Having a million dollars would be great, wouldn’t it?

Yes, of course it would be! For most of us, it’s not likely that we’re making that annually, but it’s possible that we might eventually save that much. Financial independence would be ours!

Or not.

It’s always interesting to me how we read about the amount of money one could have, if you just saved X amount per year and earned Y percent rate of return. I do these calculations too, and have included such analyses here on Squirrelers as well.

The catch – which I regularly point out – is the time value of money. Why is it that we don’t read more about this? In my MBA program, it was one of the more basic, useful concepts that I learned early on. A dollar today is worth more than a dollar tomorrow, except when there’s deflation – which we don’t want of course.

Example:

Let’s say that someone is saving for a goal of becoming a millionaire in the next 5 years.  If this is a realistic goal for you, that’s fantastic. Assuming 3% inflation, that million dollars in 5 years will equal  $862,608 in today’s dollars.  So, that original million dollars will be able to buy about $862,608 of goods based on today’s prices.

Calculation: $1,000,000 / (1.03) ^5

Fair enough.

The thing is, the further your time horizon, the lower the purchasing power of that future $1 million becomes.  Expanding the timeframe further, and keeping the same 3% discount rate, we can see this illustrated more clearly:

Present Value today of $1 million in 10 years = $744,094

Present Value today of $1 million in 20 years = $553,676

Present Value today of $1 million in 30 years = $411,987

All nice sums of money, but not the $1 million windfall that would meet the eye without discounting back these sums at 3%.

I really think that the concept of purchasing power, and how it erodes over time, is a basic fundamental of personal finance and planning for the future. People need to plan accordingly in terms of income, savings, and rates of return, in order to be able to plan for the future.  My perception is that the average person out there does not think about this concept when planning for the future.

Of course, many people do absolutely no planning for the future in the first place, which is not good. We know better, being personal finance enthusiasts, whether we’re bloggers or not.

Questions for You:

At what point did the light bulb go on for you, when you realized the need to base future retirement funds on the purchasing power of the time at which you plan to retire?

Do you think that this is something that the average citizen out there really even considers?

It’s cool when readers make comments that prompt you to create a post on a certain point, no matter how brief. Recently, on my post 5 Rules for Achieving Debt-Free Living, a simple yet valuable point was made in one of the comments:

“Look at what you want and figure out how many hours (post-tax!) you will have to work to earn it. Do you want it badly enough to buy it?”

It’s something I have thought about before. These days, I think in terms of maximizing the income minus expense gap, investing intelligently, and the concept of time is money.  This approach is one I actively thought about as a teenager, when I realized that for me to spend $9 to see a 2.5 hour movie and enjoy popcorn and a soda, it would take me that long at work just to do that. It got me thinking about how maybe I didn’t need to get the popcorn and soda, and maybe should just get one or the other:)

But as adults, it helps to remember that calculation from back in the day. I had a few friends who, upon getting their first jobs out of undergrad studies, purchased new cars. Not just new cars, but nice new cars. This was a while ago, and these people were buying $25,000 cars. Keep in mind, their salaries were in the range of $25,000 as well. Pre-tax.

These guys spent a lot of time working just for a car.

So, let’s do the math.

1. $25,000 salary, divided by 250 working days, = $100 per day.
2. $100 per day, divided by 8 hours, = $12.50 per hour.
3. $12.50 per hour, multiplied by 75% - to account for tax – = $9.38 per hour post-tax
4. $25,000 car, divided by $9.38 hourly rate, = 2,665 hours.

They worked 2,665 hours for those cars. When you consider that the calculation above assumes 2,000 working hours per year (when you consider #1 and #2 above), this comes out to 1.33 years of their life that they worked just to pay off a car.

If they just would have purchased a decent used car for much less, it would have made a lot more sense, though it wouldn’t have been “cool”.

The good news is that many years later, both guys are now savers who try to put a way a solid percentage of their income. I have only talked to one about the cars he bought when younger, and he acknowledges that it was totally nuts for him to do that.

Maybe he started to do this type of math exercise and figured it out later!

Question for You: Do you ever think of things in this way, figuring out how much you would have to work in order to pay for something you wish to purchase? This can apply to any big purchases, not just cars.

One of the enjoyable parts about having a personal finance blog is the aspect of continued learning and refinement of your own financial philosophies.  Some of it involves learning from other bloggers, reading great content and considering different points of view. A lot of it also comes from just thinking more about the subject in general, and considering it in the context of your own life.

