- Personal Finance»
- Frugal Living
Summary: Thinking right for saving right
- Utility: The benefit either emotional or physical from something you consume, or pay for
- Marginal Thinking: The act of multiplying small costs over a larger duration to see the affect on your bottom line exaggerated, or dividing large costs over smaller periods of time to better understand the affect on your daily life.
- Total cost: how much it costs to acquire, maintain, and use any particular product or service.
- Examine the utility gained for a product and look for ways you can get an acceptable amount of the same benefit for less expense.
- Think of small expenses in terms of how much it costs you over a longer period of time; such as realizing that a dollar cola from the machine at work every day costs you $260 per year per person and the same cola brought from home would cost you $65 a year.
- Think of large expenses in terms of how much it costs you over a shorter period of time; such as understanding that that a ten thousand dollar car is going to cost you at least 300 dollars a month
- Determine that you are going to consistently pursue the best fiscal option and then following through with it no matter the temptations
Marginal Cost Quiz
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Get your PH.D in living cheaply.
As with many financial projects the undertaking you are proposing, that of minimizing your living expenses, is one that relies as much on your method of thought as it does on the actual steps you take. Many people don't know the PH in PHD stands for Philosophy; when you get a PHD your institution is certifying that you know not only alot about your field, but you know how to THINK in a manner that will allow you to spot new patterns and opportunities in your field. We will set out today to learn about how to think like a cost lowering philosopher and then we will move into specific methods and the real numbers.
Determined mindset and consistent enforcement
"Consistent enforcement" sounds alot like a police action. It is exactly what it sounds like. To minimize your living costs you have to decide you are going to make some rules and police yourself for following those rules. If you don't make it a habit nobody else will either.
This is not to say that you should punish yourself for every unnecessary expense; but rather that you MUST be aware of the real gain you make for each unnecessary expense. The word utility is an important one to understand. Utility is the value that you get from consumption of a product; we will talk about utility consistently in this article.
To earn your PHD in living cheaply you have to know how to examine the utility of anything you consume; the duration of said utility and the actual value it provides. Paying your rent or mortgage gives you long term utility at a fairly fixed expense; but what about running the AC or heat? Consider alternatives to everything you pay for and compare the utility of each to the cost. Running your heater in the winter makes your home warmer; but wearing clothes and using blankets also makes you warmer, and I have yet to meet a home that complains about the temperature. Does this provide the same utility? Well, no, but it is fairly close...more importantly, the cloth layers are already paid for.
Everything that you consume should be examined with this critical mindset of utility gained versus cost. Your foods, drinks, travel plans(even daily ones), services utilized, etc. All of these should be examined consistently and alternatives should be explored.
Understand and examine marginal costs
Most of us don't understand how small numbers add up and how large numbers are spread out. We aren't dumb, but we generally don't instinctively think that way. When a thought becomes instinctual it means that you are able to react more quickly to relevant situations; it is for this reason that every time you recognize a small expense or a large expense that you marginalize it in your head immediately. Every time you buy a cola or go out to eat for lunch multiply that cost by 5, and then 52. This will give you the approximate cost of doing that thing daily(during the work week) for a year; or if you plan on eating out one two or three times a week multiply the cost by the number of days you plan on going out then multiply it by 52.
Likewise when you have the opportunity to make a large expenditure such as a car and you are examining options you should look at each cost on a per month basis to better understand how that number will affect your short term available income. Divide the total cost by the total number of months you will incur said cost to see the monthly impact on your budget.
Old and Busted
60(total cost after 5 years)
Purchase of vehicle
Total cost after purchase, maintence and difference between fuel costs
Monthly marginal cost
Nitty gritty numbers
Now that we understand how to think marginally lets move on to some real figures and methods of cutting our costs. But we aren't done with philosophy yet. You have to understand total cost before we can move on. When you purchase something to consume or a service to use you need to consider not only the buying price, but interest from financing, cost of repairs and or fueling, and any others costs that you may incur from said purchase so that you can fully understand the whole cost and compare it to the alternative.
A classic favorite of mine is cars. An argument to buy a new car is often that it breaks less often and so is cheaper than an old car. My 1988 Buick is in the shop every three to four months generally with between a 100-400 dollar repair. I have driven it for five years, sometimes i go half a year without a repair but lets assume worst case scenario, every three months and 400 dollars for repair and lets compare this to the total cost of a new car at 20K for five years and an 8% interest rate, which comes out to around 360 dollars monthly. Minimum liability insurance is comparable, but higher for the new car, but I'll be nice and assume they are the same. The older car burns more gas, generally about a third more to newer more efficient models so I have added a third the approximate cost of 30 gallons of gas monthly to the old car table to estimate total cost of both options.
ceramic indoor heater
Saving money on heating
Heat the space, not the place. Lets face it, most of us when we are actually in our home spend most of our time in one room, venturing out for bathroom trips and food; not unlike bears in hibernation.
