Guest Post

Are you paying too much for your utilities? Perhaps the cost has been steadily climbing for some time, at first only slightly noticeable, but now making up quite a chunk of your monthly payments. There are some simple modifications you can make to reduce these costs and help the planet at the same time; it just takes a bit of careful planning.

Change your supplier: Search online to compare electricity prices and take note of companies from which may be able to get a better deal. In light of recent increases in gas and electricity prices, it’s important not to be complacent about your supplier and to check that you’re getting the best deal available – even if you’ve been with the same company for a long time.

Supply accurate gas and electricity readings: Suppliers may take a monthly estimate of metre readings, rounding up costs rather than the actual amounts. Learn how to read the metres in your home and ensure you give your suppliers accurate readings so that you pay only for what you use.

Programme your heating: This is important if you live alone or work during the day. Turn the heating on for the times you’re in the house and dial it back for midday when you’re not there. If you go away for the winter, turn the thermostat to a low setting to prevent the pipes from freezing and save money while you’re away. Similarly, if your tap water is scalding, turn it down; it generally doesn’t need to be hotter than 60°C to be comfortable.

Be energy savvy in the kitchen: Simply by making small modifications you can save money on your energy bill. For example, try not to open the fridge door for longer than is necessary and defrost the freezer on a regular basis. Use saucepan lids when cooking and turn down the heat. Only boil as much water as you think you’ll need rather than boiling a full kettle for every cup of tea.

A really easy, cost-saving tip is to use energy saving light bulbs rather than incandescent ones. They take a little while to warm up, but there are some excellent bulbs available from department stores, and they last a lot longer and reduce your energy costs.

Cutting your utility costs doesn’t mean living in discomfort. Making small tweaks and living conscientiously are just two ways to reduce those bills that are becoming more and more expensive. Compare your energy expenses online to find suppliers that can serve your energy needs at affordable rates.

This article is brought to you by the Money Supermarket.

By Clair Schwan

Okay folks, this is the home stretch for this four-part series on starting a consulting company on a shoestring budget. We’ve looked at startup considerations and how to handle them, expenses associated with running the business, and the many and varied hassles that really are more imaginary than real. In this last portion of the series, let’s look at income – the fun part. If you’ve done your planning well, and are mindful to minimize expenses, you ought to be able to make a decent return on investment.

Let’s take a look at what one might create for themselves, but let’s also be cautious and realistic.

Waiting for Income

If there’s one thing a frugal person is good at, it’s handling income and building wealth. Before we start rolling around and giggling amidst our big pile of cash, there are some realities that need to be faced.

First, the bad news. Unless you’ve cultivated your first few jobs, you’ll have to hold your financial breath until you land one. That could happen in a few weeks, or it could take a couple of months or more. Plan on at least a couple of months for the cycle of business development, focusing on prospects, writing proposals, getting a contract signed, and then getting the work scheduled to start.

Even then, you’ll work for 30 days, invoice a couple of weeks later, wait at least 30 days to be paid – probably more like 45 to 60 days – and that means your first dollar will come through the door about three months after you start your first job, and that might be six months after you start your business. Now, it’s clear to see why careful startup planning can be both wise and frugal.

To weather this portion of your career change, you’ll need a pile of money. That money will need to cover your personal and business expenses for about six months, and then you ought to have some working capital set aside in addition to that so you have a financial comfort zone. You don’t want to be distracted in your new business because you’re worrying about getting down to the bottom of the peanut butter jar.
Once you build a relatively steady stream of revenue, you’ll be able to relax a bit. After a year or so, the business development, customer work and billing cycle will become much more clear and you’ll be better able to predict revenue. You’ll also be able to project expenses with much more accuracy, and that will allow your return on investment to become clear. Only then should you start counting your money.

Enhanced Income

The good news is that all of the overhead built into your previous billing rate as an employee is now yours as gross revenue, much of which can be turned into profit. For example, let’s say your billing rate at your previous employer was $130 an hour. That means you probably were paid about $65 an hour for your time. That additional $65 per hour went to overhead expenses like management, administration, property rental, and unapplied time associated with business development. Now, you have an important choice to make – what to do with the additional $65 per hour that your customer is accustomed to paying for your services.

Here’s my suggestion. Lower your billing rate to $120 per hour and your customers will enjoy a break in the price of your services. At the same time, you’ll enjoy a $55 per hour increase in your income. That’s nearly double what you were making. So, you make a lot more, and your customer enjoys a price break. You’re “a deal” in the marketplace, but you didn’t have to take a financial hit to make it happen. Over the next couple of years, you can inch your rate back up to $130 per hour, and now you’ve doubled what you were making back at Acme High Management Overhead Inc, and you’ll still be offering a lower rate to your customers because the folks at Acme will have cranked up their prices as well.

If you do it right, what you’ll quickly find is your ability to accumulate wealth will take a giant leap forward. This means you’ll have plenty of cash to carefully invest in the business, because you’re frugal, and you’ll be able to engage the services of an investment advisor to help grow your nest egg. You can see it now, early retirement is on the horizon. You won’t need to remain part of the rat race until you reach “official” retirement age according to the government. Oh boy, this is going to be good.

Cash Attracts Others

Of course, there are others who have their eyes on those bushel baskets full of money you’re making. It’s our friends at the Internal Revenue Service. And, they’re out to provide you with a type of “service” by helping themselves to your enhanced revenue streams. I’m reminded of the song, This Isn’t What the Governmeant, by the 1970s group Bread. They sang, “The more you make, the more they take, you never seem to get ahead.” It’s true, so you’ll need to know how to minimize taxes on what you earn by investing wisely inside and outside of the business, and maximizing useful deductions.