As I’ve been doing this, it’s become clear to me that for people to set themselves up for a strong and healthy financial life, there are key elements that can serve as the foundation for future success.

Here are my top 12 key success factors for personal financial health:

1. Health.  For personal financial health, one needs to be physically and mentally healthy. If health isn’t there, it’s tough to generate cash flow. Think about it – if you have trouble working, or can’t give it 100% on the job, your future earning capacity will be limited. For most people, at least in the wealth-building years, income is generated from work.  It’s imperative to keep your health and keep the odds in your favor. Having more energy to focus, and work more effectively and efficiently, will help you succeed on the job. Bad health can impair your ability to work. Good health can help put you in a position to work and create wealth, while allowing you to keep your focused on your goals.
2. Hustle.  Sitting on the sofa, surfing online, playing games, shopping, etc – those are all fun things to do. But will they make you money? I have seen in my years working that it’s the people that are willing to roll up their sleeves and actually work hard are the ones that will succeed. It’s the willingness to hustle, and move forward in a positive direction that can separate people who advance in their careers or succeed in their businesses, versus those who stay stuck in a spin cycle. Money doesn’t come to people who sit around, you have to want it and be willing to work hard for it.
3. Education.  I’m a big believer in education.  Yes, I did a post on how Stanford quarterback Andrew Luck should have dropped out school, and taken the big money that was sure to come his way. However, don’t let that distract you from my thoughts that education is critical to one’s success in life.  Personally, I ended up getting an MBA, going full-time, and felt that it was a great investment. Others I know with doctorates in different fields feel the same way about their choices. May not be for everyone, but regardless of whether you pursue an undergrad degree or go further in formal education – embrace education as being a lifelong venture. I’m beginning to think that a huge value of my grad school days was not necessarily the specific content, but rather in learning how to learn. More than that – embracing learning as something that’s fun and a necessary life skill that can be applied in day to day life, with intellectual curiosity.
4. Steady Income.  I wanted to put savings here, as I see that as being so important, but before you can save you must actually make some money first.  Making sure one has a steady income is critical to laying the groundwork for financial prosperity. Keeping aware of career and professional opportunities, networking, and doing great work are all a big part of generating income.  Make sure that you are adding value for your employer, are delivering more than what they’re paying you for, and try to make yourself truly needed. This is a baseline, with income growth the higher goal and accelerated path to wealth.
5. Control over Expenses.  This can also be looked as living within one’s means. But I’m talking about taking it step further, and not letting expenses get out of line as income increases. Sure, to some degree that’s probably natural, but in general it’s important to discern wants from needs.  Controlling those emotional urges to buy and focusing on what’s really needed as a first priority is a big hurdle for some, but is imperative for success in this element. Budgeting, comparison shopping, and frugality can be very helpful tools in this regard.
6. Saving.  Taking income and expenses into account, your net between the two is saving. Which isn’t rocket science obviously, you already knew that. But I think it’s important to have a savings mentality.  This is up for debate, and maybe my own biases are at work here, but I think that a save first, spend later approach works well. Pay yourself first and save for your emergency fund, health needs, and retirement. The latter is huge, and will get here sooner than you realize.  Nobody should want to be in a position where they have to work when old; rather, it would be great to not have pressure to work unless you want to. Big difference in terms of stress on the mind and tired old aching joints and muscles. Take care of yourself and your future, and save diligently.
7. Investing.  Saving money is crucial, but it isn’t enough. Stuffing money under the mattress is saving, and is better than nothing, but it will decline in value over time. Consider the time value of money and opportunity costs when deciding what to do with your savings.  As we should know, rate of return matters, and every percentage point counts.  A proper asset allocation strategy, based on your own life situation, should be employed. Cash, stocks, bonds, real estate, etc – are among the different buckets for your money. By investing, you’re letting your money work for you. Let time and compounding work their magic. But be careful not to turn investing into dignified gambling.
8. Purpose.  Having a sense of purpose is a way to guide your overall intentions and motivations. At the base level, we all have the instinct to survive. But beyond that, and bigger picture, what’s your sense of purpose? Connecting your overall life goals with your efforts to earn money can fuel your effectiveness to reach heights of success.
9. Risk Management.  This doesn’t necessarily mean being risk averse, but it means being aware of risks and avoiding making the big mistakes.  Examples: texting while driving then getting into an accident, not having the right homeowners insurance and then having a flood, having inadequate health insurance, etc. Whether it’s insurance coverage or decisions in day-to-day life, one needs to keep in mind the risks in given situations that could wreak havoc with your life, and manage them as best as possible.
10. Resilience.  Change is inevitable, so we should try to accept it and embrace it. This one is not easy for me, and I’m not naturally attuned to this. However, it is what it is, and I realize that I must get with the program here. So, I’m working hard on that.  We must be able to realize that despite our greatest work and plans, we can’t control everything and other people either.  Stuff happens, it just does – and we have to deal with it. Best to be internally strong with a sound perspective, and survive the tough times while thriving in better times.
11. Relationships.  It’s hard to be a lone ranger.  Whether at work, for your business, or in your personal life, relationships matter. I’m a believer that to the extent you have strong relationships, your health and wealth can only be better. Discussed this in the Role of Money post.
12. Generosity.  This one is fun.  It took me a while to figure this out, but it’s important to put yourself in the shoes of other people. We’re all human, and we all have our own needs. When some people aren’t able to have basic needs met, or are in poor health, it can make all the difference in the world to show them generosity.  Also, even just in day-to-day life, doesn’t it feel good to help others? What’s great is doing it without any ulterior motive. It’s fun, and the reality is that in some way something good will come back to help you. Karma is real. 

