5 Habits That Help Me Save Without Trying

After I started reading personal finance blogs, I started wondering why I never embarked on a rampant spending spree. Lots of people seem to have a story that goes something like this:

I bought wholeheartedly into the “yuppie” lifestyle … we had a gorgeous dining table, but it was stacked full of credit card bills.

– Trent Hamm, The Simple Dollar

I’m not picking on Trent — he’s a fantastic personal finance writer, and I hope he knows I respect him. But I can’t relate to his experience.

I thought about Trent’s “gorgeous dining table” last night as I ate dinner on a table that cost $12.99 from Ikea’s discount section. My pots and pans are a hand-me-down from a friend on active duty in the Army. My couch was a freebie from a neighbor who moved away.

Hmm. My home screams “college student,” but I graduated 7 years ago. And I share the space with my boyfriend, who finished his engineering degree 10 years ago. We could easily afford “nicer” stuff. Why don’t we buy it?

As I mulled over this question, I realized I’ve cultivated a few habits that — as an unintended side effect — prevent me from developing those “wants” that lead to lifestyle inflation.

Habit #1: I Don’t Own a Television

I know, it’s cliche to be one of those anti-TV hipsters, so let me clarify: I love television. I love The Simpsons, The Colbert Report, and yes — I love The Hills, that show about beautiful rich girls living lavishly in Los Angeles.

But too much TV can lead you to compare your lives with the people on-screen. Why don’t I wear designer clothes like Carrie Bradshaw or live in a mansion in Bel-Air?

Our minds tend to see fictional TV characters as role models. These characters don’t need to be “wealthy” to create unrealistic expectations. Look at the cast on Friends, who were far from rich. Their apartment was designed to feel cozy and normal, complete with cooky neighbors and the occasional leak.

Yet no one could afford such a spacious apartment in lower Manhattan on a waitresses’ tips or a sous chef’s wages. Manhattanites, am I wrong?

My avoidance of the screen extends to movies as well. Watch too many flicks featuring a Range Rover driving suburban family with granite countertops, and you’ll start thinking this is “normal.” This is part of being an “adult.”

By the way, I’m not going to harp about advertising or reality television. Those two genres get picked on enough, so I’ll avoid repeating the chorus.

Habit #2: I Take Pride in My Home

From the way I described my apartment, you might imagine it’s a slummy little dump filled with empty beer cans and stale bread.

Not so. (At least, not usually). I take pride in the home, but I don’t equate “pride” with “expensive stuff.” I sweep the floors. I scrub the counters. I painted the walls sunshine yellow. I grow tomatoes and basil on the balcony and, weather permitting, I open the windows to let in fresh air. I even splurged on a $40 painting I bought on a trip to South America that looks gorgeous against our sunny yellow walls.

Despite having a small apartment with no guest room, friends are always dropping by. In part this is because I’m in a great location, but in part it’s because the apartment exudes an upbeat, welcoming vibe. The collection of free furniture dotting the space adds to its eclectic, fun feel.

Habit #3: I Take Pride in My Appearance

The same goes for my looks: I buy clothes that look good, not clothes that are on sale. But here’s a secret: you don’t need many clothes, especially if you love the ones you have.

Last week I wore the same dress to dinner with the same friend on Thursday night and Saturday night. Hey, if it looks good, why not wear it again? My dinner companion didn’t even notice.

But don’t take my word for it — Stella Brennan, a then-31-year-old sales representative from Wisconsin, decided to wear just six articles of clothing continuously for a month. No one noticed — not even her husband.

Her conclusion — “I don’t need all of these clothes” — merited its own article in the New York Times.

Habit #4: I Surround Myself With Frugal Friends

Don’t misinterpret that — I don’t pick my friends based on their spending habits. But I seem to attract people into my life who don’t spend lavishly. Some friends are trying to climb out of debt. Some are graduate students. Some work just enough to “cash up” for their next overseas adventure. Some are single moms. Some are struggling artists, some work in the nonprofit sector and some had a baby immediately after grad school.

The common trait? None of them throw around a lot of disposable cash. Sure, we all go out to dinner together on the weekends — but not one of my friends drives a fancy car.