Generally, anything that you regularly and exclusively use for your business is tax deductible. And, you’re in charge of the business, so you’ll decide what array of things are required for business success. Things like laptop and desktop computers, special software, still and video cameras, a GPS unit, a color laser printer, and other fancy gadgets might be necessary to do your work and win more billable work. You’ll also need to remember that paper, batteries and mileage are all deductible as business expenses when they’re put to work to earn you more income.

Wrapping it Up

So, the income earning potential of your own consulting business can be very attractive, but you need to be aware that it won’t come immediately, it doesn’t necessarily come regularly, and others want their share of your entrepreneurial efforts. Just because you have rid yourself of the corporate money leach doesn’t mean you’ll be successful at avoiding the long arm of the government. Take heart, you’re in good company among those who know how to create wealth. If only someone would start an enterprise that gets rid of those who simply consume wealth, now that’s a job I want to put in for.

Clair Schwan hosts Self-Reliance-Works.com where he encourages others to live a more self-directed and self-managed life focused on their own self-interests. It’s just the kind of spirit that makes for a good entrepreneur.

Related Posts:

Micro Frugality VS. Macro Frugality
How Frugality Becomes Counterproductive
7 Ways to Improve the Success of Your New Business
A Successful Online Business Requires Realistic Expectations
Frugal Entrepreneurs – Start a Consulting Company
Frugal Entrepreneurs – Expenses Associated with Consulting
Frugal Entrepreneurs – Apparent Problems with Running a Consulting Business

By Clair Schwan

Continuing with this four part series for frugal entrepreneurs, we’ve already looked at some startup considerations for those who might desire to create their own consulting company. We’ve also examined the issue of expenses. Let’s now look at the general “hassle factor” of starting your own business in the world of consulting. More often than not, this area serves as a ready-made source of excuses for those who are looking for justifications for not starting an enterprise of their own.

The List of Problems

It amazes me each time I hear that someone doesn’t want to start their own enterprise because they don’t want the hassle associated with getting themselves incorporated, processing time cards, and taking out taxes each paycheck. Many also don’t like handling invoices, dealing with insurance issues, negotiating contracts, and wrestling with local officials about business licenses and other incidentals associated with starting an enterprise. To some, it’s all very mysterious and daunting. Well, it’s not.

If you peek behind the curtain, you won’t see the Wizard manipulating levers, pushing buttons or adjusting dials. What you will see is a bunch of clerks pushing papers. I can do that. Can’t you?

Easy Solutions

Let’s look at each of the “problems” on the list and examine them in more detail. They’re really not problems but excuses, so let’s expose them as such and be done with it.

You don’t need to be a corporation, you can just be a sole proprietorship. Being incorporated doesn’t protect you from anything. If you’re going to be sued, a one-zee will be sued as a corporation and an individual. The only thing that protects executives of large corporations is a team of lawyers and gobs of money.

Time keeping isn’t so tough. Your time card can be a notepad, a calendar or an organization tool.

Dealing with taxes is simply a guesstimate on your earnings, doing a little math problem, and writing a check four times a year. Around tax time, it’s just another schedule added to your personal return (if you stick with a sole proprietorship.)

Invoices aren’t a hassle either. They’re a pleasure. When you send them out, you know that money will be sent back in return. And, what comes your way will never be diminished by bloated and self-centered corporate overhead. Ahhhhhhh, it’s so very satisfying, indeed!

Insurance is simple, just like getting car insurance. There are lots of agents out there who will get you liability insurance, health insurance or whatever other kind of insurance you need. That’s their job, so put them to work for you. But you like the idea that an employer sets up and pays for your health insurance. You think it’s high value. Well, it’s not. You can pay for a much better program of insurance by simply dedicating one of your workdays each month to pay for the premium. That’s it. So, you were going to stick around as an employee of another, with a crummy health insurance plan, and collect a meager wage just because it’s too much hassle to find an insurance provider on your own? Not me.

When it comes to contracts, they aren’t that difficult to read and understand. You don’t need an attorney. There isn’t any big negotiations that are required. Even if you take exception to some of the terms, many companies will work with small service providers to modify the terms simply because the service provider’s role is smaller and therefore the potential risk to them is much less. In any event, it’s usually one set of contract negotiations per customer, not per job, so once you have something hammered out, it’s easy to modify each year or apply to follow-on work that you’re awarded.

Most cities don’t have anything to say about this type of enterprise operated out of the home, so don’t get upset about that either. No customers will ever come to visit your office, you’re not going to hang out a sign that reads, “Larry’s Biotech Consulting Service” or something similar, and there probably isn’t any ordinance against making a living from the comfort of your home anyway.

My time as a one-zee started back in early 1999, and I’m certain that very few where I live know that I’m in business for myself. And, I intend to keep it that way. I operate as a sole proprietor and deliberately fly under government radar. I don’t even look like I’m in business – my Friday casual attire is a robe and slippers, and my company mascot sleeps under my desk.

The Bottom Line

Let’s get to the bottom line on this idea of how challenging it is to start an enterprise like a consulting business. It’s only you. Just you, and no one else. How much hassle could that be?

No matter how large an effort you see this to be, you don’t have to eat the elephant in a single bite. You have plenty of time to investigate and plan and get your mind around the whole concept of being on your own. If you’re currently working “off campus,” then you’re a big step ahead of the game – you’re already used to working on your own, and you can get the ball rolling during regular business hours, not having to be concerned about someone overhearing about your plans to break from the rock group, create your own record label, and start making your first in a series of solo albums.

Recognize that much of what you see as fearful is really only a bunch of uncertainties and excuses looking back at you in the mirror. Sort out fact from fiction. Do your own research. Shine up your crystal ball and make a good plan. Chances are you’ll be successful and experience few hassles in your startup operation if you keep it simple and cost-effective. That’s how the frugal among us like it.