I’m actively working on all of these. 

Now that you’ve read my longest post to date, I ask you: 

Which of these elements do you see as being most important to you? Are there any you would add (or take out)?

It seems as though a new year brings new hope for many people. This is truly a great thing, as rejuvenation, renewed energy, and a strong sense of direction can go a long way toward improving the quality of our lives. This includes the realm of personal finance, as it fits within our lives.

While setting goals for a new year, and getting ready to charge ahead, it’s often important to take some time to reflect on what we have learned. After all, it’s better to move forward with a more informed perspective that captures what we have learned from past experiences, isn’t it?

Along those lines, I have been thinking about my perspectives gained 2010, specifically as they relate to personal finance. Much of this I had crystallized a few months back, and shared on Yakezie. That said, this seems like a good time to take stock and think about these insights that can help 2011 be an even better year.

Here are 6 lessons that relate to personal finance that I have learned or had reinforced:

1. Expect the unexpected. Life doesn’t always move forward in a linear fashion. No matter how much we try to avoid them, most of us will have some ups and downs.  The “ups” can be fantastic, and the “downs” can be frustrating.  Many of us almost expect the positives, and the negatives don’t align with expectations and can ruin our “plans”.  To alleviate that, factor in the reality that the unexpected will happen. I have learned that it’s good to frame expectations that way, and realize that things will come out of left field and impact us. That way, you are prepared, even as you optimistically strive for the very best.
2. Think savings first, lifestyle second. This is an extension of the need to discern wants vs. needs. It’s of course important to enjoy life to its fullest every day, and it can be done within your means.  If you do it oustide your means, you’re adding stress that will show up either now or later when the proverbial bill is due. It’s so much better and peaceful to live within your means and save appropriately. Life can be rich either way.
3. Even before savings, think of earnings. You can cut as many coupons as you want, but it’s better to focus first on actually making the money that you ultimately want to save.  If a company had steady revenue but was not working toward growth prospects or protecting it’s earnings, this would be reflected in it’s stock price. Who would want to invest in such a stock? Let’s remember that we need to have positive cash flow before we can think of saving it.
4. Diversify your income potential. In the days of yesteryear, some people would stay with one company for 30 years and get a small pension and a nice parting gift, such as the classic “gold watch”. These days, for the most part, our future is self-directed.  You will buy your own gold watch, so to speak. To that end, hitching your wagon to one employer or source of income is shortsighted. Rather, keep your skills fresh and current, and continually build and maintain your network. Additionally, think like an entrepreneur and better yet, become one – even if on the side.
5. Enthusiastically pursue your goals. We all have our goals and dreams. To my way of thinking, as long as you’re not negatively impacting anyone else’s life, and are also being responsible, allow yourself to get fired up, have fun, and go for it!
6. Be a giver. Reward those that have been loyal to you. There are probably more people than each of us might suspect, at first glance, that have really done some nice things for us.  Let’s remember this. In addition, it’s important to selflessly give to others without strings attached. It feels great to help others, and it can be done without possessing great means, while responsibly being done within our means. Even though you don’t expect anything directly back, you will be rewarded in some way, whether immediately or somewhere down the line. 

