A few weeks ago I was at the beginning of a 2 hour drive back from a friends lakehouse with my brother when, in the 105 degree Texas heat, the motor for the passenger window broke and the window would not roll up. I spent the rest of the drive progressing in emotional state from pissed off that my brother broke the car (which he wasn’t at fault) to being flat out grumpy because I was so hot, to laughing so hard I cried because of how ridiculous we felt.

Have you ever noticed that setbacks always seem to occur at the worst possible time, and more importantly that they always occur to you? Your computer crashes the night before a paper is due, you get sick before new health insurance kicks in, or you get in a wreck just after you drained your emergency fund to get your transmission fixed. It never fails, Murphy’s law (or what my family has come to know as “Luck of the Bowen”) always seems to show up at the most inopportune times making life much more hectic.

Now take a second and think about all the incidents like this you have had in your life; where it seemed like something that ordinarily would have just sucked, happened at the most awful time.

In looking back, was it really that bad? I would guess not. I know that when I think about the events in my life where everything seemed to go wrong, I realize that whether it was a true catastrophic event or something as silly as the car window not rolling up I am the person I am today because of how I got through them and what I learned from them.

Being a member of the Bowen clan, luck of the Bowen is always in effect and it always hits the pocketbook. As a result Mary and I have taken what we’ve learned from past experiences and started some “hedge” funds to hedge our bets against the expenses that always come out of nowhere.

We have our emergency fund for general emergencies, so far we have managed to save away 3 months expenses if both of us loose our jobs, and 6-8 months if one of us loses a job. We feel like we are in a good place with our emergency fund, and we continue to add to it every month, but we realized that there were other things for which we needed to be putting money away in preparation.

The car window breaking led to us starting a fund to replace the car. After all it is 11 years old with 150k+ miles on it. On top of that, my Labrador continually eating things she shouldn’t (Christmas Ornaments, Bottle of Tums, the Couch, a Chair…) and our Chihuahuas overly expensive teeth cleaning bills ($600) led us to hedging our bets for the dogs and creating a pets fund in which we put money every month for when one of the big pet expenses comes up. (Yes, pets can be VERY expensive, but in my opinion they are completely worth it).

We created these additional funds because we have learned from past experiences which forced us to use credit cards when we didn’t have the money available.

On top of all of these things we are currently evaluating life insurance policies outside of our work coverage, because life is just that unpredictable.

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Over a year ago I wrote a post asking the question: “Is it possible to be young and frugal and still have a vibrant social life?” To which I came to the answer of “it’s hard.” But in the 18 months since I wrote that post, I have learned a great deal about money and my own psyche and therefore would like to change my answer.

At the time of the previous post Mary and I had set our priorities on purchasing a nice new house, and accordingly were saving every penny in anticipation of the closing. As a result, we weren’t doing anything besides working and working out, which was starting to get old. In a nutshell, I was letting money control me and it was kind of depressing. 

Since then a great deal has changed, and I have learned that really knowing who you are as a person and as a couple is the most important aspect of setting priorities. Going without certain aspects in our lives to which we had become accustomed made us realize where our priorities were individually and as a couple.  Sure we accumulated a good amount of money for our house, but it wasn’t any fun because we were saving too much. With this in mind we reworked our budget after the close to allow for more social activities, entertainment, and wants.

Now we no longer feel bad about wanting to go to Starbucks or going out to lunch with co-workers because we know that having that social aspect in our lives is important to who we are. Instead of shunning social spending we accept it as something that is needed for us to stay sane…and believe me, sanity is a priority.

Making priorities is part of being frugal and living a balanced lifestyle, so if you ask me now if it’s possible to be young and frugal and still have a vibrant social life, the answer is absolutely yes… if you choose to make it a priority.

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As the Treasury Manager of the company, and the writer of this blog, I try my hardest not to get caught up in it, though I admit it’s hard. As a personal finance writer, I preach to be conservative with your money: save, invest prudently, and keep an emergency fund; and as a financial professional in charge of all of a companies cash I act the same way, because if there is one thing I know, it’s that the party always ends.