Coming Up

Okay, the next article in the series talks about the fun part – making gobs of money. We’ll look at making money, but we’re also going to temper this with the reality that money from your own business isn’t like getting a paycheck each week or two. There are many variables that we need to keep in mind, so income can be tricky, but when you get it right, it can be highly rewarding.

Clair Schwan hosts Frugal Living Freedom where he encourages others to use their hard-earned money wisely and strive to be more self-reliant in their lives. It’s one of his online projects that comprises his ongoing consulting business. He doesn’t fly around the world any more, he simply pilots a small desktop computer in his robe and slippers.

Related Posts:

Micro Frugality VS. Macro Frugality
How Frugality Becomes Counterproductive
7 Ways to Improve the Success of Your New Business
A Successful Online Business Requires Realistic Expectations
Frugal Entrepreneurs – Start a Consulting Company
Frugal Entrepreneurs – Expenses Associated with Consulting

By Clair Schwan

Continuing with this four part series, we’ve already looked at some startup considerations for the frugal-minded who desire to create their own consulting business. Let’s now look at what might be the most intimidating part of the equation – expenses. The frugal among us are good stewards of money, so we need to understand how best to minimize expenses that will erode our revenue, and as a result, minimize the profit we see from our enterprise.

Direct and Indirect Expenses

Let’s assume you’re no longer tethered to the corporate mothership nor chained to your desk inside that little cubicle. We’re off and running. You know it’s going to be scary because it’s expensive to run your own company. After all, it takes a huge corporate financial commitment to finance the business you just left, doesn’t it? No. It doesn’t. In many respects, you were financing the corporation all along. Huh? Let me explain.

In much of the corporate world, you pay for your own travel expenses until your expense report is prepared, submitted, reviewed, approved, and then finally paid. In essence, you’re giving a loan to your company for the direct expenses associated with project work and overhead travel. The only thing that the company “floats” in terms of expenses is the cost of labor. In your new business, that would be you, and your time costs you nothing – it’s not an expense, it’s an investment.

Besides, most of your travel and living expenses, and many other expenses for a particular project will be what are known as direct expenses. In other words, they are part of the cost of a project and therefore should be chargeable to the customer. When you bid a job, these direct expenses should be itemized or estimated in your bid so the customer isn’t surprised when they show up on the invoice.

Other indirect expenses like computers, printers, personal electronic devices and office resources are relatively cheap, and many have a long life span ahead of them, so costs are reasonable and not recurring. For recurring costs such as Internet and phone, you can get bundled residential service and that isn’t going to cost you anything more than it did when you didn’t have your own office in the house. Speaking of your own office, is it necessary to have one outside the home? I don’t think so. There are many a major corporation that was started up in someone’s garage or spare bedroom. You can do the same.

Labor is a Big Expense

Like most operations, labor will be your single largest cost component for any job. The only time labor is a concern is when you have a large project where you’re hiring help, and they’ll want to be paid. Try floating three helpers at $100 dollars per hour for a couple of months until your customer pays you. You’d be foolish to do so. You’d also be well advised not to consider a loan to help float that expense either. It’s just too much on your back to carry. Your interest should be in meeting your own payroll, not the payroll of others.

To eliminate this expense and financial risk, you simply team with other small business resources that are in the same boat as you are. They’ll understand about the difficulty in meeting a payroll. And, they’ll be much more likely to accept some of the pain and risk for an opportunity to be part of your project. Just propose an agreement that has them getting paid immediately after you get paid. In that way, shortly after the customer check arrives and is deposited, you can write a check to your helpers.

Defray Costs

Another helpful approach is to defray costs where you can do so legitimately. For example, if you’re traveling across the country to do a job, stop off to do some business development work at the same time. At least a portion of your travel will be a direct cost, so you’re defraying the cost of your overhead activities simply by combining trips.

For example, it’s an $800 plane ticket to fly to your customer location, but only $1,000 to make a stop on the way out or the way back. So, instead of paying perhaps $600 for a round trip dedicated to business development, you can get the same thing accomplished for only another $200 in plane fare. The customer gets charged $800 of the $1,000 ticket because that’s the portion associated with doing the project work. The rest gets charged to overhead as an indirect cost of doing business.

As part of your business planning, you need to make a good assessment of the cost of doing business. That includes travel, equipment, supplies and living expenses. If you stay a one-zee, your overhead costs can be very small, and most of the travel and living expenses can be paid for by your clients as direct expenses associated with doing their work.

Coming Up

In the next edition of this series, let’s examine some of the apparent problems, stumbling blocks and show-stoppers when it comes to getting yourself freed from the mothership of corporate employment. Many of these take the form of excuses. I’ll show you that many of the worries associated with running your own enterprise are overblown and a waste of your time and energy.

Clair Schwan hosts Self-Reliance Works where he and his team of writers support a self-directed and self-managed lifestyle, much like the kind that an entrepreneur would embrace.

Related Posts:

Micro Frugality VS. Macro Frugality
How Frugality Becomes Counterproductive
7 Ways to Improve the Success of Your New Business
A Successful Online Business Requires Realistic Expectations
Pursuing Your Passion Isn’t As Risky As It Used to Be
Frugal Entrepreneurs – Start a Consulting Company

By Clair Schwan

As a follow-on to Kevin’s recent articles about how frugality comes into play as an entrepreneur, I’m offering a four-part series to suggest that the business of consulting is a good one to consider. Perhaps this line of work has a limited application for the general population, but it’s a legitimate career path if you’re in any field that one might consider to be “professional” in nature.

Being frugal means being a good steward of resources, particularly financial resources, but it also means that me make certain we’re getting good return on our investment of time and effort. The bottom line is we’re not wasteful. Although consulting can have its expenses, especially in the area of travel, it can be a business with low startup costs, low risk, and little wasted investment, something the frugal among us can appreciate.

In this first part of the series, let’s look at startup investment, and then I’ll use future articles to address expenses, potential problems, and what we might expect in terms of income.

