Learn to Live a Frugal Life in Three Steps

Without frugality none can be rich, and with it very few would be poor – Samuel Johnson

Wealthy people like Warren Buffet (Billionaire Investor) and Chuck Feeney (Co-Founder of Duty Free Shoppers Group) believe in living a frugal life. Interestingly, both these wealthy businessmen use their wealth to help people. Chuck Feeney said, “I try to live a normal life, the way I grew up. I set out to work hard, not to get rich.”  Frugality is one of the virtues that are important for wealth building. When it comes to frugality, it is not that easy to teach how to live frugally or how to get into a frugal mindset.  Frugality is all about being aware of how you are spending your money and how can you control your thrifty habits.  There is no quick-fix to get into frugal mode. However, in order to save more and cut unnecessary expenditure, it is important to differentiate between

Needs vs. Wants

I have emphasized this in my previous posts as well. While we all know that in order to increase savings, we need to curtail our expenditure, what we need to know is what is not necessary. Well, there is no definitive answer. It depends on the age and life stage of a person. If you are in college, buying a notebook (laptop) is definitely a need and it is rather a good investment that can get you good grades. However, for a full-time employee whose job does not require working at home, buying a laptop is a total waste of money.  Similarly, shelling out some extra bucks in Starbucks is avoidable for many of us, but if you are self-employed, meeting your potential client in Starbucks may be well worth the money.  So, depending on your lifestyle and stage you are in, you need to make a list of needs and wants.

Now vs. Never

For those who have hard time deciding between needs and wants, here is a quick tip. If you really need to buy something, wait for a few weeks and if you still feel the urge or need for that particular item, go ahead and buy it. You need to be brutally honest with yourself. If for a moment also you have felt that you don’t need it, don’t buy. Take that item off the needs list and shift it to the wants list and if you are really better off without it, remove it from the wants list as well. Sometimes, we buy things that we don’t even want after a few days. So, this exercise will cure a syndrome called mindless shopping disorder.  Remember, prudence is all about being conscious about your spending pattern and spending a few minutes on observing your spending behavior can reveal a lot about your extravagant habits.
Saving to Invest vs. Saving to Splurge

To get into a frugal mindset, one needs to set saving goals. While some of you are saving to invest, others are saving to spend. Some of you are working hard and setting aside a portion every month to enjoy a luxurious vacation in Hawaii, while others are simply saving enough for down payment for their first home. So, whatever is your goal, you are working hard to reach your goals and inadvertently getting into a frugal mindset to achieve that bigger goal. Again, whether you should save to splurge or to invest depends on your lifestyle and life stage you are in. But, to achieve a bigger goal, you have definitely given up your wasteful habits and streamlined your finances. For those who have not done it yet, set a bigger goal and sacrifice small comforts and luxuries to meet that end goal and whether you achieve that goal or not, you will win, because you will definitely change some of your habits.

If you buy things you do not need, soon you will have to sell things you need–Warren Buffett

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Financial Literacy for Children

Academic qualifications are important and so is financial education. They’re both important and schools are forgetting one of them”–Robert Kiyosaki

A child ripped up his allowance money because it wasn’t the amount he was promised by his mom”. This Facebook post has received a lot of views. Many readers posted their comments about the issue at hand. Some felt that parents are responsible for actions of their children, while others thought the promise should be kept. But, the most interesting point here is the attitude toward money. In this case, it is good that the kid has learned to track his earnings. However, the action cannot be condoned. Of course, we all have heard this phrase “Money does not grow on trees.” It is true that money is always hard-earned and a person who earns this money after a long day’s work should understand the worth of every dime. So, it is not an issue related to bad parenting it is about making a financial decision. In this case, the child should be made aware that he has made a bad financial decision by ripping up the hard earned money. The issue is broader in the sense that there are many adults who are in debt as a result of some bad financial choices such as overspending. Financial literacy is effective in solving such issues.

Respect for Money
In order to value money, it is necessary for children to learn how money is managed and most important how money is earned. Children should be taught to make sense of money. So far, lemonade stands and Girls Scouts Cookie Programs have been effectively used to teach financial literacy skills. However, it is important that a systematic and formal education is provided to teens. Schools have emphasized the need for Literacy, Science and Math in curriculum. It is high time, financial literacy be introduced as a part of the formal education to help teens make effective and informed decisions that will help them to live better. In some schools of Ontario, financial literacy is taught as a part of the curriculum.

Habit of Saving
Parents are equally responsible for teaching financial literacy at home. You can get your children into the habit of saving. Remember to lead by example. Show them what you want to tell them. You can start by teaching your children the value of a buck. Yes, a buck. I wrote about the importance of a buck in an older post “What are you going to do with a dollar today?” A dollar used wisely can make a lot of difference. It can satiate your hunger (a burger) or can feed your brain (book at Amazon). Apart from saving, it is important to teach your children the importance of patience and perseverance that helps in every sphere of life whether it is employment or self-employment. It is important that children are taught how their present day habits related to money are going to affect their future resources. So, if your child is too demanding and insists on buying new gadgets and unwanted stuff, you should help your child in choosing the options wisely. A financial discipline and right amount of knowledge is all that is needed to be successful in future.

Financial literacy is not for children alone, many adults fail to understand the importance of earning and managing their money. Many of us keep complaining that they do not make enough. But, the other side of the coin is that we have to learn to spend our earnings wisely. It is important to ask, “Am I saving enough or am I investing my money in learning new skills that can help me boost my income? Start saving ( no amount is small) to take first step towards financial independence.