Buy an indoor space heater and heat the room your in, when your in it. Turn it off when your leaving for work or school or a party, and turn it back on when you get back. Space heaters will quickly heat up most rooms, and lets face it, it's really not that big of a deal to be cold while your heating up leftover dominoes.
I bought a thirty dollar space heater for my bedroom. It cost me twenty five dollars a month in the cold months to heat my apartment, the space heater adds about five dollars a month. This alone is saving me almost fifty bucks in the winter!
Would you like a spreadsheet that helps with this?
Would you like me to share a spreadsheet that calculates marginal costs of groceries for you? I could include a comparison shopping portion so you can find where the cheapest prices are.
Common methods most people can use to save money
Now that we know how to think like a money saver, lets look at some common costs incurred in the household and methods we can use to save, and just how much per person marginally we can save.
Lets start with beverages. Most of us enjoy a cola a day or so, either at work or school or on the way. Most basic colas are about 4 dollars for a 12 pack, which is .33 cents a can, and most generic colas are about .25 cents a can. Most vending machines and restaurants charge about a dollar per drink. Lets compare these three options for marginal yearly cost based on daily consumption. For giggles Im going to throw in how much I spend using generic dry koolaid powder for my daily drinks(Which is 15 cents per quart for what I buy at the dollar general, I consume about two quarts a week.)
Vending machine or restaurant drinks:$260 yearly per person
Name Brand Drinks: $85.80 yearly per person
Generic Drinks:$65 yearly per person
Generic Drink Mix:$15.60 yearly per person
So using this example, if you moved from daily vending machines to a generic drink mix you would save 245 dollars yearly. You lose the utility of caffeine and convenience of being able to grab a can and go; but if you mix the drink at the beginning of the week and pour into old water bottles or Nalgenes then you are given back the convenience and mobility of cans; the utility is nearly the same for significantly less cost.
Lets look at food costs the same way. It is cheaper to cook large portions than smaller ones, frozen food is also cheaper than raw food. It costs about six dollars to eat a meal at a restaurant with a discount or dollar menu. It costs about three dollars to eat a frozen or prepped meal like frozen dinners or Lunchables. Using ingredients like frozen broccoli, potatoes, and all sorts of pasta and rice dishes I am able to prepare meals for about seventy cents per meal(I will share recipes in a future blog if anyone is interested, adding your recipes to the comments here might help someone!) I prep all of my meals on one day, and freeze them in rubbermaid containers for the week.
Dollar Menu Meals daily: $1,560 per year per person
Purchased single serve meals daily:$789 per year per person
Homecooking in bulk:$182 per year per person.
Now for those of you who are curious, I ran on this budget for food for a month. It was not extremely pleasant, but it was well rounded and fulfilling. All of my recipes that I will post in a future blog about food have the cheap version, and the not so cheap version that makes it so much more pleasant, but even tasteless generic food can be spiced up and prepared in some excellent ways to make it significantly more pleasant than one would expect. I do NOT recommend trying to get your food budget below 30 dollars per person per month...it wasn't fun.
Next up....put ALL your electronics on powerstrips with switches and turn those switches OFF when your not using them. The average computer/printer combo costs you a little over a dollar a day to run, a game system and TV and speakers cost a little more than that. If you only use these appliances about a third of the time, then simply by cutting the power strips off when the devices aren't in use you will save fistfulls of money.
Running two computers and an entertainment center all the time; 520 dollars a year
Running them a third of the time: 173.33 dollars a year.
Now I also hand wash my clothes, saving me five dollars a week or so on the laundromat. It costs about fifty cents to fill a tub with hot water and I do NOT fill the tub each time I wash clothes. If you have an energy star washer and dryer you are only spending about fifty cents a load anyway, assuming you hang dry your clothes. If your going to a laundromat though it is more efficient to regularly hand wash your clothes.
Cost of two loads at a laundromat(weekly) per year;$260
Cost of the same amount of laundry down by hand(4 scrubbings a week);$104
Now, if you use all of the above methods to the extreme and you were doing the most expensive option listed(which is fairly common amongst middle class working americans) you would save 244.40 on drinks, 1378 dollars on lunches at work, 346.67 on electricity, and 156 dollars on laundry for a whopping 2125.07 yearly.
Most of us fall in the middle ground for this consumption; few of us eat out daily, but most of us do weekly. Work out the marginal yearly cost for YOUR eating habits and share with us how you accomplished it, or what your going to do to improve it, and look for my next blog on living cheaply and maximizing revenue. Comment or vote on what you want to hear abut!