Startup Investment

If you’re like most consultants and other professionals, you’ve spent years with one or more firms learning the ropes, acquiring technical skills, and polishing your ability to sell work, win jobs, and package your work products in a meaningful and attractive manner. You’re not necessarily smooth or slick, but you’re very good at what you do. That’s why you’re thinking of striking out on your own. You’re tired of making money for others; it’s time to build wealth for yourself instead of company management.

Before leaving the “mothership,” to get the best return on investment of your time and effort, you’ll need to busy yourself establishing good relationships with your customers and associates. You’ll want to get “tuned up” with respect to a broader range of technologies and methods, so you won’t be a one trick pony. You’ll also need to become familiar with other consultants in the industry, as they might become your associates. Most importantly, you’ll need to challenge yourself to get immersed in the business and project management aspects of the work so you’re not just a soldier, but a top notch field commander as well.

You’ll also need to have your ear to the ground so you can start to cultivate a number of clients who have needs for services, but are tired of being treated like just another customer standing in line. You’ll also want to strengthen the personal business relationships you have with your customers. If you can’t win work from them, you’ll want to have them as references.

You might even quietly cultivate your first few jobs, or at least the potential for new work, long before you jump ship. One way to do this is to get involved in jobs that are tailored to your unique talents such that no one else can take over the project and be successful. That’s a good way to get your soon-to-be previous employer to contract back to you right away to finish up your work. Voila, ready-made project work so you can hit the ground running.

When to Start

Since you’re going to be a “one-zee” out there, you’ll be fast on your feet, capable of making decisions in minutes, and not beholding to anyone in upper management, unless they’re upper management in your client’s organization. If a good customer or associate is ready to use you regularly, and right now, there’ll be nothing stopping you except your own misgivings about making gobs of money and being your own boss. Gee, that ought to be a tough decision to make!

Another consideration for startup is market timing. If the budget preparation cycle for your customers starts in the fall, you ought to consider a September and October start time as optimal. I used to work for someone who called it the “selling season.”

For many, the key to starting is when they’re ready. It’s good advice. If you’re not ready to put your all into it, you probably need to hold off. Running your own business can be dicey, so you’ll have to be your own best cheerleader when it comes to keeping things moving along, and keeping a positive attitude. It helps to be jazzed; it helps to be sure you’re ready.

Coming Up

Next in the series we’ll take a look at expenses. For the frugal-minded, this may be the greatest concern of all. I hope to show you how the consulting business can be quite a low cost operation, and that’s important because it’s your revenue minus expenses that equates to how much you’ll place in your own pocket.

Clair Schwan hosts Sensible Small Business Ideas where he encourages people to start their own enterprise. He believes that the only business you’ll truly ever be part of is your own.

Related Posts:

Micro Frugality VS. Macro Frugality
How Frugality Becomes Counterproductive
Buy a Business OR Build One From the Ground Up?
7 Ways to Improve the Success of Your New Business
A Successful Online Business Requires Realistic Expectations
Pursuing Your Passion Isn’t As Risky As It Used to Be

By Kevin M

In previous posts I’ve suggested that frugality can be counter productive if it keeps you hyper-focused on saving money at the expense of increasing your income. There is a very definite “siege mentality” that is inherent in frugality, and if taken too far it can lead to a process in which you’re constantly working to lower your cost of living but never moving forward in any real way.

Today I’d like to look at the flip side of this thinking. In this post I’d like to examine an area where properly channeled frugality can create business opportunities.

Last week I had lunch with my friend Jay and we got to talking about the possibility of a connection between self-employment and being frugal. Jay himself was the inspiration for the question—and for this post. In addition to having a very successful business, one he quite literally built from the ground up, Jay has never held a job. His entire career has been a process of moving from one entrepreneurial venture to another and sometimes juggling two or more at the same time. Oh, and yes, Jay is also very frugal. I don’t mean cheapskate frugal, but more along the line that frugality is a part of who he is.

Have you ever known anyone like this? I’ve known several. Make that many! That’s what leads me to believe that there might be a connection between self-employment and frugality. I’m not sure whether frugality sets the stage for self-employment, or if being self-employed makes one frugal out of necessity. But I’m willing to guess that there are certain characteristics of the frugal that make it easier for them to be self-employed.

What are those characteristics?

An inclination to find the best deals

What ever it is that a frugal person needs he’ll almost always pay less for it than others will. In that process he develops a sense to be able to almost sniff out the best deals on nearly every product or service he buys. A truly frugal person almost never buys “off the shelf”. He hones something of a horse trader’s instinct that he’s able to summon anytime he’s about to buy something. Think of it as buying wholesale, a skill that any self-employed person needs to develop.

”By Low, Sell High”

The inclination to find the best deals is rooted in a deep sense of value. The frugal person knows that what it is he buys is purchased at a lower cost than what most others are willing to pay. This sets the stage to sell what he buys for a profit. The primary “secret” of having a successful business is the ability to buy on the cheap and sell what you buy at a higher price. It’s easy to see how this would help in running a business.

Getting the most out of scarce resources

The frugal not only know how to buy for less, but they also have an uncanny ability to use what they have to the fullest. That may involve using a product past the point where most others would discard it, the willingness to fix or otherwise enhance it to get more life out of it or, failing all else, to find cheaper alternatives.

This is exactly what you’re doing when you’re self-employed. There are business plans, but as anyone who’s ever run a business knows, improvising quickly becomes the order of the day. Since income is never unlimited, the ability to make do with less becomes the critical “other half” of business success.

Managing cash flow

Since a frugal minded person is always aware of expenses and the need to control them, his ability to successfully manage cash flow tends to be better than that of the average person. We can see how this is a benefit in managing personal finances, but it works just as well in running a business budget. By keeping expenses low, and buying only what’s absolutely necessary, the frugal person also maximizes net income.