These happen to be mine, but what about yours?

What lessons have you learned or had reinforced within the last year, that you can put to great use going forward?

When it comes to our finances, each of us has our own individual approach. Some of us are savers, some are spenders, and others are somewhere in between.   This continuum is a paradigm that our popular culture uses to frame differences in the way people approach money.

I believe that the way we approach our finances goes beyond that particular behavioral characteristic. In reality, I think our approach to finances can be viewed in more of a multi-dimensional setting, where money has a different role in each our lives. For some, money means survival, plain and simple. For others, money is something that is a part of their lives but rarely on their mind, regardless of the role it actually plays. For yet others, money is an obsession, as accumulation signifies achievement. Some people view money as analogous to insurance, or a defensive resource to protect against future setbacks. Some people want money to provide a good home….or to contribute to the ability to have certain hobbies….or to provide something to bequeath to future generations….and so on.  Sometimes the same person may view money differently in different situations. The bottom line is that we each have our own relationship with money, and our own conscious and subconscious needs for money, rooted in our value systems and cumulative life experiences.

This is an area of personal finance that has interested me for a while. Why do people behave the way they do with respect to their money? What’s driving this behavior?

Of course, a starting point for anybody is to consider how you personally view things. Taking an introspective approach, I have spent time figuring out my own take on money, and the role it plays in my life. What I have determined is that for me, it fits into a framework that includes the following elements: Health, Wealth, and Relationships. These are linked together as a part of a system.

Think about it: HWR – Health, Wealth, Relationships. They’re all connected, and to the extent one is strengthened, the others will be strengthened as well. If one is weakened, the others will be weakened as well.

For example, lets take 2 people: A and B.  They are twins. A has good health, average wealth, and good relationships. B has good health, average wealth, and poor relationships. Over time, all other things being equal, I think that A will end up having a better overall quality of life.  My reasoning is that A’s good relationships will be good for his happiness and will lower his stress levels compared to B, which will give A a chance to be healthier. As A is healthier, he will have a better chance to be wealthier, as he will be able to in better position to earn money while having lower health care expenses. And while he is healthier, he in turn will be in a better position to cultivate, keep, and grow relationships, leading to better chances to be wealthy, etc. Circular, perhaps…yet very symbiotic.

So to me, money is a part of the Wealth aspect of HWR. Beyond basic survival, money gives you the opportunity to live a healthier life, with the time and means to have more positive relationships. One thing I want to make clear is that I am not saying that money buys friends. Well, it could, but those aren’t true friends. What I am saying is that the more money you have, on balance, the less stressed you are about it, and the more time you have to do other things, such as cultivate true, genuine relationships that aren’t based on money. Money is but a component in the system.

Of course, there is no right or wrong framework, each of us has our own specific one, whether we have consciously thought about it or not. Yours might be entirely different than mine.

It would be interesting to get everyone’s perspectives on the role of money in our lives, in relation to other aspects. What do you think?

Note: I originally posted this piece very soon after Squirrelers was launched. Given the blog’s increased readership, I wanted to revise the post a bit and revisit this topic to get everyone’s thoughts

I have had a few conversations over this past year regarding extreme frugality, with a few people I know as well as a few in the media. Some examples that I see are inspiring, many are entertaining, and some just way out there and over the top. Some, as I have alluded to, cross the line by taking advantage of others or causing one to lose self-respect. So, there is a spectrum when it comes to extreme frugality, ranging from very good to very bad.

That said, stripping away the inspiration, entertainment, and morality issues related to some of these tactics, a key question remains: Is it worth the time? Is it worth going to extreme measures to save money – even pennies – when it costs time to do so?

This is where it appears many people are not fully thinking through the value of their time. I have certainly fallen into that at times, and I’m guessing we all have at one time or another. Its important to keep in mind the value of our efforts in terms of the precious time we spend on such time saving efforts.

To illustrate, lets take the example of a person with the following hypothetical employment situation:

Wages: $50,000 annual salary

Work Day: Standard 8-hour day.

Days Worked: 250 days per year (factoring in 5-day workweek, plus holidays/vacations)

For this person, his total imputed hourly rate is $25 ($50,000 / (8*250)). Thus, before taxes and other deductions, this person sells time to an employer at a rate of $25 for every hour on the job.

