Almost-Free Iced Coffee

iced_coffeeAt a church meeting I recently attended, someone made a pot of coffee.  When the pot was empty, another pot was made.  After the meeting was over, the coffee pot was still about 1/3 full.  No one wanted another cup.  I don’t normally drink the stuff.  (What kind of person, I wonder, would take beans from some plant, roast them until they’re nearly burnt, grind them into powder, pour boiling water onto that powder, then drink that water?)   I had my own water-bottle, filled with iced tea, which I had finished.  Before someone could dump the unwanted coffee down the drain, which was about to happen, I quickly rinsed my water-bottle and poured the coffee into it.  As soon as I got the coffee home, I put it in another container and refrigerated it.  I wanted to minimize the risk of the water-bottle I use for iced tea being ruined by the coffee taste, so I washed it as soon as it was empty.  The next day I had all the iced coffee I wanted, for nothing more than the cost of some ice and milk.

The moral of the story is that if you look around you can always find things that people are getting rid of that can be of benefit to you if you do the work of obtaining them and re-purposing them.  Get in the habit and you can get lots of things for free.

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Using $-Off Promo Codes

amazon_862A couple weeks ago, Amazon announced a special deal: $8 and some change off any order of $50 or more.  Pretty good — over 16% off.  But be careful.  If you’re trying to use money efficiently, then you need to remember that when you use a coupon you only save money if you buy something you were going to buy anyway (and of course, the Amazon price has to be as good as or better than price you normally pay).

I used the promo deal to buy the same kind of snacks I usually buy by the box to keep at work, thus avoiding buying anything from a vending machine.  Because the Amazon price was comparable to the usual price, I’ll save 16% over the time it takes me to consume the snacks.  Given that “a penny saved is a penny earned”, I’ve earned over $8.  Is there any other way to earn $8 on a $50 investment in just a few weeks, with 100% certainty?  No, there isn’t.

But what if I had used the promo code to buy something I just wanted, but didn’t really need.  Say, a fancy new shirt … when I have already have plenty of shirts, probably all I need for the next few years.  (And, I often get new ones for birthday or Christmas.)  If I had bought a new shirt for $50 and used the promo code coupon to reduce the price to $42, wouldn’t I have saved $8?  No.  Using the promo to buy a new shirt I didn’t need would not have been a savings of $8 — it would have been an expenditure of $42.

Spending is Like a Faucet

An old song says “Love is like a faucet … it turns off and on”.*  Spending is like a faucet too.  It can be turned off and on.  Or it can be set to any spending level between the off and on extremes.

We can extend the imagery a bit.  Let’s say the spending faucet is attached to a storage tank.  Income is like water flowing thru a pipe into the tank.  Spending (in other words, buying things that are sure to decrease in value, such as automobiles, clothes, food, furniture, etc.) is water flowing out of the tank through the spending faucet.  The amount of water in the tank is accumulated wealth.

Spending = Income

spending_equals_income

Is your situation like the first image?  Money is flowing into the tank (as income), but it’s flowing out (as spending) just as quickly. The tank will never be filled.  There will never be any accumulation of wealth.  This will be true as long as spending = income.

Note that as long as spending = income is true, the tank will never be filled — no matter the amount of income.  This first image could represent a person with an income of $20,000 per year and spending of $20,000 per year.  Or it could just as well represent someone with an income of $20,000 per day and spending of $20,000 per day.  No matter how high the income, people who spend all they earn — people who are unable to live below their means — will never have wealth.

Sadly, this is how many people live their whole lives.  They wonder, like Senator Hoar, why they can never get ahead.  In some cases, I believe, the people are doomed to financial failure because they can’t even imagine, or they’ve never been taught, that there is any other way to handle their money.

Spending < Income

saving_and_spending

The second picture is clearly different.  The tank is filled, representing an accumulation of wealth.  Look at the picture for a moment and you’ll see why the tank is filled, and will stay filled:  The spending faucet has been adjusted so that spending has been reduced.  Spending is now less than income (spending < income).

Also notice that the tank has another pipe.  The new pipe leads to saving and investing.  We can think of the tank as a checking and savings account at a bank.  The saving and investing pipe leads to retirement savings accounts, stocks, bonds, IRAs, 401-Ks, and other investments.  Buying shares of stocks or mutual funds might be thought of as “spending” but there’s an important difference: it’s buying things that have a good chance of increasing in value.