Staying out of debt

Frugal people are keenly aware that debt and the interest it carries raise the cost of everything it’s used to buy. For this reason, the frugal avoid debt and that works very well if you run a small business. Debt can be the mortal enemy of a business entity, reducing options and cash flow during downturns. By staying out of debt, a business is in a better position to weather economic troubles. The frugal tend to be naturally better at making this happen.

Investment and business asset growth

One of the hallmarks of the frugal is a healthy savings account balance—a natural result of buying on the cheap, keeping expenses low and staying out of debt. This is also a benefit to a business owner since it keeps cash available for future investment. This can be either investment in personal financial assets or investment in the business itself.

Where ever it’s done, when a business owner is able to invest without borrowing he improves the likelihood of both the survival and increased prosperity of his business.

Getting back to the question in the title: Self-Employment and Being Frugal – Is there a Connection? In my opinion, most definitely.

What do you think? Is there a connection between the two? Does frugality benefit a business owner? Can you think of ways it might work against being self-employed?

Related Posts:

Micro Frugality VS. Macro Frugality
How Frugality Becomes Counterproductive
Buy a Business OR Build One From the Ground Up?
7 Ways to Improve the Success of Your New Business
Steady Paycheck VS. Self-employment; Which is Right for You?
Pursuing Your Passion Isn’t As Risky As It Used to Be

By Kevin M

Do you ever find yourself wondering—perhaps when you look at your paycheck or even your W2–I make a good living, why don’t I have more money saved up?

You might look at your income and your regular expenses and think that you should be saving more, but somehow it all seems to just disappear, almost as if there are termites gnawing away at both your wallet and your checking account. And perhaps there are a few termites infesting your finances. Call them “stealth expenses”—stealth because we usually underestimate them—if we even notice them–expenses because that’s just what they are.

We all have fixed expenses that we know only too well—house payments, car payments, student loan and credit card payments. There are also day-to-day survival expenses, like groceries and gas. We’re very familiar with all of these, but it’s those others, the variables, that slowly suck the life out of a budget. Those are the stealth expenses, the ones that aren’t always so easy to measure or even to prepare for.

”Where does all my money go?”

Stealth expenses are “soft” expenses that hit us in small chunks, but they’re substantial when taken together. Worse, because of the variables related to each, you can’t know with any degree of certainty what they’ll cost you in any given year. The prime suspects:

Insurance. This category is complicated by the fact that it usually has several components–home, auto, life, health, etc, that add up to many thousands of dollars each year. Often they’re paid in ways we don’t notice, such as payroll deductions for health insurance and the little corner carved out in the monthly house payment that includes homeowner’s coverage. Then there are some policies that have annual, semi-annual or quarterly payments that can escape yearly budget projections. They all add up to less savings in the bank at the end of the year.

Co-payments, deductibles and co-insurance provisions. Uncovered health expenses–deductibles, co-pays, co-insurance (the percentage of first dollar medical expenses you’re required to pay past the deductible—nearly every health insurance plan has this provision!) and costs for procedures that aren’t covered—also fully qualify as blind-side expenses, and they have an uncanny knack for hitting at the worst possible times. In any given year there’s no way to know what they can be, but they can torpedo a budget in short order.

Utilities. Utilities might the biggest of the stealth expenses. They can easily amount to hundreds of dollars per month but we don’t notice because it’s usually split between several bills (electric, water, garbage, gas, cable, internet, etc). A major complication is weather, which can increase payments even if you’re on a budget plan. Another is unexpected and often steep rate increases. Many utilities are virtual monopolies and if they’re approved for fee hikes you’re stuck.

Entertainment. The stealthiest of all stealth expenses, perhaps because we don’t like to think about budgets and saving money when we’re planning on having a good time. Like dominos, one fun activity usually leads to another, like dinner and a movie. Then there’s the gray zone factor—is eating our part of your food budget or is it really entertainment? What about cable TV? And how to you establish an entertainment budget—and live within it—when you don’t know exactly what your needs will be? Entertainment is, after all, driven more by emotional factors than logic.

Car repairs. Probably the most unpredictable of all stealth expenses, you can budget for this but you can easily miss by thousands of dollars. The reason is the wide variation in repairs costs. Replace a battery at $150—piece of cake—replace the transmission at $2,500–now we’re talking real money. Multiple major repairs could mean that all budgetary bets are off. This is a category where you can get off easy with $500 one year, then get clobbered by $5,000 the next. The older the car or the more vehicles you have, the less predictable the expense will be.

Holidays—especially Christmas. There’s often a tendency to think that this expense can be blended into a budget with little extra effort, a notion that usually breaks down quickly when the January credit card blizzard hits. Christmas in particular is difficult on a budget in part because of its sheer size. It sits astride the “holiday season”, sandwiched between Thanksgiving and New Year’s, and that season often facilitates a breakdown in budgetary order. Not only is there shopping for gifts, but there are dinners out “on the fly” because there’s no time to cook. Then there are decorations and often travel. A blessed holiday for sure, but a hard one on the finances.

If you think about if for a bit, you’ll come up with even more categories that qualify as stealth expenses, but the more important issue is taking control of them. Because stealth expenses have multiple sources, there need to be multiple plans on how to deal with them.

Keep close tabs on ALL spending

Stealth expenses like entertainment get out of control precisely because they escape close scrutiny. Tracking them will show the reality of what you’re spending, highlight substantial increases in spending trends and give you a chance to make cuts where necessary.

Controlling fixed expenses is more important than we think

Stealth expenses usually eat up a bigger chunk of your budget than you think. The wide variety of them can make it hard to establish a workable budget. An alternative is to lower fixed expenses, like housing and car expense. Not only are there fewer fixed expenses, but they’re usually larger so cutting will have a far greater impact.

