Latest posts by R.J. Weiss, CFP®
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- PeerStreet Review: How It Works, Minimum Investment, Requirements, & More - April 18, 2018
- 11 Work-At-Home Jobs With a Steady Income - April 16, 2018
You want to be frugal, but you can’t seem to pull it off. You set your goals and stick to them for a while. But before you know it, you start to lose your willpower.
But you know what’s more effective than setting goals? Developing habits. Goals are great things to aspire to reach. But habits require action, and action is your best friend in the financial world.
All the knowledge and good intentions in the world mean nothing if you don’t take action.
Here are the 10 things frugal people act upon and understand that help them with their finances.
Frugal Habit # 1: Understand Opportunity Cost
Frugal people don’t look at a price tag and take it at face value. They dig deeper than that. They know everything comes at a price and sometimes that cost isn’t apparent on the price tag.
For every dollar they spend, they’re trading something that’s far more valuable than paper money. They’re giving up their time, effort, and energy to buy that item. So they do their best to evaluate that it’s fully worth it to them.
There are multiple ways of doing that, including calculating how many after-tax hours it would take to earn the money to make that purchase. But when you do it that way, you’re not considering the true loss – what would happen if you saved that money instead.
For that, you can use the rule of 184. Here’s how it works:
Let’s say you’re thinking about joining a fancy gym. Let’s pretend that will cost you $100 a month.
If you saved that $100 every month and invested it instead, you might reasonably expect to earn 8% a year. In 10 years, that $100 a month could grow to $18,444 instead.
With the rule of 184, you can take any monthly expense and determine how much money you’d have after 10 years. You do that by multiplying the monthly cost by 184.
This trick is just one way frugal people look at every expense, at more than just a price they pay today.
Frugal Habit # 2: Take Advantage of Easy Wins
Frugal people know that there’s certain personal finance actions that take little time and effort but offer tremendous rewards. For example, taking ten minutes to optimize their 401K investments (see habit # 9) allows frugal people to potentially cut years off their working life.
Other actions with a high return on investment include:
# 1 – They earn cash back on all their online purchases
- Quick Action: Sign up for Swagbucks, which allows you to earn up to 20% cash back from your favorite online stores (including Amazon).
# 2 – They’ll shop their insurance with high rated insurers at least once every two years
- Quick Action: Use a site like Esurance, which takes only a few minutes to get a quote, to see if you can save. All it takes is a few minutes. So, with ease you know whether to continue shopping around or if you’re already paying the best price.
# 3 – They take advantage of generous bonuses and promotions
- Quick Action: Scan The Ways to Wealth’s Top Bonus Offers, Coupons, and Free Money Promotions for April 2018 to make extra money or get special savings.
Frugal Habit # 3: Know When Refinancing Makes Sense
A study by the Journal of Financial Economics found 20% of homeowners who could have benefited from refinancing didn’t. As such, Americans paid an extra $5.4 billion in interest payments then they had to.
A mortgage is likely the largest debt you’ll have. A frugal person knows this and understands how much they can save by refinancing.
Mortgage rates are still at all time lows but are starting to climb. There’s no guarantee they’ll stay like this forever. Head over to LendingTree now to compare rates from up to 5 lenders in minutes.
Frugal Habit # 4: Continuous Optimization
Frugal people are constantly optimizing their income and expenses. They actively look for ways to get more for less, in addition to earning extra money to put towards their highest priority goal.
- Quick Action: You should check out Trim, a free money saving app that helps you optimize your finances. Trim can help you cancel subscriptions, negotiate your Comcast bill, and even find you a lower car insurance rate. You can learn more here.
Frugal Habit # 5: Create A To Buy Waiting List
Controlling your spending is very much like controlling a diet. You need to know your wants and your needs.
It’s like knowing the difference between organic chicken and a piece of cake. One is good solid nutrition your body will use and the other is delicious, but not a great choice.
Instead of announcing you’ll never make an unnecessary purchase again, give yourself permission to dream. Never say never – just say not right now.