Lets say that this person’s employer came back to him and said that they wanted him to work overtime on a special project. This project would not lead to a better performance review, nor would it provide a leg up for promotion. Additionally, it wouldn’t provide experience that could benefit your career, nor would it impact his job security. All this said, the employer would pay him $5 if he spent an extra hour working on this project each week.

Would this employee, who normally gets paid $25 per hour, jump for joy at the possibility of making $5 more if he works that additional hour on this non-value added special project? I suspect that this employee might evaluate this, and think: “Why should I get paid $20 less – or 20% of my regular pay – to do this? It’s not worth my time!“

Its something to think about as we spend time devising ways to save money.

Is it worth $5 to spend an hour round trip, to shop at a cheaper grocery store?

Is it worth $5 to spend an hour driving to buy that printer that’s cheaper at the store which is a 20 mile drive from here?

Is it worth $5 to use that coupon to buy a new pillow at the store in the next town over, when I could spend just buy it at the store right around the corner?

Is it worth $5 to hunt for bargains online for an hour, when I could just go to the site I know and buy my product in a matter of minutes at the price offered?

When you frame these “savings” in terms of opportunity cost such as in these examples, it provides another perspective on frugality: Sometimes its just not worth our time to focus excessively on extreme frugality. Perhaps it’s often better to spend that extra time on improving one’s capacity to earn?

Back to the topic. Of course, I’m presenting this as a purely dollars and cents argument here. Sometimes people feel great pride in finding a bargain, and take on frugality as hobby – the thrill of the chase. In that way, if it works for someone, so be it:) Its also understandable that if frugality becomes a habit – a way of life – then this mindset can provide benefits in other decision scenarios.

I’m all for sensible frugality. It’s a great practice! That said, on an individual case-by-case basis, its worth thinking about the value of time when trying to save money. Every little bit helps, but if it costs us all of our time, it makes sense to re-evaluate that investment of time. Because while money can always be made, new time can’t be made!

Note: I originally posted this piece very soon after Squirrelers was launched. Given the blog’s increased readership, I wanted to revise the post a bit and revist this topic to get everyone’s thoughts

Recently, the family spent a day together visiting downtown Chicago.  One of the things we planned was a visit to the top of the John Hancock building, which rises 1,127 feet from the heart of the shopper’s paradise known as Michigan Avenue.

For those of you who haven’t been to Chicago, it’s a city with a remarkable concentration of skyscrapers. In fact, 4 of the 7 tallest buildings in the United States are in Chicago. The John Hancock building comes in at #4 in the city, but offers arguably the best views, with a clear look at Lake Michigan, and the city in all directions.

We got to the observation area on the 94^th floor, and then proceeded to take in the views. It was a real thrill for me, despite having seen this several times in my life, because I got to take my 7-year old for her first visit to a true skyscraper.

As I was excitedly showing her all the sights, such as the lake, and all the rooftops, and how you could squint and see Michigan across the lake – I then pointed to the tallest building in Chicago. “See that”, I exclaimed, “That’s the Sears Tower!”

“No it’s not”, my daughter calmly said.

“Sure it is, sweetheart”, I said. “It’s the tall black building over there”.

Then – to my surprise – she said, “It’s the Willis Tower. It used to be the Sears Tower but now it’s the Willis Tower.”

“Well, I like to call it the Sears Tower”, I said. “You can call it the Willis Tower if you want to.”

“Why do you want to call it the Sears Tower when that’s not its name anymore?” she then asked.

I had to stop and think about that. Why would anyone call this building by an old name? Well, the building was called the Sears Tower from its opening in 1974. From the time I was a kid, I had always known that the tallest building in the United States was the 1,451-foot tall Sears Tower.  But on July 16, 2009, after 35 years of being known as the Sears Tower, this iconic building was officially renamed the Willis Tower.

It dawned on me that I was totally holding on to what was familiar, what fit into my comfortable view of things. Clearly, for many in my generation, that building is the Sears Tower; it’s what we know. But to a whole new generation of people, it’s the Willis Tower. For now, that is. It could be altogether something else in the future, who knows. But it’s no longer the Sears Tower.

As I think about this, I wonder just how often we hold on to old beliefs, clinging to what makes us comfortable, because we are resistant to change.

Could this apply to personal finance?

I think it could, in many situations.