It’s natural to want to keep up with the Joneses. Instead of fighting human nature, why not make sure the Joneses are frugal, too?

Habit #5: I Have Big Dreams

It’s easy to spend money when you’re bored. Money can endlessly entertain you: shopping, fancy restaurants, buying and installing a Playstation — there’s no limit to ways you can spend money to fill your spare time.

But I have big dreams — or rather, big goals — and I fill my time by pursuing them. These goals have changed over the years: lose 15 pounds, write a fiction novel, learn Italian. The common thread is that all these goals are extremely time-consuming and none of them cost much money.

Let’s say I spend $200 on software that helps me learn Italian, and I use that software 10 hours per week for 8 months. The amount of money I’ve invested compared to the amount of time I’ve used it is a far better value than if I spent money on short-term entertainment to fill my boredom.

The same goes for losing 15 pounds. Let’s say I join a gym for $35 a month. I go there 3 times a week for 1.5 hours at a time. This means I’m at the gym for 18 to 24 hours per month for a value of $35. This is a tiny time-to-money exchange compared to how much I’d spend to entertain myself by going out for drinks for just one night.

More importantly, when I’m not at the gym or writing a novel, I’m thinking about my goals. My focus is on things I want to achieve — not things I want to buy.

I could sit around all day writing about time-to-money exchanges, but here’s the real reason that most goals (other than a desire to climb Mt. Everest) can help you save money: your energy gets directed towards that goal, not towards entertaining yourself through spending and consumption.

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Elmo Says: Save!

Sesame Street has always taught important lessons: how to read, how to count, and how to get along with others.

I quit watching Sesame Street in the 80’s, but apparently the show keeps adding more to the mix.

Led by lovable muppet Elmo, Sesame Street’s lessons have been keeping up with the times. They’ve added segments in which Elmo checks his email, Elmo discusses the importance of regular exercise, and now the latest: Elmo learns to budget.

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With a lesson in budgeting from bestselling author Beth Kobliner, Elmo learns to divide his coins between three jars: one for spending, one for saving and one for sharing.

Elmo is inspired to learn financial management after his own hard-knock lesson: he receives $1 and contemplates buying either flowers or ice cream, but ultimately decides he wants to spend it on the biggest, shiniest new toy, “Stupendous Ball!”

“It makes music, but that’s not all …
There are lights on Stupendous Ball!

When Elmo falls in love with Stupendous Ball, the retailer compliments Elmo’s discerning taste:

“Well, I can see you’re a fellow who knows a quality bouncing object.”

Elmo basks in her compliment and bursts into a duet about the caliber of the Street’s hottest new toy:

Stupendous means ‘great,’ and I will announce –
Stupendous Ball has some great bounce! …
It’s really great! It is tremendous!
Admit it — this ball’s stupendous!

But when Elmo tries to ring up his purchase, the seller informs him that it costs a whopping $5! Elmo doesn’t need to count on his furry fingers to realize that five is more than one. (Anyway, muppets only have four fingers.)

For $1, all Elmo can afford is Stinky Ball. (Fortunately, Sesame Street doesn’t issue lines of credit.)

Distraught that he can’t afford Stupendous Ball, Elmo gets a job. (That’s right … our favorite furry creature is entering the work-spend-work-spend cycle.)

After repairing an ice-cream maker, Elmo earns another dollar, bringing his net worth to $2.

This launches a week of Elmo hustling for cash — he folds laundry, he collects recyclable bottles. Each new dollar he earns, he saves in a jar.

“On Wednesday Elmo wanted to buy
Ice cream that he craved,
But Elmo didn’t spend it all,
No, that day, Elmo saved!”

His work pays off — Elmo earns $5, enough to buy the Stupendous Ball. But just as he’s about to make the purchase, he encounters a distraught Cookie Monster. If muppets could cry, Cookie Monster would be bawling.

Cookie Monster explains:

Me on way to bakery to buy cookie, and me had dollar to pay for it. But me got so hungry on way that me ate the dollar! And now me have no money for (sniffle, sob) — COOKIE!!!!!”

So … Cookie Monster is financially irresponsible, eating his money rather than saving for what he truly wants. If I were in Elmo’s furry little shoes, I would have taught Cookie Monster lessons on how to save, rather than rewarding his irresponsibility with a handout.

