Things I learned the hard way
The way to save money and stay out of debt is not to look for the cheapest way to buy what you want. It is to set a household budget with a maximum daily expenditure limit, and never, but never, go above it. That budget must be very easily within your expected income - and by expected I mean certain - and be set with an eye to the minimum you need reasonably buy every week. Change it if you find it does not work, but never, for any reason, go above it. Big-ticket items are usually the least urgent to buy, and if there is anything you really need, you can usually afford to wait till you can buy it without ruining yourself.
Run a tidy household. You do not own - not really - anything that you cannot lay your hand on, immediately, at need. That means anything: money in a savings account, tools in a shed, books put away in an attic, even computer data saved on a DVD or memory stick whch ended up at the bottom of a drawer somewhere. Always arrange things so you can see them, because you cannot rely on your own memory to remember what you have and what you do not Better to have a cluttered and inelegant-looking house, but to be able to find anything you need when you need it. Two corollaries:
- Never buy anything you have no need for. Need, in household management, is a large concept; but it is not limitless. If you cannot see yourself using something frequently, and if you have not found yourself wishing you had it before you saw it, leave it on the shelf. Never mind how clever and tempting it is. Never mind that it is discounted, that it is in fashion, that it enters you for a competition for a flat in Benidorm. It always means spending money you will never have again (and most likely will regret spending in a few days), and taking up space that would otherwise be either uncluttered or used by something you really do need.
- Money that is invested or placed in a savings account counts, for all practical household purposes, as lost. You may count on its profit and on the final planned return of the capital in a certain amount of years, but you should never think of it as part of the daily household budget. Any groups or people who say that they can help you access invested money while it is still invested (e.g. those who claim that they can help you use the money invested in your house) are not your friends.
You have to consider your household budget as something quite separate from your savings and investment budget. Only until you are certain of the first should you even consider embarking in the second. That is, only until you have a decently safe idea of how you will pay for the roof over your head, the heating, electricity, food, clothes, cleaning and every other necessary everyday expense, should you consider setting aside any money for savings and investment.
However, a household budget is a flexible thing. If you have a good idea or an urgent need for investment, you will find that opportunities for permanently reducing your household budget will present themselves to you. Do not, however, endanger the roof over your head or the food on your table for the sake of a business idea that may not come off. Investments can and do fail.
The essence of both investment and borrowing is to remove a considerable amount of space for manoeuvre, of possible options and opportunities, from your future. Any time you borrow or invest or both, you are cutting out a slice of your possible future. Consider it well before you do either thing. Above all, neither borrow nor invest to your limit, nor even close. It is not true that only death and taxes are certain: there is a third certain thing - Murphy’s law. What can go wrong will, somewhere, somehow, sooner or later, go wrong. It may not involve you, but sooner or later it will. And if you have mortgaged enough of your future, you will not have the resources to meet it. Wiseacres mock at old guys who keep their money under the mattress, but the old guys have learned enough to know that under the mattress is sometimes the only place where you can find your money when you need it.
Of the two, however, investment is far better than borrowing - even where it IS borrowing. That is, the only kind of borrowing that makes sense is large-scale borrowing for big-ticket items such as a house or car; better still, for something that will help you make money, like a truck or a house to rent. What you are doing there is to commit a large part of your future work and effort to the possession of things without which that work or effort would not even be possible - a roof over your head, a place to work from, a means of transport. It is a reasonable exchange. No other form of borrowing is.
What that means is that borrowing is the nuclear option, not to be used until everything else is impossible. Do not be tempted to take a loan or buy on credit anything that you could buy outright with a few months’ planned savings, like a computer or a washing machine or a bicycle; not only will you find that it ends up costing you a lot more, but you are placing a marker on your future that will, at some point, prevent you from using money in a way that would then, at that point, make more sense. If you want anything that badly, you can afford to wait for it; it will take you less, or rather, it will take less out of you, in the long run.
