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This educational resource, pertaining to trading and investing, is a continual work in progress and intended for users who are interested in self-educating themselves, there are no fees or classes. For those interested in learning more about the website’s tools, the wiki will be more insightful. As a disclaimer, nothing here is financial advice, and the examples provided are incidental.
Table of Contents:
Primer on Peronal Finance
There’s a popular statistic going around that claims that nearly half of Americans don’t have $500 in savings. It’s based on a small sample size and is counting money in an actual savings account (not investments or anything else) but it does strike an important point; many Americans are really bad at handling money. This is by design, of course, as our capitalist system functions better when its consumers spend haphazardly or go into debt to maintain their poor financial lifestyles. The importance of savings when it comes to investing is crucial; you won’t be able to build an account over the years if you’re never contributing to it or constantly withdrawing from it on unessential expenses. The more you save, the more you can choose to contribute and, realistically speaking, the sooner you are able to reach your financial goals.
The most basic essence of savings is making sure you spend less than you earn. The difference between spending and earning is all you have to work with. The necessity of saving is more pronounced in those who are younger (better to start early) and those less well off (no other safety nets besides your own). This isn’t to say that high earners should ignore this article, in fact I would argue that they, especially, should pay attention. Higher earners often times fail to save more, despite being able to. They strap themselves down with more debt and an expensive life style, which could end disastrously if a change in employment occurs. Just because you can afford a monthly payment on a new BMW, doesn’t mean you should. Don’t forget about higher insurance premiums, maintenance on luxury, fuel costs, depreciation, and money wasted on interest.
Where do you start with trying to save? Some people like to budget and track where everything goes, others are fine with having a good idea of what they’re spending on. If, at the end of every month, you see almost nothing left in between paychecks, you have an issue. It may seem like a small one, but your savings will be what helps you buy a home, plan a wedding, provide for children, travel, engage in hobbies, plan for emergencies (medical, financial, natural) and/or retire comfortably. Neglecting that now may be more comfortable, but a day may come where you regret it. If you’re one of those people who want for little beyond the bare necessities, congratulations, all you need to do is save up enough to live off a fixed income and pay off some property to live in.
Maintaining your life in the modern world isn’t cheap, but understand two obvious, critical distinctions: essential and non-essential spending. Essential expenses are typically housing, food, certain bills, and often transportation. Non-essential expenses are everything else, luxuries, conveniences, etc. Attention will be given to both points, but as a rule of thumb, try and prioritize effective spending in essential spending, as those are usually largest, and minimize non-essential ones. This isn’t about being cheap, its about making sure your money goes where you want it to.
Essential Spending
Housing
Housing is likely the single biggest expense people have, be it in the form of rent or mortgages. Everyone has different needs when it comes to housing, but simpler is generally better. It’s nice to have a house or apartment in a great neighborhood, with all the bells and whistles, just remember that you have to pay for all of it. A couple hundred dollars extra a month may seem like a small price to pay for your desires, but it adds up quick, especially over the course of years. Owning a house as opposed to renting one is deceptively expensive, as insurance, property taxes, and maintenance (which can cost tens of thousands in some cases) all fall on your shoulders. The perk of owning is having your money go towards your own mortgage instead of a stranger’s. There are different schools of thought on paying off mortgages, some suggest minimums and investing, while others suggest paying off mortgage debt as soon as possible to avoid interest. Both have their merits and its up to the individual. Homeowners have a lot of responsibility and its beyond the scope of this article to cover them, but make sure to read up on expectations. There are plenty of horror stories about naive homeowners running into huge, unexpected repair bills, losing jobs after buying a big house, or just generally being unprepared with home maintenance on their own. Always remember that while you have a mortgage, the bank owns the house, your residence there is dependent on your ability to pay the mortgage. Keeping your mortgage bill small gives you more flexibility. If your head is just barely over water thanks to it, you have an extremely expensive liability.
For those able to live with their parents for some time; do it. It’s often annoying and comes with other drawbacks, but there isn’t a single easier way to make thousands of dollars a year than not having to spend it.
Food
You need it. Expenses on food are varied and it depends on your lifestyle. Many Americans and increasingly larger parts of the world consume plenty of fast and processed foods. There isn’t really much you can do to avoid food costs and food has gotten considerably more expensive in recent years. That said, the most simple cost saving measure you can take is learning how to cook, avoiding take out, food delivery services, and cutting out snack foods. Cooking is time consuming, but there are hundreds of videos on youtube on it, and for those particularly stretched on time, look into meal prepping. Some people mistakenly believe that fast food is cheaper than cooking, maybe at one point, but rice, chicken, pork, and most vegetables are still cheap. Also consider the long term damage to your health by constantly consuming many of these processed food products. If the medical implications don’t scare you, the costs associated with the treatment of something avoidable should.