But such lessons are perhaps too complex for Sesame Street’s target audience. Elmo, in a grand gesture of generosity, gives Cookie Monster a dollar — relinquishing his long-held dream of buying Stupendous Ball.

Though this generosity, Elmo learns to downsize.

Elmo downgrades his desires, settling for Fantastic Ball (which only costs $4, instead of $5), and finding contentment in an adequate toy. It’s not the shiniest and biggest bouncy ball on the market — but it’ll do for now.

You can view the segment in Sesame Street’s For Me, For You, For Later workshop on saving, spending and sharing.

Photo courtesy Play With Me Elmo

The Shocking Reason Why My $10 Bottle of Wine is Better Than Your $100 Bottle

Welcome to AffordAnything’s Money Myth-Busting Series, where I poke holes in social assumptions. Today’s topic: wine.

Ever heard someone say, “I got this $100 bottle of wine” — implying, “I got the good stuff”?

I’m going to debunk that myth today.

One of my favorite wine regions is Tasmania, an Australian island originally colonized by the British in the 1850’s as a place to house convicts. (The jails in London were packed.)

But for most of my life, I had never heard of Tasmanian wine; after all, France, Italy, and California get all the glory. Once I started paying attention to wine regions, I noticed specific places that receive tons of wine press (no pun intended) like Malbec, Argentina and Marlborough, New Zealand. But Tasmania?

Why hadn’t I heard of it? Well, Tasmania is a bit of an “emerging” wine region within Australia — it hasn’t yet sealed its reputation on the international stage.

That’s why its wines are damn cheap.

You see, I’ve done a fair bit of – uh – “studying” on this topic. And you know what I discovered?

(Shhh. Here’s a secret.)

There’s actually very little correlation between quality and price.

Market Dominance Matters

Wine, like any other product, relies on its brand name and recognition. If you’ve got a well-established large vineyard that’s been producing decent wine for generations, you can slam a nice markup on your brand. If your vineyard is big enough to have an advertising budget, you price that overhead into the retail cost of your bottles — and add a markup, as well.

A few Tasmanian vineyards are well-known within Australia, and they charge a nice premium. Their wine is legitimately delicious, but the customers certainly pay for it.

If, however, you’re a mom-and-pop operation or a start-up vineyard, you’ll have trouble getting liquor store owners to return your cold calls. It doesn’t matter that your Riesling tastes like the nectar of the gods. You might produce the finest wine on earth, but you’ve got no marketing budget, no brand recognition, and no buyers network. You’ll practically be giving your bottles away.

It’s Not Just Wine …

This is true for all types of alcohol, not just wine. In TIME’s It’s Your Money blog, Brad Tuttle quoted a Reuters blog that noticed the same thing about vodka: while Grey Goose has glossy ads and brand recognition, there’s a lesser-known Polish brand called Wodka, selling for only $10 a bottle, that has blown the critics away. That same Reuters piece also reported that a New York Times blind taste test found that people preferred Smirnoff (a discount brand) over the higher-priced Ketel One or Grey Goose.

Want to drink fine wines, craft beers, or smooth liquor without paying the high-roller prices? Skip the brands that have an advertising budget. Skip the brands on prominent display shelves. Try the tiny bottle collecting dust on a back shelf. Better yet, go online and order a start-up brand that can’t get stocked at a store.

Who knows how it will taste? It might be awful. Or it might be the best you’ve ever had.

One Type of Health Insurance to Avoid

Many people assume that if some health insurance is good, more health insurance is better. That’s not always true.

Sometimes, having a little LESS coverage is the smarter move.

Don't let sticker-shock fool you: high monthly premiums, over time, can be worse.

To understand why, keep in mind that the purpose of health insurance is to safeguard you against risk. The purpose is NOT to pay your medical bills, it’s to keep you out of bankruptcy.

Health insurance should be used ONLY as a safeguard against calamity. It should never be used as a way to cover reachable costs.

It’s Not “Health” Insurance, It’s Bankruptcy Protection

“Health” insurance is a misnomer. Don’t think of this as insurace that covers the cost of your healthcare — think of this as insurance that protects you from going bankrupt.

