Friday was my last day at work. I am now officially unemployed.
There is something that is at once both freeing and frightening about my new found place in society. On my way home, one thought kept running through my mind, “How am I going to support myself?” Though I don’t have everything figured out just yet, the metaphorical wheels of my brain are now spinning faster than ever before.
Being unemployed isn’t such a bad thing, if you have a source of cash flow. Investment properties, royalties, side businesses or dividends, are all sources of income that can either substitute or even replace a regular paycheck. But what happens if you don’t have any extra source of cash flow and no paycheck? What do you do?
Two things:
1. Learn to Save Smartly.
2. Find another job or start creating additional income sources.
For this post, I will focus on the first point: the importance of and how to save smartly.
What does it mean to Save Smartly?
Most personal finance books cite saving as an absolute must in order to build long term wealth; this, for most people, is a no brainer. However, I would argue that saving, by itself, is not enough. Learning how to save and understanding what is worth saving is equally important.
There are two things that you can generally save that will directly impact your financial situation: time and money. Both are important, but under tight pinches, it is common to think only about the dollar sign behind every purchase rather than seeing how each particular purchase adds to or subtracts from your overall wealth.
The concept of saving smartly came to mind when I witnessed my father last week spend over ten hours trying to fix the plumbing for our kitchen sink. Ten hours! The worst part was that he didn’t actually fix it, the pipes still leak. 
My father is an example of someone who is incredibly frugal, but to the point of excess. He doesn’t save smartly because in many cases he values saving money or saving time.
Rule #1 for Saving Smartly: Time > Money
This is isn’t a revolutionary idea, but I’m surprised by how many people I know who don’t realize the implications of this rule.
In economics, there is a basic rule to determine whether a product is worth buying or an endeavor worth taking up.
It says when marginal benefit is greater than marginal cost then the action or product in question is worth it.
Put simply: if what you get out > what you put in then it is worth your time or money.
But according to Rule #1 for Saving Smartly Time > Money so if the dollar amount you equate with your time is greater than the money you need to spend to get something done, pay the money.
My father has the bad habit of trying to solve all problems on his own, especially when the alternative would cost money. In my opinion the time he spends is worth much more than the money he would have to spend to fix the pipe. Since we all have a limited amount of time in this world, I tend to believe that, in most cases, spending money over spending time is worthwhile.
For example, if a typical plumbing job costs $400 and my father spends ten hours trying to fix it, his hourly rate is $40/hr. In my opinion his time is worth much more than $40/hr given the saleability of the invention he is currently working on. Rather than spending time on fixing a leak that a much more experienced professional could do in much less time, he should by focusing his efforts on doing something that he does best and will yield a much greater monetary return for his time.
If you compare how much money you would be saving versus how much money you might gain by the fruits of your own labor, then it’s easier to get a better picture of what’s the more cost effective choice.
Rule #2 for Saving Smartly: Buy for the Long Term
The other day I went to a reunion party hosted by one of my mother’s college classmates. The host was a successful small businessman who developed software for stock traders. After dinner he spent some time sharing his life story and tips for success with us young people so that we could learn from his past experiences. I’ll save his tips for another post, but let me point out one interesting recommendation that he gave me before I left his home.
He said, “Whenever you buy furniture, buy one that you won’t have to replace.” The man then went around his house and showed me different tables and chairs that he purchased decades ago but still keeps. Though he’s moved into progressively larger homes, he has kept the same furniture with each move.
The lesson I learned from his advice is this: When making a large purchase, Buy For The Long Term.
My only experience buying furniture so far has been stuff I’ve bought for the room in my parents’ house and my college dorm. Most of the stuff I’ve bought has been from Ikea, which tend to have a very short life span. If you’re going to invest in a desk that you hope to use for years to come, rather than try and save a few hundred dollars on a cheaper desk, spend those extra hundred dollars to get a desk that will last.
Another good example of purchasing for the long term would be my experience purchasing a laptop. When I bought my laptop for college, I made sure to do extensive research into different companies’ models. I compared cost, durability, usability and warranty policies. I focused on three different models, the Dell Latitude, IBM Thinkpad and the Sony Vaio. I liked Sony Vaio’s because they looked cool. But in terms of durability and warranty, it didn’t compare with the Thinkpad. The Dell Latitude was the cheapest of the three but after seeing a couple of my friends lose their data to motherboard malfunction in their Dell laptops I decided that it wasn’t worth the couple hundred I would save. In the end, I chose the IBM Thinkpad T40. Even though it cost approximately $400-500 dollars more, I am still using it four years later and it’s still running smoothly and I’ve never had any loss of data or other serious problems.
When I make big purchases now, I tend to think long term because when you have less to spend it’s better to spend a bit more on something that you can use for years to come. Before I bought my laptop I had decided that I would use it at least five years. This made it much easier to decide which laptop model to pick. The only model that I was confident could last the duration of five years was the IBM Thinkpad.
Although it may cost you more in the short term, spending the extra dollars for something that will last a long time is worth it. In the end it’s cheaper on your wallet and on your time.
Rule #3 for Saving Smartly: Always Ask for a Discount
One of the most valuable experiences I’ve had abroad was learning to bargain in China. Unlike most first-world countries where people buy things mainly online or in retail stores, in China, many purchases are made at marketplaces where various small vendors gather to sell their goods. In China, it is almost expected that you ask for a discount, especially if you are a foreigner, because they will automatically mark up the prices to increase their profits.
I’ve seen a shirt sold for USD $50 to one person, only to be sold to another person for half the price minutes later. In China, if you don’t haggle, you will be ripped off.
But the same applies in many places in America or other first world countries where marketplace shopping is less common. I was reading a personal finance book a few weeks back that had a story about a man who learned to always ask for the best deal by learning the seven golden words, “Is That The Best You Can do?” and developing the habit of always repeating that phrase whenever making a deal. As a result of these seven golden words, he was able to make deals and get discounts that most people would never think possible.
A month ago, I was shopping around for gyms and I called up NY Health and Racquet Club to find out more about their membership plans and prices. The salesperson was very kind but wouldn’t give me a direct answer when I asked him about the price. Instead he wanted me to come in to see the facilities and then we could talk about pricing. I told him I’d look into it.
A few days later, the same guy called me again; I didn’t pick up. He left a message quoting a monthly membership price as well as a sign up fee. I called him back and told him it was too high and said I’d continue looking around.
He called again a few days later and gave me an even lower price and was said that he was willing to drop the sign up charge. This time I was interested.
What I learned from the experience was that you should always ask for a discount. Worse case scenario is that they refuse; the best case scenario is that you save money. Which would you rather have? Personally, I’d be willing to take the rejection if that means I can potentially save some money without any added effort.
Saving Smartly is a discipline that needs to be practiced regularly in order to become apart of your daily life. But once you develop the habit, it’s hard to break and it will help you on your way to becoming a financially independent and wealth individual.
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