A good financial plan is a road map that shows us exactly how the choices we make today will affect our future“–Alexa Von Tobel

Common Sense: Key to Success in Investing

The three great essentials to achieve anything worthwhile are: Hard work, Stick-to-itiveness, and Common sense”–Thomas A. Edison

Often termed as practical intelligence, common sense plays a major role in our success whether it is professional world or daily life. While it is easy to make every day decisions like buying furniture or getting a smartphone simply by relying on our common sense, it is difficult to trust our practical intelligence when it comes to buying stocks. Therefore, we rely on financial experts or advisors and let them plan our financial future for a simple reason that we do not want to make mistakes. In other words, we trust the education of experts over our street-smartness when it comes to planning our own financial future. However, education in finance alone cannot guarantee success. Robert Green Ingersoll said, “It is a thousand times better to have common sense without education than to have education without common sense.” Therefore, it is important that you trust your common sense when making an investment whether it is your retirement fund or a 529 plan or for that matter a real estate investment. Follow these tips for a better financial planning.

Act, Act, Act
Do not just think and read and do not wait for perfection, because after several years of education also you will never be content. Hence, you will keep waiting for the right time to start acting your plans. Remember, nothing can work until you act on your plans. So, act today and play around with a small sum of money and rely on your instinct to make a wise choice. In this process, you will learn to think on your feet and make right decisions in the least amount of time. So, if you want financial planning to work for you, you need to take part in this process actively.

Follow your Instinct
Each individual is different and every individual knows best as to what they want in life. When it comes to financial advice, use your brain and don’t just follow the advice, because it is important to understand what you have learnt and read so far in your life. After all, buying stocks is no different from buying furniture, if you follow the trends and do a little extra research. If you are investing in a stock because your friend has, you might not get the same results as expected. You know what you want from your investment and thus you should design your own financial strategy. Remember, you can make the best decision of your life, if you trust your own instinct rather than relying on advice by others. You need to create your own financial future and therefore, must have a strategy.

Stick to a Strategy
Once you have a strategy, stick to it until you get the results. If you stay the course, you are definitely going to be successful in any field whether it is investing or business. There is nothing called overnight success in investing. You might be tempted to change your plans and switch funds from one stock to another. You ought to stick to your strategy before you expect a huge gain. In that period you might fail. Making mistakes give you a chance to learn and be wiser than before. So, it is ok to stick to your financial strategy after all, you have created the strategy looking at your needs and personal goals.

Be Optimistic, not Greedy
Earning a good return is always desirable and everyone just loves to earn good dividends on stocks and increase their wealth. But, there is a thin line between being optimistic and being greedy. Greed in Investing cost you dearly especially if you are a new investor. So, never fall in the greed trap and look for the signs that you are turning greedy. When someone suggests you to buy stocks or for that matter invest in any business that offers quick earnings and easy money, do a little research about that company. Remember, there is no such thing as a free lunch. If you are presented with an offer that is too-good-to-be-true, it is like a free lunch for which you have to pay a very heavy price at some point.

Have no fear of perfection, you will never reach it”– Salvador Dali.

Keep Emotions out of Investing

We often wonder why do we think and act the way we do. Psychologists have contributed to our understanding of human behavior by exploring in human minds. At the core of our behavior are emotions such as fear, joy, anger, love and trust. People behave in a certain manner for emotional reasons. In fact, emotions govern our everyday decision-making and investing hard earned money is one of the biggest emotional decisions of our life. Some emotions like joy, love and trust are positive and help a person deal with problems, but emotions like fear, anger and sadness may have a negative impact on an individual’s decision-making ability. When it comes to making money through investing, most of the people react to market situations out of fear and make wrong decisions that impact their profitability. A study conducted by Stanford University professor and his research team suggested that emotions prevent a person from making wise financial decisions. It was found that the participants who were unable to feel emotions due to brain lesions made prudent investing decisions and earned more money than the normal participants. The research team concluded that fear leads to risk-avoidance behavior of the normal participants and as a result their returns are low.

Fear is Failure
For those people who are scared of losing money soon after the market crash, billionaire investor Warren Buffett offers a valuable advice, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” So, a valuable lesson is to never look for short term gains. If you believe in a product or a company or for that matter the industry that company is in, you should invest and keep your investments for a long period of time, so that you make money. Warren Buffett says that he always knew that he was going to be rich. So, have a firm belief that you are going to make money in the long run and hold on to that belief until you transform it into the reality. Half of the time, we win the money game with our thoughts and beliefs. If we start with a risk aversion and in disbelief we are never going to make money. Remember, in investing business fear is a failure.

Stocks vs. Bonds
Most of the people invest in bonds because they feel that if they will invest in stocks they might lose money when the prices of stocks go down. Moreover, they look for safe returns on investment and have zero risk tolerance. But, it is important to understand that if you are looking for long term gain, it is always advisable to invest in stocks because despite market fluctuations, you will earn a higher return than you do when you invest in bonds. Again, this behavior is governed by fear and safety needs of an individual. Thus, it is important to keep your emotions in check when taking a major investing decision.

Keep the Strategy Simple
The best way to plunge in the investing is to keep your strategy as simple as possible. If you are risk averse, then it is best to go for an evolutionary change and introduce one or two investment products such as an index fund or a growth fund in your kitty. Do not get obsessed with heavy jargons and do not simply look for some formulas. The best formula and the rarest of the asset is your common sense. Use your everyday commonsense that you use to get the best deal when you shop around or the one that you use to fetch a job offer is your best guide. Most importantly, hang in there and don’t quit.

Most of us feel that we will lose money and never enter the game. A minor setback should not deter you from the big game”Warren Buffett