The Golden Rules of Saving

Stop your budget from leaking like a waterfall (Seen in a national park in Costa Rica)

Today,  let’s start to save some money.

Saving per se is a thing many people don’t like to think about, because it means to surrender some consumption.

So let’s look at some tricks that helped me saving and might help you as well:

1. Understand the economic concept of opportunity costs

This concept basically says that you can spend each Euro only once.
So you should not look too much on the price of something, but you should look at the utility (or happiness) it gives you compared to other products with similar price.

Example:
When you are about to buy something (let’s say a dinner at a restaurant), don’t say “well, that’s 20 EUR, this is a good price so I buy it”, but think what you could do with the 15 EUR instead. Think about something you like very much (let’s say watching films) and compare (my meal in the restaurant equals buying 2 DVDs, or renting out 7 DVDs). And now decide: Buy only if the comparison seems worthwhile. If not, this good is not attractively priced for you (might be different for somebody else).

2. Calculate in yearly savings and imagine what you can do with the saved money

Often people are too lazy to optimize e.g. their electricity provider, because the hassle involved seems to be big (compare offers, find a better one, cancel the old contract, set up a new one) and the reward seems to be small, e.g. a couple of Euros per month only.
What helps is to think in (a) yearly savings, (b) the hourly pay for your effort and (c) what you could do with the savings each year:

E.g. if changing your electricity provider saves 9 EUR per month this might not seem to much and not worth the effort if it takes let’s say 3 hours work to switch.
But in 1 year this is 108 EUR. In 5 years this is 540 EUR.
Different picture.
That means – if you look at the five years return – you are paid 180 EUR per hour for your effort. And that’s tax-free!!
Then think about what you can do each year with the 108 EUR.
E.g. pay for a weekend trip. Or go to a very fancy restaurant. Or whatever you like. A that year for year, without any effort later!
Not too bad, isn’t it? Even if you really hate paper work you should now consider doing it.
Add 3 or 4 optimizations of this kind of savings and you quickly end up with an extra week of holiday per year for nothing.

Example from Woodpecker’s:
After scrutinising all of our families insurances, telephone and utility contracts, subscription of different types, retirement plans, childcare, dry-cleaning etc. we ended up with more than 2000 EUR additional per year (=165 EUR per month)!
Only by optimizing, without having anything less!
I admit, that was hell of a paper work and took me weeks, but now I earn the rewards in form of a decent holiday for free year on year.

3. Make a sport out of saving

The path to financial freedom is controlling your spendings (Seen in Cappadocia, Turkey)

Learn how to save small amounts in your daily life and always have a look at the yearly saving again.

Small amounts can pile up heavily!


Example from Woodpecker:

I realized that the daily chocolate-snack from the vending machine at work costs me 0,8 EUR * 220 work days = 176 EUR per year. So I decided to bring the same snacks to work at half the costs (later I decided to leave them out at all and replace them by fruit – again half the costs). Quickly saved 88 EUR per year. Then I stopped buying bottled water at the vending machine and started to drink water from the tap which is very good quality in Munich – 154 EUR saved per year.

4. Understand where your money flows and what is important to you

I strongly advise keeping record of your spending (I will write later how my family does it technically and what my findings were).
Do a broad tracking in categories (grocery, transport, cloths, etc.) all the time and also a detailed tracking (types of food etc.) for a limited time span to find out where your money goes.
Then again think of opportunity costs and compare utility: If the restaurant spending make up 10% of your budget, and sports only 10% – was the restaurant visits worth it? If yes – fine! If not – cut it down.

5. Think about how long you have to work for buying something

If you want to buy a car for 15.000 EUR, think about how many hours you have to work for it. Then think again how much leisure time you would gain if you take a slightly cheaper version of the same car, for let’s say 12.500 EUR.Are the foregone extras worth e.g. 100 hours or 3 weeks of work (if – for example – you earn 25 EUR after tax and social security deduction per hour)?!

6. Don’t get too stingy

Saving is great, it’s fun and is very important. But don’t get too much a grumpy old niggard!
Allow for some spending and some generosity every now and then. That’s fine if you do it consciously and don’t blast away all your monthly savings in one big party rush! 😉

Enjoy your day,

Woodpecker

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