Example: Suzy thinks that health insurance should pay for all of her health-care bills. She’s 28 and in good health. She pays $350 per month for individual coverage, which allows her a $500 deductible and pays 100 percent of her health-care expenses after the deductible.

Total cost per year = $4,200 + $500 deductible = $4,700 per year out-of-pocket, every year.

John thinks that health insurance is protection from bankruptcy. He doesn’t expect it to cover the health-related bills he can afford out-of-pocket, like eyeglasses, an annual physical, prescription allergy medication, and a yearly dental exam. He’s also 28 and in good health, and he pays $105 per month for individual coverage, which allows him a $1,500 deductible and covers 80 percent of his health-care costs after the deductible until he reaches his out-of-pocket maximum of $5,000, at which point it covers 100 percent of costs.

John understands that this means that, in any given year, the most he’ll have to pay is $1,500 (the deductible) + $5,000 (the out-of-pocket maximum) + $1,260 (his premium). This means that if the worse-case scenario unfolds, he’ll have to cough up a maximum of $7,760. This is the worst-case scenario.

But most years, while he’s healthy, he pays only $1,260 (his premium) + $700 of his deductible, which he uses for an eye exam ($150), new eyeglasses ($100), allergy medication ($150), and miscellaneous other costs ($300). This means that most years, John pays $1,960.

Who Saves More?

Suzy pays $4,700 per year, while John pays $1,960 per year. Both are protected against the worst-case scenarios: if they break a bone, need emergency surgery, or get diagnosed with a disease, their expenses will be covered.

John knows he needs some padding in his bank account to cover any extra out-of-pocket expenses, so each month he stashes away the difference between Suzy’s monthly premium ($350) and his own monthly premium ($105). This means each month, he saves $245, which he can tap whenever the worst-case scenario unfolds.

John saves this $245 per month in an Health Savings Account, a tax-deferred account that is only available to people with high-deductible insurance plans like his. The $245 he saves each month is tax-free income, and as long as he spends it on medical expenses, he’ll never pay a penny in taxes on that money. Since he normally pays 28% in taxes, this means each month he gets $69 in “free money” (money he’d otherwise have to pay the tax man).

Suzy, meanwhile, is paying her after-tax money as a monthly premium.

Both John and Suzy Break Their Leg.

Two years into their health-care plans, both John and Suzy break their leg. Cost: $10,000. Suzy pays her normal yearly rate: $4,200 premium plus $500 deductible. She doesn’t see any difference in her bills; she paid the same amount last year, when she had no major medical expenses.

John is faced with a total bill of $3,200 for the broken leg. He has been saving $245 per month in a tax-free Health Savings Account for the last two years, so he has $5,880 in the bank. He uses the balance in his Health Savings Account to pay in full.

Add the $3,200 bill to his $1,260 normal premium, and he’s spent a total of $4,460 that year.

How Much Did They Each Pay?

Over the span of two years and one broken leg, Suzy paid a total of $8,400 while John paid $6,420.** Suzy paid after-tax money while John paid mostly tax-free money from his HSA.

In that same span of time, Suzy has $0 saved, while John has several thousand in the bank.

**(John’s payments = $1,960 from Year 1 and $4,460 from Year 2.)

What Should I Do?

Don’t assume – as most people do – that more is better. If you’re in good health, sometimes less health insurance is better, as long as you can pay for costs once they skyrocket.

Afford Anything’s Golden Rule of Buying Insurance is to never pay insurance for something you can cover out-of-pocket. It may stink to have to pay such a big bill out-of-pocket; there’s a large sticker-shock at receiving a $6,500 hospital bill, or shelling out $1,500 for an out-of-warranty refrigerator. But paying high premiums for high coverage does not make sense for most people. (Add up those premiums over 2-3 years, and you’ll get an even worse sticker shock.)

If you’re in poor health or elderly, and you’re likely to run up high medical bills every year, it might make sense to get the higher coverage. But if you’re healthy, then stick to the Insurance Golden Rule.

*****

Want to compare health insurance quotes? This website lets you compare policies with different premiums, deductibles and out-of-pocket maximums. Check it out and apply for the cheapest-and-best coverage you can afford!

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