Ask the Readers: What Do You Do When Frugality Gets You Nowhere?
Published on - March 20th, 2009 (by J.D. Roth) In general, the frugal person who saves and invests will slowly build wealth, and will find herself far ahead of her peers. But sometimes the progress is slow — or even non-existent. When this happens, good financial habits can seem frustrating. Sara wrote to ask what to do when frugality seems to be getting you nowhere:
Although I practice extreme frugality, I feel that I cannot get ahead financially. Every month I seem to be back in exactly the same place as I started the month before. Here are the details:
- I am 24 years old and have never carried credit-card debt.
- I have $4000 in student loans at 2.5%.
- I am responsible for half of a mortgage at 5.5%.
- I work 20-25 hours of overtime every week for extra money to save.
- I contribute the full employer match to my 401(k).
- We eat all our meals at home and pack our lunches everyday. I cook lots of beans and rice and other low cost foods.
- I do not drive a fancy new car or buy fancy new clothes. In fact, I do not buy many consumer goods at all.
- Every month, I pay extra principal on the mortgage and put extra money toward my student loan.
- Every month I put money into an ING savings account.
- Every month I put money into an index-fund Roth IRA.
Even paying extra on my student loans, it will still take years to pay them off. Even though I am putting 15-20% of my gross income into a 401(k) and an IRA, the balances don’t go up. They go down, or, if I’m lucky, they stay the same. Even though I put money in savings, I seem to have no progress because the savings rate is so low. Even though I scrupulously keep track of my tax deductions, my tax refund from 2008 will be less than $20. When I think of what I pay in taxes, it makes me feel queasy.
Why does it seem that I am doing all the right things but getting all the wrong results? I feel like I have been running in circles, going no where fast, and I am exhausted.
Saving money is work. It’s a challenge. Success does not come overnight. And, in fact, there can be long stretches where it seems nothing is going right. This is especially true if the economy at large is conspiring against you. You may be making good choices, but if interest rates are low and the stock market is declining, it will seem like you’re making no progress (or maybe even losing ground).
I believe that Sara is doing the right thing. Obviously there’s no guarantee that she will be successful, but it’s my belief that if she continues to make smart choices, she will be rewarded in the long run.
My advice — and it feels odd to say this — is for Sara to be a little less thrifty in the present. I think she should reduce the extra payments on her student loans (and possibly her mortgage), at least for a little while. She should use this money to pursue something that she enjoys or that gives her life meaning. She might, for example, save for a trip to Europe, or for a new bicycle.
Since re-discovering it last autumn, I’ve become an adherent of Elizabeth Warren’s balanced money formula, which is designed to let people build wealth while also setting aside some money for fun. Warren says that, ideally, no more than 50% of your paycheck should be spent on Needs. Of the remaining amount, at least 20% should be devoted to Saving, while up to 30% can be spent on Wants.
Here’s what the balanced money formula looks like:
This simple plan has made a huge difference in my own life. Because I’ve reduced my Needs to below 50% of my net income, I’m still able to meet my Savings goals and have plenty left over for Wants. But the key is to allow myself to actually spend on Wants. For a time, I wasn’t doing this, and it made money management a drag.
My guess is that by allowing herself a bigger budget for Wants, Sara will feel better about her progress. But I also think that she needs to be patient. She’s only 24. She’s young, and she’s making smart choices. I believe that in the long term, she will succeed. But it takes time. Right now she’s being thwarted by one of the worst economies in the past 100 years. That’s a powerful tide to swim against!
What do you think? Am I completely off base? What advice do you have for Sara? Should she stay the course and continue to embrace extreme frugality and debt reduction? Or should she lighten up in an attempt to find some balance? Are there other options that I’m forgetting? How can she begin to feel like she’s making some progress?
This article is about Ask the Readers, Frugality, Psychology, Real-Life
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This girl Sara is smart. Wow!
Set a financial goal for the medium and long term. This will remove your frustration. Medium targets could be new clothes in 6 months, a travel vacation in 12 months or dinner out once a week. Thats fun money, by gosh you’re only 24.