And here’s a bonus: the lower your fixed expenses are, the lower your stealth expenses will be. For example, the size of your home will affect your utility expenses, while the cost and type of car you drive will have a huge impact on both car repairs and insurance costs.

Set up a dedicated savings account for predictable but irregular expenses

Set up a third savings category—somewhere in between an emergency fund and long term investments—that will cover the loosely expected and vaguely predictable nature of stealth expenses.

Emergency funds are typically based on predictable monthly living expenses, which include regular insurance and utility payments. However, car repairs and health insurance deductibles and co-insurance provisions are close to impossible to predict with any certainty—all we know is that they can happen, and will at some point in the future. How do you save for that?

One way is to average how much you’ve spent on these over the past few years. It’s far from scientific since car repairs can increase as your vehicles age, and healthcare is always an X factor. You could use a worst case scenario on healthcare, for example, by adding up the deductible and co-insurance provision that you would have to pay for a large medical expense for one person, then add in an average amount paid for car repairs. You could also begin loading up the account as the holiday season approaches, or you have a wedding or graduation to attend when entertainment expenses will increase.

Stay liquid!

Liquidity is vastly underrated as a budgetary tool. The lack of it is a primary reason people go into debt. Don’t overload investment or retirement savings at the expense of near term needs. You’ll pay for these one way or another, and it’s always best to do so without using credit.

A “stealth expense” is any expense that we would be likely to underestimate or to even exclude from our budgets; can you think of other examples?

Related Posts:

Simple Ways to Save Money Everyday
Micro-frugality VS. Macro-frugality
Tame the Greedy Gadget Monster in 5 Easy Steps
High Cost Cars Cost Even More Than We Think
10 Things You Should Buy Used
Entertainment For Less

By Kevin M

One year ago—just about to the day—I took my first stab at this topic in Why Earning More Money is More Important than Frugality. It was one of the most popular posts I’ve done in the two years that I’ve had this site up and running. It seemed for a while that I’d covered the topic as thoroughly as I could imagine, but the subject has hit the blogosphere with a vengeance in the past couple of weeks stimulating additional thinking.

That doesn’t mean I’ve changed my original thoughts on frugality—quite the opposite. I’m now even more convinced that I was heading in the right direction on the first go round. My comment on Len Penzo’s 100 Words On: Why Frugality Has Its Limits made me realize that the subject is even more important than I imagined and that it’s time to take it on with some fresh ideas.

Frugality in a changing world

I believe we’re in the early days of a massive era of change that will eventually earn itself a chapter or two in the history books. Think Industrial Revolution here—an event so all-encompassing that it will change life as we know it. Space doesn’t permit presenting all of my thoughts here so it’ll be the topic of a future post that I’ll roll out as soon as I get the bugs worked out of my crystal ball.

In the meantime, we can safely say that at the moment we’re living in world of changing circumstances—I’d dare say negative for most, though I think the very long term will hold many positive surprises.

When change comes, and it seems disruptive in nature, we can do one of two things. We can either circle the wagons and work to protect what we have, or we can plunge forward and try to reinvent ourselves to thrive in a very different looking world.

The obsession with frugality strikes me as part and parcel of the circle the wagons strategy. Inside the wagons, we may feel secure and think that we’re in control, but as conditions outside deteriorate they’ll eventually drag us down in spite of our best efforts.

Frugality works best when you have something approximating employment for life, in a job that pays a living wage WITH full benefits AND predictable increases in pay. In that situation, your income is reliable and rises with time. By cutting expenses and saving the difference you save your way to prosperity.

But that’s not the world we live in any more. Jobs and long term employment are no longer certain, benefits are being cut, and raises–if you get them–are puny. Frugality doesn’t work as well in that situation and isn’t a long term solution to that problem.

The ultimate solution is to move beyond the circle, charge forward and work to cut a new path. Frugality doesn’t prepare us for that, at least not the way it’s generally used.

Micro-frugality vs. macro-frugality

So I don’t risk painting with too broad a brush, let me say that I think there are different types of frugality, and I can identify two as general categories.

Micro-frugality. This type of frugality is searching two dozen expenses for savings in each in the hope that collectively they’ll reach the level of real money. While that may (or may not) happen, the effort itself is exhausting, and requires constant vigilance. It has us researching, analyzing, discussing and executing cuts in nearly all expenses that make up our financial lives, and the effort can easily rise to the level of a part time job.

Macro-frugality. This is cutting the two or three biggest expenses that have the greatest impact on your finances. If your house is costing you $2000 per month between the basic house payment, utilities and upkeep, you replace it with one that you could live in for $1200 a month. A car with a $600 payment is replaced by a used car with no payment.

Macro-frugality makes abundant sense, especially if you’re trying to lighten your load to make a career push forward. You cut the structural expenses—which often causes other expenses to drop as well—and let the rest go. It’s better because you make two or three major changes and then move on. Simple, with maximum effectiveness.

Micro-frugality on the other hand, has us buried in small details. While we should be focused on generating fresh income streams, we’re busy plugging small leaks in our budget. What’s the end game to that strategy?

Is frugality motivated by a hatred of work?

That’s a strong statement but before you judge me too harshly for writing it, I came up with it while reading the comments posted on a New York Times article, Forget Frugality: Focus on Earning More.

The article was written by Ramit Sethi at I Will Teach You To Be Rich, an author and personal finance blogger who’s been very outspoken in his criticism of the frugality faith. There were 90-something comments responding to the article, and from the 40 or so that I scanned, the responses were overwhelmingly negative. I’d even go so far as to say that some of them were hateful, as though Ramit struck a deep emotional nerve.

Why the rabid responses? Ramit was suggesting that rather than use their free time to find new ways to save money, that they instead find ways to earn more money. That was the bone of contention—the frugal wanted to save money precisely so they wouldn’t have to work more.