Adorning the walls of my office I have hung constant reminders of this: vintage advertisements for Chrysler and Chevrolet. Every time I look up and see the ad for “The New 1967 Chevrolet Pickup” or the “Silver Anniversary Edition Chrysler New Yorker,” I think about what their management would have said at that time had someone approached them to announce that their company would go bankrupt. As much as I’d like to think they’d sit down and ask “how? when?” I have a feeling that they would have laughed it off. After all it was the heyday of the automobile!

Think about approaching an internet startup in 2000 (really, any startup will do), with the same information. Money was being handed out left and right, it was a huge party!, but the vast majority of them got caught up in the party and never looked at the bottom line. For a prime example, watch the movie e-dreams which follows the rise and fall of kozmo.com.

What about telling Bear Stearns in 2005? Worldcom or Enron in 2000? Blockbuster in 1999? All of these companies were at the peaks of their “Party” stage in these times, only to go drastically downhill a few short years later.

With all this said, I’m not against the “party,” in fact I love the party stage it’s fun and very exciting, but like any party, you have to party like the party will end, or else you wake up in the bushes wondering where your clothes went.

In personal finance partying like the party will end means saving, planning for retirement, and keeping an emergency fund, all while still enjoying your money. In the business world, that means always keeping an eye on costs (I just saved the company $15k by changing vendors for deposit tickets), managing the funds prudently (and safely), always striving for efficiency, and growing the business at a manageable pace.

If you stick with this advice, the party will last longer, and you’ll be prepared if it abruptly ends.

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Maintenance.  In a world where quality has declined, and new products are cheap, frugal people go out of their way to take care of every purchase as if it’s an investment.  And they know that spending money on maintenance is less expensive than spending money on repairs.

• They maintain their bodies.  Did you know that fit people get sick less than non-fit people?  Which means by taking care of your body you can save a great deal of money in doctors bills!  They also find frugal ways to work out: Run, Walk, Stadium Steps, the list goes on.
• They follow a maintenance schedule for their car and house.
• They check to see if something can be fixed before they buy new. You’ll be surprised to realize that more often than not things can be fixed.  The soles in my nice dress shoes were completely worn out, but I took them to a local cobbler, and for $15 they are as good as new!  

Make instead of buy.  Frugal people understand markup and know that they can easily make many things instead of buying them to save a great deal of money.

• Mary and I make most of our meals instead of eating out.  Just by taking our lunches to work we figure that we save at least $250/month.
• Instead of spending $80 on a particular medicine ball for our workouts, I made one using an old basketball, sand, and a tire patch, now I have the same thing for about $70 less.  It’s not as pretty, but it’s just as functional.
• Here’s a list of 100 Things You Can Make Yourself, some of them are very random, but it’s interesting to learn what you can make with household products.

Set a budget. Frugal people track their money and set priorities, because being Frugal isn’t about not spending money (that’s called being cheap), it’s about prioritizing where you spend it and where you save it to have balance between to two.  They think long term and know why they are prioritizing and saving.  They will occasionally splurge with their discretionary spending, but it’s something that they plan on doing.  They also tend to budget on meaningful things like a nice family vacation, instead of spending money on stuff.  By setting a budget frugal people are always aware of their financial standing.

• Check out 13 Tools for Building a Better Budget to get a good grasp for budgeting.
• Also, check out Mint.com, it’s an online budgeting tool aimed at Gen-Y that will send you text messages or e-mails when you go over budget on something, when your bills are due, or when you get charged a bank fee!  We’ve been using it for about a year, it’s a great tool.

