The most simple-minded measure of your standard of living is how much money you spend: spending more equals living better. Reality is more complex. There are a lot of ways to live better without spending more.
I'm not just talking about the "touchy-feely" ways of being happier that come from strong connections with friends or relatives or having a spiritual aspect to your life, although that's also important. I'm talking about the sort of standard-of-living stuff that you usually have to pay cash for.
It sounds obvious, but it's not so easy in practice. It's hard enough just to grasp the difference between needs and wants. It's all the harder to grasp the difference between the things you truly want and the things that are just a passing fancy — especially in the face of advertising, the expectations of your family, the consumption practices of your neighbors, and all the other influences on the way you think about what you want.
Still, this is the core principle of of frugal living. The less you spend on stuff you don't want (or don't want as much), the more you have to spend on the stuff you really care about. Get this right and the other pieces fall into place pretty easily.
So, how do you get it right? Here's what I've been able to come up with:
Probably the key tool for doing this well is a budget. Always remember, a budget is not a constraint. Those constraints that seem like they come from the budget are actually from the real world. Your budget is a tool for maximizing your joy in the face of those constraints.
There is probably no more powerful tool for raising your standard of living than sharing. After all, if you can use something without having to buy your own, you get the benefits at zero cost.
People actually share all the time within the household — I knew very few kitchens where each person has their own pots and pans, let alone their own stove and refrigerator. In fact, a lot of people don't even think of it as "sharing" to have a common set of stuff in a household. Sharing between households, though, has become increasingly rare.
I talk about some of the reasons for that in a post called Why don't people share more. (That one picked up a bunch of good comments as well.) If that doesn't convince you to make sharing a fundamental tool for living large on a small budget, there are some less effective alternatives (that are still better than just buying everything yourself): Renting, substituting, and doing without.
Since sharing within households seems more normal, that's a place to start. And sharing stuff is only the beginning — it's also possible to share the work, both household work and work in the money economy. See my post: Strategies for households with more than one adult.
Too many people think of saving only in terms of a specific goal: Saving for a new car, saving for a new house, saving to send the kids to college, and (most especially) saving for retirement. The fact is, though, that just having some money — some capital — raises your standard of living.
Investments can earn a return — raising your income — but that's only part of the story:
Want more details? Here's some of what I've said about this before:
There are good reasons to borrow. But however good your reason, it still costs money.
If you've been borrowing, then living within your means will initially lead to a drop in your standard of living. But it's a drop that doesn't last. As long as you don't rack up debts now that you have to pay off later, your standard of living tends to rise automatically.
This is a fairly small item — the average household spends about 15% of its money on food. But the average household spends about 6% of its money on food away from home. If you spend more than that eating out (which half of you probably do), then just a little more home cooking can save you a lot of money. And even if you spend less than average on eating out, unless you're already a subsistence farmer you can almost certainly save money and eat better by cooking more.
Of course, someone in your household needs to be able to cook. Fortunately, it's pretty easy to teach yourself how to cook.
Once you're cooking (even a little), it's pretty straightforward to save money in the kitchen. There's lots of support for frugal, healthy eating, such as healthy recipes with cost data courtesy of the U.S. government.
Really, cooking your own food would be an increase in your standard of living even if it didn't save money, simply because stuff you make yourself can be better (i.e. more to your taste) than stuff that someone else cooks. The fact that it's cheaper is just a bonus. Plus, it's fun.
Finally, here's a bonus tip that doesn't quite match the headline, because it sometimes involves spending money, so I'm not counting it as one of the five.
There are lots of ways to spend money to save money. The most basic is simply to stock up on things when they're cheap. (This yields a return which can be huge in percentage terms and tax-free.) There's also just taking good care of your stuff.
More generally, though, there are lots of ways that small investments (of money, time, or both) can produce a permanent decline in your cost of living. There are obvious examples, like weatherstripping or insulating your house. Some, such as learning how to make or fix things yourself can be free (although sometimes you need to pay for classes or tools).
Non-financial investments — investments where either the investment itself or the return is in the form of something other than money — often yield a higher return than ordinary stocks or bonds.
I think this will turn out to be especially true of investments that either save or produce energy, because they're priced based on the current costs of energy, and I happen to think that energy is going to be more expensive in the future:
I think that #3, having some money in a savings account for emergencies, is the very important. If you can get the spending under control, then you're on your way to financial freedom. But, life always seems full of surprises when you least expect it. Having some money in savings can help reduce anxiety and the need to borrow, like you mentioned in #4.
thanks for the post-
Little House
I agree with Little House, you need to have an emergency savings account for when things like vehicles break down or for medical emergencies.
I really like the suggestions about sharing and cooking your own food. We were spending hundreds of dollars eating out every month, but since we started cooking at home more, we've really cut down on the amount of money spent on food.
Great tips! Thanks!
This is an excellent post - thought-provoking!
On the spending-to-save idea - my husband and I are thinking about this one a lot - we need a new boiler and the cost is very steep. We're looking into big-time insulation of our home. It will be costly, but then we'd be able to have a much smaller heating system which would cost a lot less to run. Energy conservation is certainly better for the environment too. And there are a lot of rebates and tax incentives available to do this kind of work (not yet familiar with the ramifications though).
Mary ... sizing for a smaller system through better efficiency is not only possible, but the sensible and frugal thing to do. Google "zero net energy building" to learn more.