But was Ramit suggesting that they become workaholics? Hardly. He was suggesting that they think long term. What he was pointing out was that the better use of spare time is to use it to earn more money so that credit cards and other loans can be paid off or savings can be accumulated. With less debt and/or more savings, structural improvements in life take place ultimately resulting in less work, more free time and more money. Its old fashioned work-save-invest, but the masses apparently want no part of it—too much work in the short run.

The primary risk of over-emphasizing frugality

Ever wonder why human beings are creatures of habit? It’s because life is easier that way. We don’t want to have to stop and think about everything we do, to hatch new ideas for the things we do every day, especially those that are mostly about survival. Going into automatic pilot is what we might think of as “brain save mode”, and there’s a good reason for that.

Each of us has only so much creative capacity, and so much time. True, some people are more creative than others, but all of us have the ability. The difference is primarily that some people make better use of their creative skills than others. The same is true of time. Each of us have only 24 hours a day, and much of that is consumed by work and sleep, leaving precious little time for much else.

That begs an obvious question: what are we spending our creative energy and time on?

Are we going to spend it analyzing four cell phone plans to see which is the cheapest? Running from store to store to see who has the best price on laundry detergent? Investing 100 hours of our time on research and efforts to weather proof the home so we can save $25 a month on energy bills?

All of these can seem like noble pursuits, but making a deep dive into details can also be a form of creative avoidance–that’s majoring on the minors, and it’s guaranteed to keep us right where we are.

That’s the risk that frugality brings—that the lions share of our creative energy and time will be dedicated to what amounts to an effort to keep what we have. In a period of changing circumstances and declining economic fortunes, will that be enough? Will it move us successfully into the future? I have serious doubts.

Yes, income generation IS more important

Frugality has its place—certainly macro-frugality does—but what I’m challenging is the notion of frugality as some sort of overriding financial guiding principal. That’s a role it can never fill. If your income shrinks down to zero, you won’t be able to cut enough expenses to survive.

Only by increasing income and generating new sources can we move forward, but it may be even more important than that. Why?

1. Jobs and careers are disappearing fast, and many of us need to completely retool in order to be economically relevant

2. Employers are no longer providing the type of training that will lead us to relevant new careers (they too are circling the wagons and have largely abandoned forward strategies like training in favor of cost cutting and survival)

3. Entrepreneurial skills are becoming critical as the choice for the unemployed is increasingly between self-employment and no employment

4. Developing multiple income streams may be the single best survival strategy in a world where fulltime, fully benefited, living wage jobs are becoming increasingly rare

5. University educations are not only prohibitively expensive, but the coursework is increasingly out of step with the most recent developments in the economy and job markets

6. Developing new businesses and income streams will take time, so the time to get started is now

Income earning ability is our single greatest financial asset. Our overriding financial principle then needs to be that we’ll always have an income—preferably a generous one. Making that happen is now completely up to us, and where we spend our creative energy and time will determine how well we do on that front more than anything else.

If you’re looking for a way to spend more time earning income to help your cash flow, check out my post, The Freelance Blog Writer Side Hustle. Even if you’ve never written professionally in the past, this post will help you get started converting your passions and interests into an income earning business that you can work in from the comfort of your own home.

Your thoughts?
 

Related Posts:

How Are You faring in the “Jobless Recovery”?

Buying vs Renting a Home – Its Not All About Money

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All Jobs are Temporary! (And What You Can Do About It)

A Successful Online Business Requires Realistic Expectations

Multiple Income Streams to replace One Man-One Job?

By Alban

Chances are, you’ve recently found yourself lamenting the cost of things these days, and wondering how everything got to be so expensive. Well, rather than automatically hand over the sticker price for a purchase learn how you can negotiate a better deal and save yourself some money.

Haggling on price is not something which must be reserved for the market place on your next vacation, instead there are six tips you can use to help you pay what you believe is fair price, rather than the market up retail price. And don’t feel bad—if the seller really couldn’t afford to offer you the discount they wouldn’t, no one is going to run their business at a loss just to clear stock.

1 – Know what you want to pay

You can’t negotiate a better price if you don’t know what that price is because negotiating is all about directing the sale towards the price you want to pay with these subtle tips – therefore you need a starting point. All you need to do is consider the selling price and decide on what you think the item is worth and what you’d like to pay for it.

Then start negotiating with the seller below your ideal price because if your first and second offers are knocked back, your third offer could be accepted at your ideal price. Plus, you may be able to get the item even cheaper, since the seller doesn’t know your limit.

2 – Find hidden flaws

If you’re not getting anywhere in trying to reduce the selling price, point out flaws or defects in the product. Perhaps the item is a display model and has a few scratches or doesn’t come in a box. These are perfect reasons for a seller to offer a discount, especially when you start pointing out these flaws and they begin to think that maybe the item isn’t worth as much.

If you’re at a garage sale or at a market you can point out the disadvantages or defects of one item over another and though you may not care, you have inserted leverage into the negotiations which now has the potential to save you money.

3 – Take your time

Don’t immediately jump at an offer which sounds good without considering it fully. There are plenty of slick sales people out there who are not new to the negotiation game and they know how to spin an offer and skim over your questions and concerns to make the sale.

Think about the offer and what it really means; a good way to do this is to repeat the offer back to the seller to clarify the details, but make sure you listen carefully. Remember that if a price sounds too good to be true it probably is, so consider why the seller would be offering such a great deal. Also don’t be influenced by a sob story and don’t be distracted by the seller because many sales people will try to befriend you and search for commonalities between you to make you doubt your ability to negotiate with a ‘friend’.

4 – The power of confidence

A successful negotiation is about confidence and if you think something is overvalued, then stick to your guns and negotiate to save yourself some money. Have an attitude of success by making sure you stand up straight, don’t fidget and look the seller in the eye. Speak clearly and concisely and leave your emotions out of it, getting angry or frustrated will not win you the best deal.