For example:

• Clinging to old views on real estate: “you won’t lose money on a home over time, homes are always a sound investment”
• Holding on to investments too long: “I know this stock has dropped, but I don’t want to sell it until it comes back up in value”
• Staying with the same job too long: “My employer will always take care of me”
• Resistance to learning about new techniques: “I don’t want to pay any bills online – I only want the old-fashioned way of writing checks”
• Refusing to explore diverse investment opportunities: “I’ll just stick to what I already know” 

Things change, and we have to adapt to the times. It’s important to keep our core values and beliefs, but also accept that it’s important to keep an open mind and learn at all times. These positive, open traits can lead to a more positive orientation toward wealth preservation and creation. 

What do you think? In the world of personal finance, do you know anyone who sticks to long-time beliefs, but could benefit from fresh thinking and an open mind?

Last week, I left the office during the lunch hour, and went to grab a quick bite to eat. I work in Chicago, so there is frequently a lot of “hustle and bustle” in the middle of the day. People in suits, business casual folks (like me), tourists – people from all walks of life are out enjoying the city. Late Spring, Summer, and Early Fall in Chicago are beautiful, and I think it’s that reality plus the harsh reality about the brutal weather the rest of the year, that brings people outside.

As I walked down the street, I saw up ahead a group people in short-sleeved, collared shirts – like they were representing a company – stopping people as they walked and motioning them over to the right. This isn’t uncommon, as people in major cities and tourist areas are always trying to sell something to people passing by. In this case, however, I can see that instead of the usual quick brush off, people were stopping to pay attention.

As I got closer, I sensed a vibe of excitement from the people milling about, so I stopped to see what was going on. As it turns out, the people dressed in those short-sleeved collared shirts were pointing people to a stand that they set up, where you could get a free sandwich. I quickly figured out they were promoting a new TV show, which is to be aired nationally on a major cable network. As a part of their promotional campaign, they were stopping folks on the street and offering free sandwiches while mentioning the name of the show and when it will debut.

I was hungry, so I thought to myself: why not?

As I took the sandwich, a guy also handed me what looked like a mini DVD which promoted the show. This DVD, which is what I assumed it was, was very tightly wrapped.

Anyway, I didn’t care about show, I was just happy about the FREE LUNCH!

It was a good sandwich: BBQ pulled pork, very tasty (probably not healthy, but it was good), and filling. And FREE!

As I walked away, I took a look at the mini DVD, and got curious. So, remembering that, I saved it for later that evening, and opened it up. As I mentioned before, it was tightly wrapped, so it actually took a couple of minutes to get the thing open. Then, after looking at the DVD, I got curious about the show. I didn’t try to play the DVD, as I set it aside. What I did do, however, was go online and spend about 10 minutes looking at information on the show.

Then it hit me: I probably spent 15 or 20 minutes of my time when you add up opening and looking at the DVD, and going online out of curiosity. This was for the sandwich that would probably sell for $5 tops.

The company’s strategy worked: give me the sandwich, make me aware of the show, make me try to look up information on the show. The next would be for me to tune in, and at this point, I’m curious.

They won. No regrets at all from me, but they got what they wanted.

That sandwich wasn’t free. As my Dad always liked to tell me when I was a kid: There’s no such thing as a free lunch. Thanks for that advice, Dad!

It takes a highly positive, can-do attitude to be a great athlete. You have to have a vision to be the best you can be. Set high goals, work hard, practice, and demonstrate great determination. Make it all second nature, a part of your persona.  Then, after a lot of effort, commitment, and dogged perseverance, you make yourself into the athlete who wins the big trophy.

The frugality trophy, that is.

What? Did you think I was talking about sports or fitness?

Actually, I was talking about what it takes to become a great frugal athlete!

The term “frugal athlete” could mean many things. One definition could be an athlete that happens to be frugal. You know – someone who wants to get in shape without spending a lot of money. That would be a great topic, perhaps one for another article, but I’m talking about something different here. When I talk about a frugal athlete, I’m talking about someone who is a highly skilled, competitive athlete in the sport of frugality!

Let’s face it: there are many people that thrive on living within their means, and maximizing the income minus expense gap. To do that, you have to:

a)      protect and maximize your income earning potential; and

b)      maintain a disciplined approach to keeping expenses low

As financial athlete, you take the two together. We can call that cross-training:) But in terms of the sport of frugality, we will focus on the latter: managing expenses. 