If your personal financial situation is like the second picture, then you have learned the lesson of living below your means and allocating part of your earnings for savings and investment.  If your situation isn’t like the second picture, then there’s an important lesson you need to learn.  Start today.

saving_and_spending

Here’s another image, which is the best way to think about the financial plumbing.  It’s basically the same as the second picture.  You can see that spending < income because the tank is full.  But, by using the pipe at the bottom to represent saving and investment, and the pipe at the top to represent spending, the third picture represents the application of another important principle, which is, “Do not save what is left after spending, but spend what is left after saving” (Warren Buffet).


*

Did Bill Gates Say “If you born poor, it’s not your mistakes”?

bill_gates

This meme is found all over the internet in various forms.  As far as I have seen, it’s never presented with any citation as to where or when Gates is supposed to have said this.  I think it’s safe to assume he didn’t say it.  Also, note how poorly phrased it is:  “you” (instead of “you were“) and “mistake” and “mistakes” (where “fault” would be much more idiomatic).

Old, But Good, Advice

Browsing through an old issue of The Sabbath Recorder (A Seventh Day Baptist Weekly, published by The American Sabbath Tract Society, Plainfield, N.J., vol. 76, No. 10.), I found some financial advice from Charles Grant Miller in the form of a story. This was reprinted in the March 9, 1914 edition.

The Saving Habit

They tell a story down in Washington about the late Senator Hoar’s improvidence. A rich friend was riding to the Capitol with him on a street-car, and Mr. Hoar was expressing wonder at the ease with which some men acquire wealth.

“I have had a good income all my life,” he explained, “but never have been able to get ahead. I would like to know how money is accumulated.”

At that instant the conductor came along and Mr. Hoar handed him a nickel while the rich friend turned over a ticket.

streetcar_ticket“There is one way in which you might acquire money.” said the friend. “You could save twenty per cent by buying six tickets for a quarter, and that is a pretty good investment. The habit of saving money grows upon one, and that is a better investment still.”

This is a good deal more than a jest.

The oversight of small investments lying close at hand leads to half the world’s financial miseries.

Of course, none could get rich by investing in street-car tickets. Nor can one get rich merely through small savings in a bank. But it is generally found that the investment in street-car tickets and the savings in the bank go together, and with them go a lot of other frugal habits.

There is no more flexible law of nature than that one frugal habit begets another, and that frugal habits beget riches.

We hear of great fortunes made in a moment. But that is not the common way.

Ordinarily a great fortune is built up like a stone wall — a stone at a time.

The young man who declines to lay the first stone, because it comes so far short of a wall, will never make progress in financial masonry.

It is a sure thing that the young man who considers it not worth while to save small amounts will never have large ones to save. He is first cousin to him who declines to go to work until he can start in at a big salary.

The first savings of Mr. Rockefeller, Jay Gould and the first Vanderbilt all look pitiably small, even to the average laborer of today. But they were seed from which sprang not only increased profits but increased enthusiasm in business-building.

Small savings and investments if constantly added to and the income compounded, grow marvelously in time.

And the saving of money is a habit that grows more marvelously even than compound interest.

— Charles Grant Miller, in Watchman-Examiner.

There’s a lot of good food for thought in that story.  Let’s look at it point by point.

Income Alone Isn’t Enough

“I have had a good income all my life,” he explained, “but never have been able to get ahead….”

As long as spending is equal to income, there will never be wealth.  This is only common sense.  Or, rather, I should say, it should be common sense.  But actually, it’s amazing how uncommon this bit of wisdom is.

Imagine a water tank with water flowing into it thru a pipe at the top.  If there’s another pipe at the bottom of the tank, then the tank will never be filled: The water goes out of the tank as quickly as it goes in.  Now imagine the pipe at the bottom has a valve that can be used to reduce the amount of water going out of the tank.  If the valve is set to allow only 90% of the water to exit the tank, then the tank will fill with water.

Checking accounts work the same way.

If people spend 100% of all they earn each year, year after year, what will they have accumulated when they stop working?  Think about it.  The answer, of course, is … nothing; those people will have nothing.  (And if spending is greater than income, that’s real misery.)

Don’t be one of those people who end up with nothing.

The best way to accumulate wealth is to live on less than your income and regularly save some percentage of your income and invest it so it grows.  The Richest Man in Babylon recommends that you save at least 10% of your income.

Don’t Pass Up Good Deals

“You could save twenty per cent by buying six tickets for a quarter, and that is a pretty good investment….”