Well many comment posts have suggested this & I voice it again – you don’t have to look at your 401k and Roth IRA everyday. Maybe 1 a year should be good if your strategies have changed.
Mortgage & student loans at the rate at which you have are great. Paying it off may have some short term psychological benefit, but believe me there is a reason why they are long term loans.
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I’m going to echo everyone else in saying that Sarah is doing just fine financially. Her frugal lifestyle absolutely will pay off and show significant gains – in 10 to 20 years (these things take time!)
In the mean time, I’m concerned about her other choices. Working 20-25 hours OT every week will kill her health and relationships. For what end? This is a type of “all or nothing” mind set. In the end, relationships bring joy to life. Ane the journey should be great too. A car accident, cancer, could cut it off tomorrow, so at least make sure you’ve lived life well so there are no regrets!
TO that end, I propose the following:
* Create a mix of financial goals to track progress against. “Pay off student loan by next Feb”. “Save 5K for dream trip to Africa” Note that some goals are fun goals, some savings goals, some debt reduction goals. Make sure they are specific and measurable so you can track progress.
* Cut the OT back to 10-15 hours a week, and have some weeks where there is no OT. Spend time creating relationships to last your lifetime. When the hard times come (notice I used the word “when” not “if”) you’ll be glad of it.
* Establish a FUN bank account. This is to be used for trips and other fun things. Since you’ve budgeted for it, there will be little guilt using the money. It’s part of your plan!
* Consider giving some time and money away. I agree with the 10% comments by some. Now that I’m older I can do even more, and do NOT regret it. I am greatful that my frugal lifestyle allows me to alleviate pain in others.
* Yes, by all means run the long term numbers. That brings the long term gains back into focus.
* Don’t focus on others. Most of those people in the BMWs and Pradas have debt up to their ears. Do your own personal best.
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It was refreshing to hear this article mention “have fun!” Very important.
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I have done everything you are saying in your bulleted list above.
I have done a bit less (you can say), but lived in a very ‘controlled’ (read it as non-impulsive) environment by using self-control and discipline since I wanted to make it big.
I DID. I HAVE. I WILL NEVER GIVE THAT UP EVEN WITH ALL OF THE MARKET TURMOIL.
Here is why:
1. Have saved money every penny at a time, but yet enjoyed what I wanted and lived a good 20 years years from the days of my college.
2. I maximized on using company events to save money.
3. I traveled with company folks instead of using my car.
4. I jumped jobs and got ‘overtime pay’ and volunteered for any jobs that would give me overtime.
5. By doing overtime, I did not have time to spend.
6. I saved in the highest yielding M.Mkt accounts.
7. I got credit cards, used their money for 30-45 days, NEVER paid $1 in interest EVER, and paid off at end of month (still do the same).
8. I used ALL promotions, free gifts, free money offers as I could, going out of my way to do it.
9. I have opened and closed 25 credit cards in 10 years, and 8 bank accounts in 11 years. Each of them offered free Digital Camera, Free iPod Shuffle, Free GPS, Free $25 or $50 or $100 or $125 etc. You get the picture.
10. Got 2 for 1 coupons. Sold stuff on eBay (total sales approx $500-$600).
11. Joined ‘recycling groups’ all over the US.
12. Bought stuff online, after intensely doing comparison shopping (late nights).
13. Always negotiated my way for every purchase that was more than $50.
14. Did Dollar Cost Averaging into 401(k) and non-tax-deferred accounts, and sold with some profits every 2-3 years.
15. Took a financial hit in 2000-2002. Taking another financial hit in 2008-2010. But, will be patient and wait it out.
16. Sold house by myself in 2003 (FSBOwner) and saved $14500 and got $5000 more on the house than what the RE promised to list for.
17. Using a car that I bought in 1992, and still using it. Using a van that I bought in 1996 and still using it. Bought a Lexus from Dealer auction (contacts) for cash in 2005. And, work from home 1-2 days a week to save on mileage, clothes, etc
18. Teaching kids to drink water from 1992 until now at restaurants. It used to be sacrifice, and now its ‘cool’ to do so!!!!!!