5 – Negotiate with someone who can make the decision

If you find yourself negotiating with someone who is not actually authorized to offer a discount you will be negotiating to reach a lower price, but that price then has to be approved. You were not actually part of a real negotiation as the real negotiation starts when you are able to talk to the manager. You risk losing your focus and motivation if you have to start all over again.

6 – Save money through your job

Having more money isn’t always about direct savings on the ticket price of things you buy. You can negotiate with your boss to see if your job can help you save. Many companies are not able to negotiate a pay raise at the moment because it’s still simply not in the budget. However, you can negotiate to add value to your employment package.

This is the golden rule of successful negotiating because you shouldn’t give up something – a pay raise – without getting something in return – like an employment benefit. Therefore, consider what you want to be able to save money on and your employer may be able to include that in your employment package. For example, they may be able to add health benefits for you so you can save on the private health cover you’re paying for to cover yourself and your family.

Alternatively your employer may be open to salary sacrifice, where your pre tax income pays for something you need for work. For example, instead of receiving a $5,000 pay raise, your employer may pay for a new lap top or for your home phone and internet if you take work home.

Moral of the story: nearly everything’s negotiable–find ways to use that to your advantage.

Alban is a personal finance writer at Home Loan Finder, which offer information on reverse mortgages.

By Kevin M

There’s a “stealth expense” that chews through budgets and often leaves us with an empty bank account or even a little deeper in debt each month; its called entertainment expense, and at least part of the problem may lay in the fact that we’re usually reluctant to even view it as an “expense”.

Maybe this is the case because entertainment has a way of defining us—it’s often who we are, which has to be something more significant than just an ordinary expense, doesn’t it?

We can be meticulous about budgeting for housing, groceries, utilities and a host of other expenses, but entertainment is often—to borrow a political phrase—“off budget”.

Entertainment diverts our time into stimulating activities in ways that usually won’t happen through working at our occupations, managing our homes or many of the other more mundane tasks we participate in as a matter of survival. People have sought to do this since the beginning of humanity, but the one thing that’s changed radically is our contemporary willingness to break the bank to make it happen. That’s the part of it that we need to control!

The most basic purpose of entertainment is to have a good time; we need to get past the idea that we need to spend a lot of money, or even any money at all, in order to make that happen. We all have a need to be entertained but there are inexpensive ways to do it, and then there are the other ways—the ones that often lead to debt.

Entertainment as an addiction

I’m not a psychologist, but I’d be willing to wager that much of the spending on gold-plated forms of entertainment these days is an attempt to compensate for weaknesses in other areas of life, such as stress, lack of companionship, lack of community, or other voids. This goes beyond the realm of simply looking to have a good time, to the point that the planet is now crawling with entertainment addicts. And like all addictions, it must be controlled.

Replace costly entertainment habits with less expensive ones, and we can do that simply by engaging in more participatory activities, and by increasing the amount of time we spend with people. Bigger picture, much of the reliance on entertainment might be replaced by reducing stress in your life, by increasing connections with family and friends and with involving yourself more with the community and the world around you.

Do these things, and you may find yourself craving fewer restaurant meals, amusement park visits, trips to bars, and all of the other entertainment activities that can suck a budget dry.

Instead of eating out, going to the movies, to the mall to shop or to costly amusement parks and other venues, come up with some inexpensive alternative activities you can engage in so that you can still keep yourself entertained but without spending a bunch of money to do it. Don’t be afraid to consult with family, friends and coworkers for more activities—see what others are doing for entertainment, especially those of a more frugal persuasion.

Compile a list to help you when you’re looking for something to do—this will help you to develop some new habits and attitudes toward entertainment, at least until it becomes set in your mind.

Eight activities for under $20

To help you get started, here is a list of activities which will get you out of the house and into the world without bleeding you dry:

1. Visit with friends and extended family—your house or theirs; we’re social creatures so people are the best source of entertainment
2. Head out to the local park or a nearby beach; pack a lunch, bring your bikes, in-line skates or a ball or two, and spend a couple of hours just taking it easy and enjoying the outdoors
3. Window shop at the mall; bring $10 with you and remove your credit and debit cards from your wallet; sometimes just being out and about is all we really need
4. Plan “Family Night In” with a home cooked dinner and a video, or cook a nice dinner at home, then go out for dessert afterward—which is just as much fun but much cheaper than a full restaurant meal
5. Go hiking in a state or national park—you don’t need to be an athlete to walk, and you can do it at your own pace and enjoy nature as you go
6. Pass some time in your local library, or at one of the chain mega book stores; you can browse or read for hours and no one will ask you to leave. Some large book stores also have coffee shops, and you can always get a cup for under a couple of dollars.
7. Hang out with family or friends at Starbucks or some other coffee house
8. Pack a lunch or some snacks and spend the afternoon or evening at your local neighborhood or community swimming pool. At our community pool, daily admission is $3 per person, $12 for a family of four, and there aren’t a whole lot of places you can go for less than that.

This is just a start—work on expanding the list, and I’ll bet you could come up with at least 20 activities you can engage in for less than $20 each and many of them free. A lot depends on your own personal preferences, but the more possible activities you can come up with, the less expensive your entertainment will become, so be purposeful in developing a list.

We’ve found over the years, that doing several low- or no-cost activities in combination can make for an enjoyable day. You can have a picnic in the park for dinner, window shop at the mall for a bit, hang out at the bookstore for a while, then go to Starbucks for coffee and dessert—an enjoyable evening for under $20.

The more options and combinations you can come up with, the less likely you’ll need to go to the movies or an amusement park.

What are some other ways you can think of—or have done yourself—that you can entertain yourself or your family for not a lot of money?