Create a waiting list of the things you want to buy at some point. By putting it on the list, you won’t feel so deprived. It will be there waiting for you should you decide to purchase it later.
But you’ll likely resist that urge – either permanently or for quite a while.
Frugal Habit # 6:. They Know Where Their Money Is Going
What frugal people excel at is making the most of the money they have. To do that, they have a plan for where they want their money to go. Then, they track their income and expenses to ensure they’re on target.
All this planning, doesn’t have to be complicated. One great app that’s perfect for tracking your financial progress and goals is Personal Capital. You simply connect your financial accounts, then the app does all the work for you. I’ve tried dozens of financial apps and Personal Capital is by far my favorite.
Frugal Habit # 7: They Know and Manage Their Credit Score
Just as your weight matters to your health, your credit score matters to your finances. Most people know that the better their credit score, the better the interest rates they can receive.
Having a high credit score keeps more cash in your pocket in other ways too. You can land savings on car insurance if you have a high credit score, for instance.
One great way you can check your credit score and get recommendations on how to improve it is by signing up with Credit Sesame.
This is the site I use to keep an eye on my score and get recommendations to improve it. When you sign up, you’ll get a very handy Credit Report Card which will tell you exactly what you need to do to improve your score.
Frugal Habit # 8: They Use the 20 Percent ROI Rule for Buying Decisions
Sometimes it makes sense to spend money to save money. One concept frugal people borrow from the best investors in the world is ROI.
Let’s say a business is considering investing in a new manufacturing plant for $1,000,000. Based on their best estimates, they plan to see an increase in net income of $200,000 a year. In this scenario, the $1,000,000 expense would equate to a 20% ROI.
20% ROI is very good. Knowing that the stock market has appreciated about 7% per year, if a business has an opportunity to return 20% on capital, it’s growing at about 3X the rate of the market.
Frugal people use the 20%, or whatever they deem an acceptable ROI, for making purchases. For example, it makes sense to pay $200 to cancel a phone contract if you save more than $3.33 a month.
What’s important is that frugality isn’t all about saving money–it’s more about allocating and optimizing your money. And if there’s an expense that can actually save you money, frugal people take advantage of it.
Frugal Habit # 9: They Don’t Tolerate Hidden Fees
Nothing can eat into your money quite like hidden fees.
Frugal people know to always read the fine print. They know where hidden fees are and are doing what they can to control them.
Hidden fees can be found everywhere. Credit cards have them and so do 401(k)s. Even your checking account might charge you hidden fees if you drop below an average daily balance for the month.
One trick to reducing hidden fees in your 401(k), which average over 1.5% in many cases and are often hard to spot, is to get a free analysis of your 401(k) with Blooom.
To get your free analysis, all you have to do is enter your name, birthday, and estimated retirement date. Then, let Blooom link up to your 401(k).
Blooom will then uncover any and all 401(k) fees, so you can learn whether or not you’re being overcharged.
Frugal Habit # 10: They Protect What’s Important
What frugal people understand well is using insurance for what it’s meant for–to guard against true financial catastrophes, not minor inconveniences.
Frugal people don’t pay for cell phone insurance or warranties on appliances. These “risks” are covered by a fully-funded emergency fund. Instead, frugal people protect themselves with the type of insurance that guards against TRUE financial catosphere.
A good example of insurance frugal people buy is term life insurance. Term protects your loved ones in the event of your death. There’s no gimmicks or bells and whistles. It’s simply protects against financial catosphere.
It’s also super-cheap compared to other types of insurance (no-kidding, I pay $12.25 a month for my Wife’s $250K policy, which is cheaper than many cell phone insurance plans). Your rate will vary by age and health but most people are surprised at how affordable term is. You can get a free life insurance quote here (it only takes 2 minutes) with A++ Rated Haven Life Insurance.
The Ways to Wealth Related Reading
- Learning The Stock Market: 8 Investing Rules That Can Make You Rich
- How To Invest In Yourself: 25 Mostly Free Ways To Upgrade Your Life
- Dave Ramsey Recommended Household Budget Percentages