19. Will bring home food from restaurant to not do impulse buying (2 out of 5 times). It is good to be served every so often. BUT, will rarely go to restaurants where I do not have an online coupon or a deal.
20. Will always have parties at home with people bringing appetizers and dessert, with us cooking the main meal at home. No buying wonderfully decorated plates from grocery stores.
21. Buy everything in bulk as much as possible…..Walgreens had Dr Pepper, Fanta, 7-Up bottles for $0.50 with a buy 1 get one free. Loaded it up for 2 years by buying 30 bottles (2 liter). Who gives 2 liter for 25c each.
22. Just today I found General Mills Chex-Chocolate Cereal for $0.99 with a 50c coupon. It is 14.5oz box, and therefore loaded up by buying 6 boxes.
It takes a LIFETIME of doing the right thing, but this is NOT WORK and should not be EXHAUSTING, since this is called ‘SAVINGS’ and you will eventually get a KICK out of it.
Bottom-line is ‘Not what I did’…..’Not I much I saved’……But, WHAT DID I KEEP IN MY BANK!!!!!!!!!!
I can say that even though my ways are aggressive, parallel Japanese/Chinese/Indian ways of saving-first, they all lead to one conclusion: Am I a Millionaire with my own efforts.
YES…..Multi-Millionaire coming from an environment where at age 21, I had $3000 in my bank account given to me by my Dad as a ‘starting point’, and living in an apartment.
I am NOT a show-off (can’t be with a 17 year car that I drive), and I am NOT showing off here. I am just sharing the fact, that:
> Where there is a Will There is a Way.
> If you Work Hard and Sacrifice, You Achieve
> Don’t lets the Joneses stop you EVER
> Do what is Right For YOU & YOUR Family
Good luck……No offense to anyone, since I am just doing what I think is right for me based on my experiences, background and culture. This is just an open share, SINCE, you asked!
Kenny
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I’m so glad everyone seems to agree. There is more hope for this country if we can continue to have more people like Sara.
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Sara – I think you are looking at investment too narrowly. You are at the stage in life when you should be investing in friendship, community-building, and skill-acquisition/learning. Taking good care of your health, physical and spiritual – don’t underate those investments. they pay off big time as you age.
And of course we’re in the middle of the biggest economic contraction in a few generations. Once the economy is back on track you will see progress in your investments. Take the long view.
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I can tell you how we look at our situation and maybe that will help.
When we feel like the goal is far away, we don’t look at the how far we have to go, we stay focused on the goal itself. We visualize how our lives will be and live in that moment, not this one.
we tried getting out of debt by the numbers and cracked. we were too deprived and couldn’t take it. So we allowed ourselves spending money. it takes longer to get out of debt this way, but at least we are sticking to getting out of debt this time.
it helps to really determine the things you love to do vs the things you would like to do. We don’t deprive ourselves of the things we love to do — except travel. That’s just too much money to spend right now. but we have new computers, go for walks, see first run movies at the imax, and buy books, etc. we just found really cheap, if not free ways to get/do these things.
We focus on one goal at a time. it really does help to accomplish something. so like all the others before me, i would knock out the student loans. who cares that they are at 2.5%? that’s still money you’re paying.
I would not quit your second job/overtime. you’re getting to your goals just that much faster. and when/if you decide to have kids, you may not have the option of working that second job. life has a funny way of throwing obstacles at you. so the better prepared you are now, the better off you will be. However, I would put some sort of limit on it. You’ll only work overtime till you have kids or till you fund X goals. that way psychologically you know there’s an end date.
maybe you could rephrase your words? “I put money here, I do this, I do that”. You’re focused on the now. “Every month, I put extra money toward my student loan.” vs “Every month I’m $300 closer to paying off the student loans” or “I only have 18 months left on the student loans!” Also, “I do not drive a fancy new car or buy fancy new clothes. In fact, I do not buy many consumer goods at all.” vs. “We are working on being financially independent.”