So, how do you become a frugal athlete? Well, let’s just say I’m continually working on the “manual” as I train, day by day! But here is how I view it: 

1)      Visualize success. Just as athletes work toward the goal of winning a championship, making the game winning shot, or getting the clutch game winning hit, the frugal athlete can work toward his or her individual, overall financial goal. Within that goal is the sub-goal of reducing expenses to the lowest reasonable level at which a comfortable lifestyle can be lived. As with many things, what is “comfortable” is relative to each of our individual tastes. That said, it’s visualizing where you could be in terms of spending – living a waste-free life that’s comfortable, where you don’t throw away money but do get value for every hard-earned dollar you spend.

2)      Break apart the long-term goal into tangible, intermediate goals. Just as a pitcher in baseball learns his pitching mechanics, fastball, curveball, pickoff move, fielding skills, etc – you can break up your frugality goals into different tasks. These might include: deciphering wants vs. needs, knowing where to shop for groceries, learning how to obtain the best mortgage, learning the best sources for online coupons, etc.

3)      Train effectively. Just as an athlete works with knowledgeable trainers and uses the latest techniques, the frugal athlete should do the same. To me, this entails spending time learning from the most current and knowledgeable sources – such as books, blogs, and those who have achieved frugal success themselves.

4)      Practice Regularly and Routinely. Natural talent alone will not get it done here; you must work hard at making frugality a part of your daily routine. This could mean substitution: cutting out that $3 daily latte for a $1 cup of coffee instead. Or, it could mean cutting out that cup of coffee for water, thereby kicking that caffeine habit. Perhaps it means checking online for coupons before grocery shopping at a store with good prices, as opposed to going to a pricier store that you’re used to visiting. No matter how you do it, you have to practice. The more you practice, the better chance you have to succeed.

5)      Persevere. Just as an athlete must press onward in the face of obstacles, so must the frugal athlete. A basketball player, for example, may get up at 5:30am in the off-season to run sprints and keep in tip top shape. If he gets tired, loses focus, and skips a few days – then he slips back a bit in his conditioning. He needs to be mentally tough. With the frugal athlete, it means keeping your focus and discipline when you have weak moments. For example, you may want to give in to the temptation of buying a very nice pair of shoes at the mall, but when you realize it will blow your budget, you pass on the opportunity and head down to a less expensive store. Emotion can be a big obstacle to staying disciplined. 

Ultimately, the athlete who takes these steps will be in a great position to succeed and meet that big goal, be it winning a tennis tournament or achieving a personal best in a marathon. For the frugal athlete, taking these steps could lead to achieving the goal of bringing down expenses as a part of maximizing the income minus expense gap. The prize in this case could ultimately be financial freedom. 

Is this a bit esoteric? Maybe it is. But we can learn a lot about reaching goals and becoming our best from areas outside of personal finance. Applying these principles to our money management could lead to our own victories that bring us a higher quality of life. 

What do you think? Do you think that we can learn from other disciplines to become better at managing our money and reaching our overall goals?

This post was included in Festival of Frugality #232 at Provident Planning

There are plenty of people who have achieved greatness in different walks of life. Many of these people are in the public eye, and have achieved notoriety through their achievements in certain high profile vocations. Politics, sports, entertainment – these have created some of the most popular examples of success in our modern society.

What makes some of these people so successful? Sure, some have inherent, incredible talent – but many of these people needed a chance to develop their skills, and often times it’s a matter of opportunity and practice that got them to where they are. 

Two books – Malcom Gladwell’s “Outliers”, and  “Talent is Overrated” by Geoff Colvin, take fascinating looks at what gets someone to be successful to the point of being exceptionally successful in their specific areas of focus. In “Outliers”, it becomes clear that it’s not just the natural inherent talent that certain people have which gets them successful, but it’s a matter of opportunity as well. Once they get the opportunity, they may get even more opportunities, exposure, etc – which leads them to success. For example, Canadian hockey players who are born soon after the January 1 age cut off tend to be disproportionately part of top teams even later in their teen years. These kids were more physically advanced at early ages than their counterparts born later in the year, and were selected for the top teams, received the best training, most ice time, etc – until they became the best. The results fit the selection. 

In “Talent is Overrated”, the author looks beyond natural gifts, and focuses on practice as a means to greatness. It is the hard work and deliberate, repetitive practice that someone takes on which can ultimately drive the person to high levels of success. 

Taking these two interesting books together, it can be surmised that greatness might not be just a matter of natural talent, but rather of opportunity plus hard work. Old fashioned, but in this day and age of instant celebrity status, perhaps it is these standby approaches to success that still hold true. 

Taking this further, can this be applied to personal finance? In other words, is it possible for any of us to achieve “financial greatness?” 