Of course, this is not an absolute rule. It can happen - not often, but it can - that a sudden and desperate need for a new item arises - a computer, a wheelchair. If the need is really urgent and will not wait, then take any reasonable financing option available, and consider it an investment, in the same sense as borrowing for a home or car. Other than that, however, avoid borrowing.
And if there can be a reason to borrow to meet an urgent and unexpected need for a single item, there is absolutely no excuse to borrow to meet household expenses. Rather starve; it comes to the same thing, and you are not going to be in debt to anyone else at the end. Borrowing to pay for your daily expenses means, essentially, that you do not know where the money for your most desperately needed expenditure is to come from. That is, you are for all practical purposes without reliable sources of money. Do you see why I say that to borrow money to meet ordinary expenses is essentially the same as to be starving? It IS starvation - date briefly deferred, and with the added humiliation of debt on top. You should have thought of that months before, when you made your spending plans and set your budget for the near future.
At the heart of this lies an immensely important norm: NEVER LIE TO YOURSELF. With the possible exception of sexual desire, there is no more fertile ground for self-deception than money affairs. To take one instance: I have said, above, that it is legitimate to take a loan to meet an urgent and unexpected need for a piece of equipment such as a computer. However, it is entirely too easy to deceive oneself as to the urgency of the need. If you really do not need that computer TOMORROW, you can afford to wait for it. This can be painful: the children will want the toy that everyone else has, the family will expect the holiday abroad that all their friends brag about. But that is neither an urgent nor an inevitable need.
It can be even more painful when setting your budget. I said that borrowing to meet household expenses is ony starvation with the delightful extra of humiliation; but when you are setting a budget, those options are far in the future, whereas that of facing up to the fact that income does not match needs is present and agonizing. Poverty is an ugly fact which people tend not to want to look at.
And yet they should. A fact once accepted, and however ugly, is an asset. It is something on which you can build. As I see that in so much time I will run out of money, what should I do? Can I find an extra job to pay for the excess expenditure? Do I really need the expenditure? Are there items that are not essential, that I can do without? Would it be possible to find a cheaper lodging, and if so, how much time do I have to find it? (And to prepare for the inevitably expensive and tiring move?) If these questions are met in time, it is possible to get out even from very ugly situations.
Run a tidy household. You do not own - not really - anything that you cannot lay your hand on, immediately, at need. That means anything: money in a savings account, tools in a shed, books put away in an attic, even computer data saved on a DVD or memory stick whch ended up at the bottom of a drawer somewhere. Always arrange things so you can see them, because you cannot rely on your own memory to remember what you have and what you do not Better to have a cluttered and inelegant-looking house, but to be able to find anything you need when you need it. Two corollaries:
- Never buy anything you have no need for. Need, in household management, is a large concept; but it is not limitless. If you cannot see yourself using something frequently, and if you have not found yourself wishing you had it before you saw it, leave it on the shelf. Never mind how clever and tempting it is. Never mind that it is discounted, that it is in fashion, that it enters you for a competition for a flat in Benidorm. It always means spending money you will never have again (and most likely will regret spending in a few days), and taking up space that would otherwise be either uncluttered or used by something you really do need.
- Money that is invested or placed in a savings account counts, for all practical household purposes, as lost. You may count on its profit and on the final planned return of the capital in a certain amount of years, but you should never think of it as part of the daily household budget. Any groups or people who say that they can help you access invested money while it is still invested (e.g. those who claim that they can help you use the money invested in your house) are not your friends.
You have to consider your household budget as something quite separate from your savings and investment budget. Only until you are certain of the first should you even consider embarking in the second. That is, only until you have a decently safe idea of how you will pay for the roof over your head, the heating, electricity, food, clothes, cleaning and every other necessary everyday expense, should you consider setting aside any money for savings and investment.
However, a household budget is a flexible thing. If you have a good idea or an urgent need for investment, you will find that opportunities for permanently reducing your household budget will present themselves to you. Do not, however, endanger the roof over your head or the food on your table for the sake of a business idea that may not come off. Investments can and do fail.
