I am not wealthy, by any stretch of the imagination. What I would say I am is comfortably middle class. Outside of the mortgage on our home, I am completely debt-free and always have been. We go on a family vacation about once a year, most recently to Los Cabos, and we enjoy eating out. Being smart about your money doesn’t mean you need to cut out all the things that bring joy to your life. It just means you need to keep certain fundamental money principles front of mind when you make these kinds of buying (and saving) decisions.
Here are key guiding principles I’ve always maintained.
1. Use Credit Cards Responsibly
Many people are going to disagree with me (and many have already), but I continue to assert that credit credit cards are not evil. Credit card companies may be evil, with the way that they prey upon those most vulnerable, but the credit cards themselves are not evil so long as you use them responsibly. If you can’t trust yourself with a credit card, then only use it for emergency purposes or don’t get one at all.
I got my first credit card as a teenager. It was a supplemental card off my mom’s account and I only used it in a pinch. The first credit card that was wholly under my name was a student Visa I got while attending university. It only had a $500 limit.
Ever since then, I’ve upheld two main rules. Never buy anything with a credit card that you could have not paid for in cash and always pay off your balance every month. Credit cards provide greater security, more rewards, and oftentimes other benefits (like extended warranties and purchase protection) too.
2. Build a Comfortable Buffer
This is especially true given the ebb and flow of freelance income that I experience today, but it is equally applicable to employees who receive regular paychecks too. Always strive to have a comfortable buffer that extends beyond what you might consider your emergency fund.
The size of this savings cushion will depend on your individual circumstances. For me, it means having enough cash on hand (“cash” referring to liquid money I have in a checking or savings account) to absorb regular monthly bills and other expenses without having to worry about waiting for a payment from a client (or receiving a paycheck every two weeks). There is never an instance where I can’t pay for X until I receive money from Y.
3. Be Wary of Lifestyle Creep
All too often, if you get a 10% increase in pay at work, you’ll feel tempted to increase your monthly expenses by 10% (or more) too. You’ll eat out more often. You’ll buy more toys. You’ll want the bigger, newer, shinier toy with more features. Don’t do that. Reward yourself for your hard work, certainly. Just make sure you don’t start spending far more than you did before.
This happened when I got my first work placement as part of the Arts Co-Op Program at UBC. It was the first time in my life that I had “full-time” work with “full-time” pay. So, I splurged. I started buying modifications for my car, for instance. I went to the casino more often (and for more money). Thousands of dollars were spent unnecessarily. The same thing happens later on in life, just on a much bigger scale. Avoid that.
4. Take Time to Realize the Truth
“You take the blue pill, the story ends. You wake up in your bed and believe whatever you want to believe. You take the red pill, you stay in Wonderland, and I show you how deep the rabbit hole goes.”
I’m not Morpheus. There is neither a red pill nor a blue pill. There is simply a shift in perspective in just about everything and we all need to get past our initial delusions to get closer to the truth. Here is one of my favorite examples.
When you received an income tax refund, you don’t suddenly come into free money from the government. That is your own money that you are getting back, because a refund means that you overpaid in taxes over the course of the year. It means that, in effect, you gave the government an interest-free loan. If you took the steps such that you didn’t overpay in taxes, that “extra” money could have worked for you as an investment, as a means of paying down your debts, or whatever else.
You didn’t get a “free” phone when you signed that contract with your wireless provider. The cost of the subsidized phone is simply baked into how much you’ll be paying on your monthly bill. In effect, you’re financing your phone.
5. It’s Only Free If Your Time Is Worthless
Some time back, Starbucks had a promotion where you could go in and try one of their new iced teas for free. No strings attached… except everyone else wanted to get that free drink too. From what I recall, the free giveaway was only open for an hour or two in the middle of a weekday afternoon starting at 1 p.m.
A friend of mine shared a picture he took outside a Starbucks near his workplace. This was just before noon and the lineup easily had at least 20 people in it already, if not more. If you were to join the line at that point, you could only hope to get your drink by about 1:30 p.m. Assuming this, and if we were to value the iced tea at about $3.50, that would mean that you are effectively valuing your time at $3.50 / 1.5 hours = $2.33 an hour. That’s less than a quarter of minimum wage in Vancouver.
The “free” iced tea wasn’t free. It costs time. I don’t expect everyone to be working (and earning) all the time. I would think, though, that there are far more fruitful things you’d rather be doing than standing in line at a Starbucks for an hour and a half.
Do you have any favorite financial tips you’d like to share?