I say yes! 

Sure, it will be harder for some of us to achieve certain levels of strictly financially-measured levels of success than others. Some already have more than others, are born into wealthy families, have lives free from encumbrances, are healthier than others, etc. That said, I think success is a relative term, and it is different for each of us. What financial greatness means across the board, however, is reaching levels of success that are truly beyond what we originally thought possible. 

How do we get there? Well, I’m not there yet, so I can’t give you a foolproof path to riches. Even those that are there can’t give us a guaranteed path, because otherwise we would all be on the way there. But I’m willing to say that learning from the examples in the books I mentioned, it’s possible for each of us to reach extraordinary levels of success. For some of us, it could be a matter of opportunity – or putting ourselves in position to succeed. For most of us, I suspect that hard work and a regimented, disciplined approach to money management can get us there. If this has worked with athletes, musicians, actors, public speakers – as well as people studying math, history, etc – then I believe it could work with personal finance. 

Here is my suggested approach, utilizing 6 steps: 

Have a philosophy: Visualize what you want your life to be like, and where money fits into it. For me, money is part of what I call the HWR framework – interrelated with health and relationships as a component of overall quality of life. Since I would like a high quality of life, with strong relationships, strong physical health, low stress with lots of enjoyment, and plenty of generosity, I think having money to fulfill those dreams can be helpful. It’s not just about accumulating the highest dollar total for me; it’s about total quality of life. Of course, if it’s about the bottom line for you, so be it. This part is highly individual. 

Set goals: Ok, so I just got done saying its not just about accumulating the highest dollar total for me. True. But, in order to facilitate the bigger overarching goals I have, specific money amounts do come into play. This is where goal setting comes into play. I believe that as in many other activities, it helps to set a goal that is aspirational yet conceivably achievable. Figure out how much you need to make your dreams come true, and go for it. Write it down, record it – make yourself aware of it on a regular basis, while not obsessing. The goals may be different for each of us – sky high for some, while many of us will have more modest goals, relatively speaking. Again, the specific goals are highly individual. Putting this into practice, one can determine goals at the 1, 3, 5, 10, 20 year markers. 

Learn: Get educated, and make it a continual practice. There is always something new to learn every day. Keeping a mindset that is attuned to constant learning can only help. Reading books, blogs, talking to people – these are all great ways to learn. For me, blogging on personal finance is a way to increase my knowledge of this space. Learning about financial concepts, different asset classes, how debt impacts your finances, different products in the marketplace (such as an Empire Building Kit), and ways to save money on purchases are all good uses of time. Often times, it’s what you don’t know that you need to know that can help the most. That’s a continual journey for all of us. Let’s put ourselves in a position to succeed. 

Record Expenses: Keep track of your expenses, and analyze where you money is being spent. It’s a topic that is blogged about frequently, and I am a proponent of doing this, at least on a period basis. If never done before, it can be an eye opening experience. Done right, it can tell you where your money is going, and help you control where future cash outlay is going, in order to meet your goals. 

Spend in a Disciplined Way: This, I believe, is a critical aspect of influencing a successful outcome vs. the alternative. There are plenty of stories about regular people of average means who were able to grow a comfortable next egg just by being disciplined in their money spending decisions. This helps maintain or even grow the important income minus expense gap. 

Manage your Career: This can take different forms, but it essentially means protect and ideally grow your potential to bring in positive cash flow. How can such cash flow come in? Well, if it is passive cash flow that requires very little effort, that’s great. For most of us, however, we need to get to the point of having such investments that can do that for us. This is where your career comes into play. It is the other side of the equation – it provides the money that you can manage through steps I mention above. While many of us tend to spend a lot of time thinking of ways to save money, it’s often the income stream that makes the biggest difference. Actively managing your career so that you can put yourself in a position to maximize your earnings potential can only help. Over deliver on the job, seek promotions, build your resume, learn in everything you do, and keep a strong network going. Combine those actions with long term goals and keeping your head in the game, and you’ll be on the way to financial success. 

I plan to follow these 6 steps, with overall discipline and practice, day in day out. I don’t plan to be obsessed with this. Rather, I am working toward making this a part of my routine, like brushing teeth  

This is my game plan, and we’ll see what happens. My strictly financial goals are probably more modest than others, but as I said, it’s all individual. 

What do you think? Is it possible for the average Joe or Jane to achieve “financial greatness” using such disciplined strategies?