Whenever the savings you get from buying something* are greater than what you could otherwise earn if you had invested the same amount of money, then you should buy it.

In the example in the story, tickets cost 5¢ for 1 ticket, or 25¢ for 6 tickets.  If purchased one at a time, 6 tickets would cost 30¢, which is 20% more than 25¢.  There’s no investment that is certain to yield a 20% return; that was true in 1914 and it’s true today, and even moreso in the short time and with the small amount of money it takes to buy and use 6 train tickets (a rider might use 2 each day).

Apply this to your daily life.  Suppose you eat a can of beans each week — so once a month you buy 4 or 5 cans.  Now suppose the grocery store has canned beans on sale.  Say it’s buy 5 and get 1 free (like the deal on tickets in the story).  How many cans should you buy?  Your usual number, maybe 5 cans for a month of bean eating and get 1 free?  That’s okay, but not good enough.  Why not buy enough for a whole year?  Buy 50 and get 10 free!  They won’t go bad in a year.  (Check the labels.)  Remember, a penny saved is a penny earned.  Do you have any opportunity to earn a 20% return on the additional money that you’re spending on canned beans?  No.  The stock market won’t do that well, certainly not with 100% certainty, and neither will bonds nor savings accounts.  So, what are you waiting for?  Put those cans in the cart and get to the cash register!

Some years ago, a large grocery store chain closed the local store in my neighborhood.  For a couple weeks everything in the store was marked down 30%.  Then, in the final week, everything was 50% off.  My wife and I went to the store twice that last week and spent about $400 each time.  A total of $800 spent to get $1,600 worth of groceries.  It was mostly bottled, canned, and boxed goods, of course.  We were eating breakfast cereal, spaghetti, cooking oil, and canned beans from that haul for months thereafter.  But we doubled our money with those 50%-off purchases.

Every time I see a good deal on basic foods or cleaning supplies, I make it a point to stock up if I think I could use them within the next year.

* that means something that you definitely need and will use and won’t spoil or expire before you use it.

Make Saving A Habit

“The habit of saving money grows upon one, and that is a better investment still.”

Like lots of other things you should do — like eating right, exercising, being polite to stupid people — making a habit of saving money takes practice.  The more you do it, the easier it becomes.  Efficient use of money should be your goal, it should be foremost in your mind each and every time you buy something.  You can strengthen your money-saving habit by reading books and magazines, listening to radio programs and podcasts, and watching videos about personal finances.

Just as buying when you see bargains is a good financial investment, developing the savings habit is a good investment of your time and willpower.

… one frugal habit begets another, and that frugal habits beget riches.

The more you practice the efficient use of money — frugality — in one part of your personal financial affairs, the easier it will be to apply it to others.

Slow And Steady Is the Surest Way

We hear of great fortunes made in a moment. But that is not the common way.

It’s the unusual, the uncommon, that most often receives the most attention.  (As the saying goes, “1,000 planes safely land today” isn’t likely to be a newspaper headline.)   So, it’s the rare cases of people getting rich quickly that gets the most attention.  A fortune made slowly, acquired through years of working, saving, and investing is the more common occurrence, but you are unlikely to read much about it unless you make an effort.  Your best chance to acquire wealth, in fact, it’s almost a certainty, is the tried-and-true method of living below your means, spending less than your income, saving at least 10% of every dollar you earn, and investing the savings to earn long-term compound growth.

Accept the Fact That You (Probably) Have To Start Small

It is a sure thing that the young man who considers it not worth while to save small amounts will never have large ones to save.

Don’t wait until you have a large income to start saving.  Start now.  Right now.  Chances are good that your income will grow as you advance in your career.  But small amounts you save and invest now have the advantage of having more time to grow.  To grow the kind of personal fortune you’ll need to be secure after you retire, you will need to invest…

Small Amounts … … For a Long Time
Middle-size Amounts … … For a Mid-length Time
Large Amounts … … For a Short Time

Just remember, at least 10%.  That percentage of a small earnings will be a small amount, and as your earnings grow, that same percentage will be a larger amount of larger earnings.

The Most Important Thing to Remember

Small savings and investments if constantly added to and the income compounded, grow marvelously in time.

It’s all right there in one sentence

  • A small amount, just 10% of your earnings,
  • consistently put aside and invested,
  • subjected to the miracle of compounding.

That’s all you need to know.  That’s all you need to do.