Sunday, 16 March 2008

How to Be Thrifty: Lock Up Your Money

I think I'm very good at being thrifty. I invest virtually all the money I earn. I only spend money on bare necessities like car servicing, petrol, and food. It helps that I live with my parents, but I still think I'd do very well if I lived on my own. I want to give some advice to others about how to be thrifty.

Most people love to say that they are thrifty. They tell others that they are thrifty and they tell themselves that they are thrifty. However, they are usually not. One of my friends named Heidi just got married. I was speaking to her about football just for the sake of conversation. She then told me that she didn't take any interest in football because she believes it's a waste of money and that she values her money so much she only wants to spend money on necessities and not spend money on things like football games.

However, Heidi just got married and she planned to have a wedding ceremony soon. I asked her how much she was going to spend on the wedding and she said she was going to spend more than $30,000! I pressed her for details about the wedding and she said that she wanted to release butterflies in the wedding hall to create a nice atmosphere for the guests. I asked her why in the world she would splurge $30,000 on an extravagant wedding ceremony yet refuses to pay $100 for admission to a football stadium. She said, "Some things are important while others are not."

The problem is that the definition of needs and wants can be blurry. Heidi switched from needs versus wants to important stuff versus non-important stuff. The definition of what is important is vague and as such she could easily splurge money on anything and ex-post rationalize by changing in her mind what is important or not important.

If you see a Porsche 911 and buy it on impulse and afterwards say it's a necessity and it's important, then that is clearly a case of your definition of needs and wants being completely useless to the goal of being thrifty.

I save money by locking my money up. In other words, when I earn money, I put it somewhere where I will have difficulty getting it back. In other words, I decrease liquidity. The ultimate way to do this is to put your money into your superannuation account because you cannot touch this money until you are 65. Another way is to have your money automatically put into a savings account and then to destroy any cards you have so that you cannot easily withdraw anything from the ATM, thereby forcing you to go speak to someone in the bank if you want your money back. Another way is to simply put your money into a mutual fund. Withdrawing money from a mutual fund is not extremely difficult but it does require more effort than usual. For example, to withdraw money from my mutual fund I have to print out a form and mail it interstate.

How illiquid you make your money should depend on how much money you're locking away. When I get paid I put about 90 per cent of the money straight into my mutual fund. However, I keep some money in my bank accounts for day-to-day expenses and emergencies. I have two bank accounts. In one I can use a key card to withdraw money from an ATM. I only ever keep $20 in this account because it is highly liquid money that is vulnerable to impulse buying. However, my other bank account doesn't have any card. It is a savings account. I keep about $500 in here. If I run out of money from my main account then I go on the Internet and transfer money from one account to the other. Basically, the more money is in an account, the harder it should be to get.

Once I have withdrawn my money, I follow the same concept with my notes and coins. I keep my notes in my wallet. However, I put my gold coins in my bag and my silver coins in my piggy bank. Using actual cash allows you to see with your own eyes the scarcity of your money. If you had a credit card or a debit card with heaps of money in it, there is a feeling that you are holding infinite wealth in your hands. I like to carry around notes and pay with cash for this reason. I also keep coins in my house for the same reason. I don't usually carry around too many coins because they are heavy.

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