Research. Frugal people know that they can’t avoid spending money, so when they do buy something, they research it first.  Frugal people spend money on quality that will last, they don’t go right for the cheapest thing.  So spend time researching, and looking for the best deal.  As a general rule of thumb my Finance Professor taught me, spend an hour of research for every thousand dollars that you spend.  I think this advice is pretty fitting, essentially, the more you spend, the more you should research (but remember to value your time!).  Here are some great research aids for you:

• Fatwallet, the forums on this site are a great resource for finding deals.  It may take you some time to learn the lingo (PM= Price Match, YMMV= Your Mileage May Very, B&M= Brick and Mortar store, FS= Free Shipping…), but you’ll be sure to find great deals in their Hot Deals section.  Also check out the Finance Section for great financial tips, and the Deal Discussion section for great tips on buying cars and houses.
• Edmunds is a key resource for all your car buying needs.
• Bankrate is a site dedicated to finding the best rates on Mortgages, Auto Loans, Home Equity Loans, Savings Accounts…

Coupons. Frugal people know that 35 cents here and 50 cents there really starts to add up.  They also know how to combine coupons with credit card rewards and/or haggling to save even more!

• Buy the Entertainment Book, spending about $30 on this book (if it’s available in your area) can save you hundreds throughout the year.  It has coupons for everything from groceries, to movie tickets, to dinner.  In fact, when we go out, we check to see if we have a coupon from the Entertainment Book first!
• Subscribe to the Sunday paper, it’s full of great coupons!  We pay $7.50 per month to get the Sunday paper, and easily save at least $5.00 per week in coupons!
• Learn how to combine coupons with rewards programs, like learning how to make CVS work for you!

On the Ball. Frugal people are on the ball by being organized and informed.  They don’t just use the paper for coupons, they actually read it too!  How does staying informed help you be frugal?  It makes you aware of where rates are at so that you might be able to get a higher return on your money, or a lower rate on a loan.  It allows you to follow legislation that might have a direct effect on you. Staying organized is also a key aspect, if you aren’t organized, you aren’t ready to act to make sure you lock in that low rate on your mortgage refininance, or you can’t find the coupon you need to make use of the CVS cash back. Only informed people can make informed decisions, and only organized people can act quickly enough to make the move.

Understand Needs vs. Wants. Frugal people understand what is a need and what is a want, and they ask themselves if something is a need or a want before making a purchase.  Do you want something really badly?  Prioritize and save for it, you might be surprised to see that the desire to purchase will pass.

• I am writing this from a 6.5 year old Powerbook.  Do I want a new mac?  Absolutely, but I maintain my computer and it still functions perfectly for what I need it for.
• I drive a 10 year old Acura with 150,000 miles, and yes, I want a new car, but I absolutely cannot rationalize it.  It’s paid for, it runs great, I can work on it myself (unlike many new cars with which the manufacturers have made it nearly impossible to work on yourself).
• I want to finish outfitting our garage as a gym, no we don’t need it, but Mary and I see an ROI in our health (body maintenance) so we are slowly gathering things from Craigslist, and finding good deals at specialty shops. We understand that this is a want, but it is a priority for us, so we are pursuing it.

I hope that you will be able to form some of these habits and become more successfully frugal!

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When I began writing, I’m not quite sure if I had the knowledge of frugality that I do now, but after a year of writing and adapting my frugal lifestyle I think I’m finally able to give a good explaination of what frugality is.

First, in order to give a good view on frugality we need to remember that being frugal is not being cheap.  A cheap person refrains from purchasing until they absolutely have to, even then they might wait to buy.  When they do buy they buy the cheapest thing with no regard for quality.  A frugal person may hold off making a purchase, but it’s usually to make sure they get the best deal (not necessarily the cheapest).  Case in point: Would you rather spend $400 every two or three years on a piece of furniture from Ikea, or would you rather spend $1,000 on a nice good quality piece that will last you a decade or more?

Now we need to analyze the day to day lifestyle of someone who is frugal vs. someone who is cheap.  A cheap person tends to not buy things unless they absolutely have to, a frugal person makes calculated choices about what is important to them.  You may frequently see frugal people at starbucks or going out to dinner.  Cheap people typically don’t like to put money into maintaining what they have, they will use something until it is broken, and then might keep using it.  Frugal people put money into maintnence.  We take care of our vehicles by do regularly scheduled maintnence, and we take care of our bodies by staying fit and going to the doctor for checkups.  We keep our houses nice and frequently do minor improvement projects so that we don’t have to do major ones later.