Transportation
In many cases, the largest expense outside of rent is car payments and insurance. There are some cases where having a car isn’t strictly necessary; in cities with robust public transporation, those with remote jobs, or a location where a bike suffices. If you can live without a car, you can save a boat load of money by abstaining. For most people, this isn’t an option and cars are inevitable. The only comments to be made here are similar to what was made above, avoid frivolous spending on cars, they are tools not investments. A BMW or Porsche might impress people and feel nicer to drive, but they come with huge repair bills. There’s a reason you can find these cars used, for cheap. Luxury cars also cost significantly more to insure, require higher grade fuel, and tend to be more problem prone. Unless you’re seriously rolling in cash, spending a huge portion of your income on a depreciating asset is not advised. The simplest ways to minimize expenses with cars is to buy notoriously reliable cars with cash, avoiding interest charges on auto loans. If you don’t have a mechanic friend, find a reliable one and pay them for a pre-inspection. Honda and Toyotas are known to be bulletproof cars, but there are other ones out there too. They are boring compared to a performance car, but again, its a tool. Living beyond your means with a car you can barely afford is questionable. Even if you must have a new one, get a reliable one first and foremost.
Non-essential Spending
It’s hard to categorize each possible expense in this category as there are millions of things you can spend your money on. Instead, the most common money pits will be addressed.
Luxury Goods
This is a really common pitfall for lower and middle class people alike. The main issue with them is that they are typically cheaply produced abroad and extremely marked up based on brand recognition. This is really their only value, status recognition. You don’t need it, buy it second hand or knock offs if you must. Remember one thing, billionaires rarely wear flashy logos, opting for low-key and high quality brands. Wearing Supreme or flexing Yves Saint Laurent only shows you have enough money to get ripped off, and not enough money or sense for something better made. Jewelry at least has some intrinsic value thanks to precious metal content, but they aren’t investments and most luxury goods should be avoided. The moment you buy luxuries and leave the store, they lose a significant portion of their value because they are no longer new.
Clothing
There’s a good amount of overlap between this category and the above one; the same rules apply. Cheap, poor quality goods are imported and significantly marked up for consumers. You need clothes and they’re definitely a necessity, but you don’t need to overspend on them. Thrift and resale stores have recently seen a huge boom and you can find plenty of fashionable clothes there. Go to Goodwill in a wealthy neighborhood, people donate barely used clothes all the time. If you can’t stomach buying used clothes, there are plenty of stores that resell new overstock items from different brands. It is obviously OK to spend more on new clothes, especially if you know it's from a brand that will last.
Other Items
There are too many other items to cover adequately that people regularly overspend on, the above are just some of the biggest. Go to local garage sales, estate sales, check out Facebook Marketplace or other online resellers. There are plenty of things you need to buy new, but not everything NEEDs to be. It’s worth mentioning that subscriptions are a great item to check you aren’t spending more than you need on.
There are plenty of people who go to absolutely unnecessary lengths to save every dollar and there is definitely a point of diminishing returns. Get control of the big ones and address the smaller ones if you choose to. If you need more ideas, r/Frugal has nearly 7 million members and bookmarks for multiple other subreddits.
https://www.reddit.com/r/Frugal/
Debt and Vices
Debt
Debt is almost unavoidable in today’s world and some would argue it is good, if only to build your credit score so you can take on more debt, cheaper, down the line. It is unlikely that any person will save enough money to buy a house in cash, so mortgages are unavoidable. In comparison, car payments are much easier to avoid, but if you are in a situation where you need one, putting down as much as you can saves you money in the long term. For those living in the U.S., student loans are also difficult to avoid for many, with the only advice being to choose the most cost effective schools rather than the nice sounding but expensive ones.
The above forms of debt are often necessary, however, not all debt is created equal. Credit debt is one of the single largest forms of debt across the entire nation and it would be safe to guess that a very substantial portion of CC debt was spent on things you either did not need or could have waited for. Credit Card APRs are usually in the 20-30% range. Meaning that if you miss a payment, you are charged up to a third on top of whatever you bought! Reckless credit card spending has caused many bankruptcies and is a sure way to dig an extremely deep hole for yourself. If you’re diligent about making monthly payments and are using a card to generate points and build credit, that’s fine. If you have a habit of missing them, just don’t bother. Credit card expenses are more likely to be on things you don’t need, which makes the pain of paying them off that much more unpleasant. For similar reasons, things like personal loans are also not advised. Some people may think that denying themselves “fun” now may ruin their quality of life, but this isn’t true. If you knew how much thought, effort, and money exists behind advertising these lifestyles to you, you wouldn’t think this way.
Avoid debt if possible. There is “good” debt if you want good credit, but the rest of it will drag you down and keep you from focusing on things that you truly need.
Vices
An often under appreciated handicap to people’s ability to save are vices. Liquor, nicotine, drugs of all sorts, sex-related vice, and other niche addictions often have a way of undermining you. For “under control” vices, a set amount of money is always prepared for them, and should your habits run away from you, you can see them affecting more than just your ability to save. This is not to morally pontificate, most people have vices, at least be aware of them. Many have been ruined by allowing them to take over their lives. There’s a reason why vices are one of the oldest and most consistently profitable industries on earth!
Final Comments
Hopefully this article has served as a first step in a better understanding of personal finances, or at least where to look when money keeps getting away from you. By no means is this article suggesting you become a cheap bastard, rather, reflect on your true wants and needs before spending your hard earned money. You may discover that some of what you thought were needs, were just wants or really wants. All of this is in service of setting aside money for something or some experience actually useful to you. No, buying a daily latte is not why you can’t afford a house, but that money could be spent better elsewhere. The core idea of investing is building it up and letting it grow, every dollar spent on that end is worthwhile. A lot of pointless spending comes from not being able to control your impulses, if practicing self-discipline is what it takes to become better at handling money, then give it a try.
A dollar saved is a dollar earned