(Guest Post by Trevor van Hemert)
Today I’d like to show how I trick myself into spending much less money without the need for budgeting. I use three different psychological tricks in three categories: Survival, Slavery, and Mileage. I’m giving you three so you can pick the one that best resonates with you!
But I’d like to start off by describing a well-known personal finance psychological trick. You’ve probably already heard of it.
The Debt Snowball
Decades before I was born, personal finance titan Dave Ramsey packaged and promoted a method of paying off debts called the “debt snowball.” In this method, you pay off your debts one at a time, from the smallest to the largest – regardless of interest rates on the individual debts.
The Debt Snowball method has been subjected to a lot criticism over the years ever since Ramsey has promoted it. After all, isn’t it more efficient to start with the highest interest rate debts first?
Eventually, SCIENCE weighed in on the long disagreement. Researchers at the Kellogg school of management studied the records of a debt collection company to reach an unbiased conclusion. It turns out Ramsey’s right – the Debt Snowball method has a much better success rate than any other method of paying down debts.
Let me say that in another way. More people succeed in paying down all their debts using Debt Snowball than an interest rate optimized strategy. When it comes to changing personal finance habits, psychology counts, not numbers. Those tiny early victories build stamina for the struggle ahead. Paying off that first debt feels monumental and lets you prove to yourself that debt-free is possible.
But paying down debt is just a small piece of the personal finance mosaic. Many readers of this blog don’t have any debt at all, and are just interested in building their savings. Well, good thing you’re still reading! Because I’ve got yet more psychological tricks to reduce spending, build savings and change how you think about your money.
I’m going to share three of my tricks with you. These techniques have helped me reduce my expenses enough to achieve self employment ,and an imminent early retirement in my 20’s. And they’re all so simple you can begin today!
Your Survival Number
Try this: calculate how much money you need for a decent survival each day. Count all important expenses, but aim to come up with as low a figure as possible. For me, this number is $26. That includes fancy things like an entire pot coffee every day, a nice apartment in frozen Alberta, and pretty damn good home cooked food. Your number may vary if you have kids, a spouse to support, soul crushing debt, etc.
Keep your survival number with you during your day. Write it on your hand if it helps. For most people, reducing expenses is about changing their day-to-day habits, not increasing their salary or saving a bunch of money on car insurance. Those small, easy-to-ignore expenses will seem much bigger when compared with your survival number.
For example, as I said my survival is $26. That delicious ten dollar burger? That’s almost half of a day’s survival budget! Ouch!
You can get more granular with it too, play around a bit. My fairly overpriced internet costs $2/day – which provides for almost all my entertainment and education needs. For what I get out of it, I consider it money well spent. But would I spend an entire day’s internet on a single Starbucks coffee?
How Many “Energy Slaves” Could That Buy?
Do you know what the best bargain for your money is? It’s the greatest deal of all time and it’s staring you right in the face every day when you go to work.
That so-called “expensive” $4 per gallon gas embodies an incredible amount of energy that would make kings and emperors throughout history seethe with envy. A single gallon of gas contains 31,000 calories of energy.
I like to think of this in terms of slaves because gasoline powers our modern slave equivalents – cars, cargo ships and corn combines. Here’s what Wikipedia has to say on this:
An Energy Slave is that quantity of energy (ability to do work) which, when used to construct and drive non-human infrastructure (machines, roads… etc) replaces a unit of human labour (actual work). An energy slave does the work of a person, through the consumption of energy in the non-human infrastructure.
Now a single human slave would need 2,000 calories per day, which means a single gallon of gas is like having over fifteen slaves for a full 24 hour day. That’s about 26 cents per slave per day (talk about getting your 4 bucks worth).
Again, take this number and apply it to your every day purchases. It will start to make you sick how expensive some things are. I just bought 10 rolls of toilet paper for $10. Seems like a pretty good deal right? WRONG.
Each of those $1 rolls could have bought me a gasoline-powered energy slave for four days. That’s enough work to clean my house, cook all my meals, wash my dishes and give me a daily back massage for half a week.
Note: Obviously slavery itself is immoral and illegal, however these “energy slaves” I talk about is a common and well studied concept as noted above.
Tripling your Money Mileage
One last mental trick, ladies and gentlemen. This is a new one I’m developing so forgive me if it’s a bit undercooked.
Remember when I told you I spend $26/day for all my living expenses? For those of you who would rather not do the math, that’s $9,490 per year. It turns out the average adult in my country spends more than three times that. I found that out on the excellent Stats Canada website, which catalogs statistics like this.
Effectively what this means is I’ve increased my money mileage to three times the baseline. One dollar to me does three times more for me than it would do for a typical Canadian.
To do this math for your own household, divide the average expenditure for your household type in your state or province by your own expenses, and find your money mileage multiplier. As with all my previous tricks, take this number with you and integrate it into your routine. Revalue that $4 deli sandwich at $12, is it still worth it? The more you multiply, the less you’ll want to spend, which in turn will bring your money multiplier even higher!
It’s worth noting that this trick works best if your spending is below, preferably far below, the average.
The End Goal
These tricks are all meant to help you revalue your money. You’re not going to hang onto what you don’t prize highly – it’s the same in relationships as it is in personal finance.
I’ll happily admit that I’m not even close to an expert at reducing expenses – there’s folks over at Early Retirement Extreme who have dropped expenses down to $7/day, and that’s including children!
Run the numbers and tell us what your “survival number” is. Maybe you have other tricks too?
Trevor van Hemert makes things, mostly bad jokes and websites. His experiments litter the internet like corpses after a battle. By far the least terrible of these sites is about 5 gallon buckets. His newest tepid creation is about mason jars. [Authorship: Trevor+]
EDITOR’S NOTE: My “survival number?” A whopping $183. Damn…
[photo by NatalieMaynor]
Featured savings tip
You already know that banks pay $$$ for the privilege of holding your money…it’s called interest. But maybe you didn’t know this: that so-called interest can be as little as .01%. If your cash savings aren’t sitting in a high interest savings account that earns you at least 1%, you’re basically saying “no” to free $$$!
Now, obviously the 1% interest you get with a high interest savings account like the one at Discover bank won’t make you rich, but that extra 1% compounded over 30 years can grow into a *big* pile of cash. And if you wanna hit lofty $$$ goals, you should be looking for every edge possible.
Here’s another way to look at it: if you leave $50,000 in a regular savings account, that’s almost $500 you’re just throwing away, each and every year you don't setup a high yield savings account! Will you do 5-10 minutes of work right now to earn an extra $500/year for years to come?
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