Being frugal is about controlling your money and making choices so that you can allow yourself to splurge.  It’s about not doing X so that you can do or buy what you love.  In fact, you will frequently see people choose to give up Starbucks so they can afford a nicer car, or give up a nicer car so that they can afford a nicer house.  We all need to splurge, if you don’t you’re letting your money control you, and you will eventually lose.

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The following information is adapted from research by Stephanie Komon at Kent State University, and is based on the book The Millionaire Next Door.  Stephanie’s research was derived for the ability of fundraisers to be able to spot wealthy people, but it is very relevant for us.  Her presentation can be seen at the end of the post.

You may be surprised to know that only 5% of millionaires make a taxable amount over $1 Million a year, 8% make a taxable amount between $500,000 and $999,999 a year, and the other 87% work hard and live well below their means.  In fact, the average taxable yearly income for a millionaire is about $250,000.  Taxable income is mentioned because millionaires are most likely to greatly reduce their tax bill by investing in municipal bonds, real estate, an unrealized gain in stocks, and various other forms of (legally) reducing their tax burden.

80% of millionaires are self made, meaning that they are first generation holders of wealth, and 66% are self-employed.  Of the self-employed, 75% are considered to be entrepreneurs, the other 25% are professionals (Doctors, Lawyers, Accountants…).

Most of the entrepreneurs are not in glamorous industries, in fact they are in the opposite…think construction contractors, pest exterminators, plumbers, farmers, and even owners of mobile home parks.

The most common degree these millionaires have is an undergraduate degree.  The second most common?… no degree.  In fact the least common degrees for millionaires are the Ph.D., J.D., and M.D.

97% of millionaires are home owners, and 50% of those have occupied the same home for more than 20 years.

What does the most common millionaire look like? He is 57 years-old, married to his first and only wife, and has three children.

What does the millionaire spouse look like?  The spouses are typically “meticulous budgeters and planners and are more conservative that the millionaires are.”  The spouses are also most likely to be housewives.  If they are employed they are most likely to be an elementary or high school teacher.

Most entrepreneurs live well below their means, and in fact, live so conservatively that if they make $200,000 in a year, they will most likely live off of $80,000 and invest the rest in an effort to accumulate more wealth.

By what means do they live frugally?  They just don’t live extravagantly.  Half won’t spend more than $400 on a suit, they also won’t spend more than $140 on a pair of shoes.  They most likely haven’t bought a car in the last couple of years (if they did it’s probably used), and they are most likely driving an inexpensive domestic car.

What does all of this mean for you?  It means that there is light at the end of the tunnel.  Living frugally is not easy, in fact it’s hard, but as you can see from these that statistically the way to wealth is becoming an entrepreneur and living frugally.  Most small businesses owners make less than $250,000 per year, but they live frugally enough that they live well and save a ton.

Hopefully this has served as a pat on the back for conservative living because it helps us see that there is long term gain from making your own meals, carpooling, owning a home, and consuming less.

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We admit that we are stretching ourselves to buy our first house (I think that’s something that most people do), but as we are re-evaluating our budget (less than a month until we move in!) we have found ourselves looking forward to our raises in the fall (even if it just equates to a cost of living raise) because let’s face it…as much as budgeting is important, no one likes sticking to a strict budget, so we look towards the future at what we will be making and what we can spend (or save) at that point in time

I think our problem is that we are always looking to acquire more. We want more and don’t want to make sacrifices to get more.

As Mary and I caught ourselves looking forward at what we will be earning and what will increase in our budget I thought to myself, why not look backwards?

Why not live on last years salary? Say your salary was X last year and it increased to Y this year. If you live on last years salary and budget you inadvertently save Y-X all year. Then when your salary increases to Z you can live on Y and save Z-Y.

This concept allows you to save more and forces you to permanently (ideally) live below your means. It’s simple, but a great and easy way to save!

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