We just did a major upgrade of the insulation in our home through our local utility program for only $500. Just call and ask for a free energy audit, and they will refer you to whoever they are using to make upgrades. The government picks up 75% of the cost up to $2000 in our state to have somebody come in and check how much your house is "leaking," they'll seal up all the cracks, install better weatherstripping, and insulate the heck out of your attic. Then, they'll do followup "leak test" to show you how much better your house should hold heat. We dropped from 2300 (a bad number) to 1800 (a much better number), but next year we'll qualify for an additional $1500 worth of services and can get our house down another 600 points to 1200 (the "goal" number for a house our age and size). We're estimating our heating bill should drop around 25% and earn back that $500 investment within 1.5 years.
We also took advantage of the 30% tax credit up to $1500 to purchase a wood-burning fireplace insert stove. You can only take the credit once during 2009/2010, but if you are a two-income family with a big mortgage and a lot of kids, you will want to make the investment THIS year because purportedly the credit will be subject to the Alternative Minimum Tax next year (it's unclear whether Congress fixed this defect for 2010). You don't need to buy a wood stove ... the credit also goes for new energy efficient windows and doors (but not the installation cost), weatherstripping, extra insulation, etc. However, BE CAREFUL the product you buy actually qualifies for the tax credit. An Energy Star rating is not enough ... Congress upped the standards and the industry has not caught up yet, so get it in writing from the manufacturer before you buy.
Lastly, if you've ever considered investing in a true alternative energy system such as solar PV, solar hot water, wind, geothermal, etc., now is the time to invest. The 30% credit is making many of these technologies cost-competitive for the first time and there is no cap on how much you can spend (if the credit is more than your tax bill, you can carry it over multiple years). However, be cautious that the 2010 Alternative Minimum Tax won't snag you (you may need to insist in a 2009 install date).
Mary, perhaps a solar hot water heating system combined with a backup-heat wood stove would heat your home, and you can just keep the old boiler around a bit longer for 3rd-tier backup?
The government is GIVING AWAY and PAYING 30% of the cost to upgrade. With the market in the dumps right now, and figuring in broker fees and taxes, what other investment do you know of that will give a guaranteed tax-free 30% return on investment over the next several years?
As always, your articles are excellent. It would be an insult to call what you share "tips". Reading this and most of the links has been the best use of my time in a while. I truely appreciate the finanial/life maturity you share. Most of what you provided here I do, but you have helped me figure out why it works and encourages me (my frugality in large part was forced on me by chronic health problems which meant either live in poverty or find a quality life in frugality). This weekend I am motivated to discuss budgeting with my adult foster son again, but with your insight that it is not constraining in itself (but rather a tool to maximize the use of available resources). Also, you have helped me see the joy in the things I spend much of my money on, I REALLY do enjoy helping my foster son start out in life more than a better car for myself, a little vacation... Thank you for making my life better.
I have some tips, make a budget planner, A budget planner dosent necessarily mean that you dont put down costs to enjoyment, you need to include these, in fact 5 things per month that you would enjoy doing, examples are, meal for 2, cinema, night out with a friend down the pub etc etc, this will then be a realistic planner, with everything included, the reason many planners become a scrap piece of paper is that all human beings want to have some enjoyment in there lives and we forget to include the costs to these! so lets get these in there along with all the other all important bills! you will see a planner you can stick to which in turn will increase the quality of you life
Never really been much for saving money - reason being I have never seen a light at the end of that tunnel...
What is the lowest you can reduce your expenses to? The answer is not zero. You can't reduce your expenses below a certain amount - which makes us look to the other obvious question -
What is the highest you can raise your income to? There is no ceiling on this number.
There is no way to reduce your expenses to nothing - but there are ways to increase your income so much that your expenses mean very little. So that's what I have focused on.
However, that's not to say focusing on reducing expenses isn't rewarding or worthwhile.
Saving money means you have more money to invest on creating more income. So if you save $2 somehow, and you know that your method of investing will bring you 10% for the month, you have just increased your income by 20c!
Something to keep in mind for those who, like me, have a hard time coming to grips with saving
@ Tyson:
I tend to look at it exactly the opposite way around: Maybe you can earn more money and maybe you can't, but anybody can spend less than they've been spending.
Looking at the bigger picture, my logic is that frugality leads to freedom. If you spend a lot, you've got no choice but to find a job that pays a lot. And the more you spend, the fewer choices you have for how you earn your living, because only a few jobs pay that much. On the other hand, the more frugally you live, the more options you have for earning a living, because you can earn a modest amount of money lots of different ways.
I find that much the same logic extends to savings. So many people seem to have some sort of binary filter for their savings--it's either enough to live on for the rest of their life or else its nothing. Personally, I find that there are lots of advantages to having a modest amount of savings. A small amount of savings is essential as an emergency fund. Having a bit of capital saves you money. Even a small amount of retirement savings is a good step toward retirement.
When you get your paycheck, cash it and use the "Envelope" system to budget your cash. Write on each envelope the name of an expense, like gasoline, groceries, clothing, eating out, and put the cash allocated for those expenses in the appropriate envelope. When the envelope is empty, that's all you can spend for that month.
Love the article on how to live better without spending more. I think making a budget deserves its own heading. Once you have a budget which is detailed and includes not just necessary expenses and discretionary expenses, but also funding various savings accounts, investment accounts, other goal accounts, THEN you can start cutting and determine what is really important and what you can do without. Now you can PRIORITIZE needs and wants.
I use the don't buy stuff you really don't need, cook your own food, don't borrow, and buy to save methods. Of course, it all starts with a budget.
Have some capital. That slapped me in the face. This statement is so true and I think few financial bloggers focus on it. This is such an excellent point and is so freeing. Some times I feel like I'm a slave to whatever I'm saving for but just being a saver rather than a spender increases quality of life and reduces stress.
I also love spend money to save money. :-)