Are fancy clothes/cars/consumer goods really that important to you? if they are, figure out a way to have them without blowing your budget. You could save up and buy a car at auction or scour the ads to find the great deal that may take you 2 years to find,but was worth the wait. You could meet a nice person at church who is a clothes horse and gets rid of her clothes at crazy speeds and you are just her size. you love to cook and she hates it. I see a trade here. We have a lot of nice things, but everything is used or we bartered for it. it’s kind of fun. we get to help people and we don’t pay much of anything.
As far as the stocks go, think of them as diamonds. you buy 100 diamonds for $1,000,000. The bottom falls out of the diamond market and now they are only worth 100,000; but you still have 100 diamonds. the diamonds didn’t change, just people’s perception of them. People are still going to want them. you just have to wait till people get their head on straight again to sell them at 1m or higher. Not a perfect analogy cuz there are some diamonds that go out of business (think an intruder crushed a diamond or stole it and you didn’t have insurance). But thinking this way helps me.
you can also get a sticky pad and make a countdown of months or payments or $100 increments. then rip off a note each time you accomplish. that’s an awesome feeling to rip it off and to see the numbers get smaller. Good Luck!
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Two of Sara’s complaints actually deserve kudos. The fact that you only get $20 back from your tax return shows that you are not letting the government borrow from you interest free. WTG!
The fact that you keep investing even though your IRA and 401(k) balances keep shrinking will serve you well. At the age of 24, you have time on your side. Keep it up.
That said, JD has a point. Life is for living and it is OK to spend money. Go ahead and live a little!
BTW, I recommend “How to lower your taxes big time” if you would like to try to decrease your tax burden. It doesn’t work for everyone, but it might help you out.
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Sara, the simple answer to your question is that you’re simply not going to see your results immediately. This doesn’t mean that what you’re doing isn’t working, just that it takes time and patience, like anything worthwhile, for things to pay off.
For instance, you mention that despite paying 15-20% per month into your 401K the balance is going down, not up. What you need to keep in mind here is that it’s not the balance right now that matters, it’s the balance when you’re 65. So while it’s disheartening to see that low balance right now, it also means that you’re buying many shares at historically low prices that have almost nowhere to go but up in the long term.
The same can be said for your extra principle payments on your mortgage. The effect of putting an extra $100 a month down on a $100,000 loan is hard to see. If you’re not thinking long term it’s just a drop in the bucket. But take a step back (do the math if it helps) and you’ll see that you’ll be paying off your mortgage years early and saving tens of thousands of dollars in the process.
I would suggest breaking your long term goals down into medium and short term goals and tracking your progress towards them. For instance, calculate just how early you want to pay off your mortgage and how much that will require per month and per year from you. When you meet that goal you know you’ve taken another small step towards financial freedom.
There’s a reason that so many people fail at personal finance despite the “rules” being so simple. It takes a lot of effort and patience to see yourself through to the end.
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> Even paying extra on my student loans, it will
> still take years to pay them off.
Of course it will. But it will take less time, and more importantly less MONEY to pay them off with your current approach.
> Even though I am putting 15-20% of my gross
> income into a 401(k) and an IRA, the balances
> don’t go up. They go down, or, if I’m lucky, they
> stay the same.
You’re 24. Why do you care what your 401k is doing? Set an investment plan, re-balance when needed, and keep contributing. Do NOT let yourself get caught up into watching the balance of your portfolio. The decision you made years back to start contributing is based on the exact same decision inputs as now. The only difference today is EMOTION, namely fear.
> Even though I put money in savings, I seem to have
> no progress because the savings rate is so low.
Keep only your emergency savings and your general savings in liquid accounts. The idea that you should be piling up cash in a savings account is misguided. Interest rates are significantly lower than inflation right now, so every year you are guaranteed to lose wealth for every dollar that is sitting in ING.
> Even though I scrupulously keep track of my tax
> deductions, my tax refund from 2008 will be less
> than $20.
This is a GOOD thing! This means that your employer is not taking out more money than they should from your paycheck, leaving you more to invest and live on.
> When I think of what I pay in taxes, it makes me feel queasy.
