Few want to deplete assets. This is another rather major psychological shift in thinking that ultimately reduces the outflow.
3. Be frugal, but not cheap. For example, we clip coupons for items that we regularly buy. We spend time looking at the ads for stores, and match the coupons with items on sale. Doing this religiously, just this year, I estimate that we saved more than US$2,000. And this is on stuff we ordinarily buy! Toothpaste, shaving cream, grocery items, etc. But we buy certain brands that we like and are of good quality. For example, Colgate toothpaste instead of the store brand which we tried and don’t like. Some generic brands are fine; some are not. This is what I mean by “being cheap”. I have a friend who only buys store brands and then complains about the lack of quality of some of the products.
4. Each of us is our number one creditor. That is, we “pay ourselves” before paying others. Each paycheck, royalty check, rent check (actually, all direct deposits)… we take anywhere from 10% to 25% of the amount we received and put it into savings toward retirement and our emergency fund. Yep, we have an account where we keep the amount of money we estimate that our expenses will be for one whole year. If anything happens — loss of a job, disabling injury, or other disaster — we have funds to tap into to carry us comfortably. Most financial consultants recommend having at least three months of expenses saved in an emergency fund.
5. We pay our debts when due. We never carry balances on credit cards. The only long-term debt either of us have ever had is our mortgage, and that will be paid off soon. You may have noticed — no car or motorcycle debt. We have saved toward these big purchases and paid cash when it came time to buy a vehicle. Now THAT takes some serious discipline!
6. If after all savings and debts are settled we have money left over, then we may choose to spend it on fun stuff. Okay, for me — boots. For my spouse — books, on-line for-credit college courses, and gardening stuff. We both feel that we can treat ourselves from time to time on things we want. We are just careful not to go overboard and spend money on things that we can pay for and not carry forward on credit at expensive interest rates.
7. We also have deliberately made choices that we know are quite different from most others. We do not eat at restaurants but maybe once or twice a year; instead, I cook meals at home. We do not have smartphones and do not pay for data plans (including texting). We do not subscribe to pay cable channels. These choices alone save both of us over $10,000 per year or more. Those savings are significant!
Final but most important financial discipline rule of all:
We do not spend more than we have — aka “no credit.” Funny, living by that rule has gotten our FICO scores (credit worthiness) close to a perfect 850.
Life is short: be financially disciplined.