The essence of both investment and borrowing is to remove a considerable amount of space for manoeuvre, of possible options and opportunities, from your future. Any time you borrow or invest or both, you are cutting out a slice of your possible future. Consider it well before you do either thing. Above all, neither borrow nor invest to your limit, nor even close. It is not true that only death and taxes are certain: there is a third certain thing - Murphy’s law. What can go wrong will, somewhere, somehow, sooner or later, go wrong. It may not involve you, but sooner or later it will. And if you have mortgaged enough of your future, you will not have the resources to meet it. Wiseacres mock at old guys who keep their money under the mattress, but the old guys have learned enough to know that under the mattress is sometimes the only place where you can find your money when you need it.
Of the two, however, investment is far better than borrowing - even where it IS borrowing. That is, the only kind of borrowing that makes sense is large-scale borrowing for big-ticket items such as a house or car; better still, for something that will help you make money, like a truck or a house to rent. What you are doing there is to commit a large part of your future work and effort to the possession of things without which that work or effort would not even be possible - a roof over your head, a place to work from, a means of transport. It is a reasonable exchange. No other form of borrowing is.
What that means is that borrowing is the nuclear option, not to be used until everything else is impossible. Do not be tempted to take a loan or buy on credit anything that you could buy outright with a few months’ planned savings, like a computer or a washing machine or a bicycle; not only will you find that it ends up costing you a lot more, but you are placing a marker on your future that will, at some point, prevent you from using money in a way that would then, at that point, make more sense. If you want anything that badly, you can afford to wait for it; it will take you less, or rather, it will take less out of you, in the long run.
Of course, this is not an absolute rule. It can happen - not often, but it can - that a sudden and desperate need for a new item arises - a computer, a wheelchair. If the need is really urgent and will not wait, then take any reasonable financing option available, and consider it an investment, in the same sense as borrowing for a home or car. Other than that, however, avoid borrowing.
And if there can be a reason to borrow to meet an urgent and unexpected need for a single item, there is absolutely no excuse to borrow to meet household expenses. Rather starve; it comes to the same thing, and you are not going to be in debt to anyone else at the end. Borrowing to pay for your daily expenses means, essentially, that you do not know where the money for your most desperately needed expenditure is to come from. That is, you are for all practical purposes without reliable sources of money. Do you see why I say that to borrow money to meet ordinary expenses is essentially the same as to be starving? It IS starvation - date briefly deferred, and with the added humiliation of debt on top. You should have thought of that months before, when you made your spending plans and set your budget for the near future.
At the heart of this lies an immensely important norm: NEVER LIE TO YOURSELF. With the possible exception of sexual desire, there is no more fertile ground for self-deception than money affairs. To take one instance: I have said, above, that it is legitimate to take a loan to meet an urgent and unexpected need for a piece of equipment such as a computer. However, it is entirely too easy to deceive oneself as to the urgency of the need. If you really do not need that computer TOMORROW, you can afford to wait for it. This can be painful: the children will want the toy that everyone else has, the family will expect the holiday abroad that all their friends brag about. But that is neither an urgent nor an inevitable need.
It can be even more painful when setting your budget. I said that borrowing to meet household expenses is ony starvation with the delightful extra of humiliation; but when you are setting a budget, those options are far in the future, whereas that of facing up to the fact that income does not match needs is present and agonizing. Poverty is an ugly fact which people tend not to want to look at.
And yet they should. A fact once accepted, and however ugly, is an asset. It is something on which you can build. As I see that in so much time I will run out of money, what should I do? Can I find an extra job to pay for the excess expenditure? Do I really need the expenditure? Are there items that are not essential, that I can do without? Would it be possible to find a cheaper lodging, and if so, how much time do I have to find it? (And to prepare for the inevitably expensive and tiring move?) If these questions are met in time, it is possible to get out even from very ugly situations.