Can’t help you there, and the reality is that it is only going to get worse. Between the additional debt our nation will need to service and the new government programs that are being created, we have a hard road ahead of us when it comes to taxes (both direct through income/sales/property taxes, and indirect via inflation).
But you do not have control over this. It is what it is, and you cannot change it. Further, all of your competitors are dealing with the same taxes, and if they’ve got any kind of advantage on you, then they are likely paying MORE in taxes. While angering, the tax issue is mostly a non-issue, at least as far as something worth worrying about.
Focus on the things you have control over, which is your spending, savings, and investment decisions. Tax considerations only influence those decisions; they do not change the need to make any of them.
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I think Sara is doing great! I do agree that she should put some money aside for fun stuff. The husband and I did that and were able to travel to Europe 4 times in only 3 years. I’m sure that’s not the top thing to do on everyone’s list, but it was on ours. I’m so glad we could do this while we were young and full of energy.
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Relatively quick scan through the responses, and i don’t see this mentioned: Don’t forget when you’re on the front end of your mortgage, very little of your regular monthly payment actually pays off the principle. In effect, the only part of principle you’re paying in the early years is what you pay extra toward principle. However, this early investment eventually pays off by accelerating the day when what you’re paying each month really ends up paying down the balance of the loan. A $1000 payment at first is $999 interest and $1 principle. At the end, it’s the reverse, $999 principle and $1 interest.
All other comments are good too – dollar-cost averaging, paying off loans, etc., but the real meat is in making sure your actions match your goals, which means you have the goals understood and clearly in mind, and the goals may include more enjoyment today as well as saving for tomorrow. Balance in all things.
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doubt anyone is still reading the comments on this post, but wanted to add:
we were in a similar position. what made a huge difference for us was we got a lodger for our spare bedroom. we checked with our landlady, first, as i wanted this to be as legit as possible. it helps that we live in new york city– we rented the room out for $500/month. only for 6 months, but that extra cash made things feel much less hand to mouth. by the time our friend found a more permanent home, our finances had changed enough that we no longer needed the extra money (and our son did need the room!)
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I think what she should do is maybe stop paying ahead on the student loans for a while and let that extra money go toward loosening the belt a little bit, so she can enjoy life a bit more and not feel so frustrated. The mortgage carries a higher interest rate, so I feel paying ahead on THAT is a good thing.
It’s important not to feel deprived, becuase if you feel deprived, you will eventually rebel. Been there, done that.
As for myself, my needs cover well over 50% of my income. Heck, my mortgage alone is over half. I don’t carry any other debt, however, so it balances out.
I’m currently looking at what it would cost me each month to max out my 401K. If it won’t make things too tight, I’m then going to do just that.
Jen M.
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I’m a bit late to the party here, but I think she’s definitely going a bit overkill on those loans.
I have a 3% student interest loan and I’m rejoicing that it’s taking me plenty of time to pay it off. It’s the last thing on my list of items to pay off because the interest on it is so dang tiny. That same money could do much better than 3% somewhere else – so it makes more sense to get that.
Say I were to put money into a 3.5% CD for 2 years. Putting that same amount against my school loan principal would only save me that amount + a compounded 3% on it. So, by only paying the minimum on my loans and investing elsewhere, I come out 1.5% (again, compounded, so it’s not *actually* 1.5% of the initial value) ahead on that money.
Also of interest are those “saver’s remorse” articles that I’ve seen mentioned recently.
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I just want to tell Sara that she’s doing a great job and that I’m proud of her.
I agree that she might want to think about re-distributing some of the money she’s using now to pay extra toward student loans and mortgage debt to do something fun. Geesh, working that much overtime she needs a vacation! (I work like that too, so I know.)
Sara – I know that you feel like you’re going nowhere, but trust me you are laying down a foundation that is going to get you very far in life. Keep in mind too that your salary will likely go up as you get a little older, which will make paying extra toward debt payoff easier. I was stuck at awful jobs with low pay through my 20′s. I’m now 35 and my income this year is literally just shy of five times my income the year I was 30.
It’s great that you’re so dedicated to being financially smart and frugal, but be sure to make some room for some fun. You definitely deserve it.
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