The #1 Rule of Saving Money

Background

The vast majority of content I publish is about increasing the size of your money pond without changing how much you work your job (the money coming into your pond) or what you buy (the money leaving your pond). And I’ll never tell you to work your job more because people (family, friends, whoever it is) are more important than work.

But there is a fundamental aspect of increasing the size of your money pond that I will never deny. This leads us to the number one rule of saving money: don’t buy it. You don’t need to slow the flow out of your money pond if you can stop the flow altogether.

Naturally, it’s sometimes necessary to make a purchase. But everyone wants a bigger money pond, and here are six things that motivate me to act on that desire.

I’d rather have four times the money in 30 years

This point is all about paying extra on your mortgage. At today’s average mortgage rate for a 30 year loan, a $100 extra payment at the beginning of your mortgage will save you $482 in interest. That’s right. Taking a bite out of your principle this year takes a bite out of your interest for this year. And the next year. And the next. And so on, until your mortgage is paid off.

Now, one factor to consider is inflation. $480 in 30 years isn’t as much as $480 dollars today. So let’s round that figure down to $400 for simplicity’s sake.

What that means is that for every thing you can avoid now, you’ll be able to get four of those things down the road. Can you skip eating out this week? If so, then you can eat out four times when your mortgage is paid off – for the price of only one meal. Can you skip Starbucks for a week? If so then you can get Starbucks for a month later on – for the price of only one week.

Another way to look at this concept is to multiply the price of something by four, and then ask yourself if that price is worth it. Is your cup of coffee worth $8? Oops, my mistake, that’s the normal price! Is your coffee worth $32? If not, then skip it.

(For the record, paying down debt early isn’t always the smartest financial move).

I’d rather have twice the money in eight years

This topic regards taking the money from a potential purchase and investing it in stock instead. Even in this year’s down market, a $100 investment six years ago would be worth $203 today if invested in the S&P 500 index. 

Again, inflation is a factor that must be considered. The long-term rule is that S&P 500 investments double every eight years, adjusted for inflation. 

Just like before, ask yourself if you would rather have one thing now, or two things in eight years. If you can avoid buying a TV this year then you can buy a TV and a surround sound system down the road. Or you could trade in a vacation to the beach this year for a trip to Hawaii in eight years.

What if you extrapolate this concept longer? If your investment doubles every eight years then that’s exponential growth. You don’t need to have learned a lot of math to have heard that exponential growth means an explosion in growth.

For example, imagine skipping a $1000 vacation this year and putting the money into stock. You could continue your $1000 vacations the following years, but that initial investment keeps growing. In sixteen years it’ll have doubled twice, to $4000. But you could still take a regular $1000 vacation that year and stay invested. Extending that to 24 years from your original investment, and you’re looking at the chance to go on an $8,000 vacation – for only $1000.

I’d rather buy something expensive

This topic is about good, old-fashioned discipline and delayed gratification. A lot of us wish we could do something expensive – get a nicer car, go on vacation, do something fun. But we make too many little purchases to ever afford the big, expensive thing.

When this is the case, ask yourself: What’s more important to you? The fast food or the family vacation? Doritos or Disney World? Coke or car? Can I cut out the little things to get the important, big thing?

I value efficiency

Most of us don’t like waiting in line because it’s an inefficient use of time. Similarly, traffic is such a test of your patience because it’s inefficient.

In the same way, we should be efficient with our money. This can cover everything from driving fuel efficiently (which helps you save on fuel costs and promotes engine/brake longevity) to using secondary cellular services that cost a fraction of what the primary carriers charge.

Don’t buy everything you want – buy everything you need. Don’t buy Cabela’s when you can buy Ozark Trail (for more quality per dollar). Don’t indulge yourself when you can satisfy yourself instead.

Did you know that last year the average alcohol expenditure per consumer was $4451? Cutting that number in half will make you twice as efficient with your money in that category.

I understand that there are ripple effects

A lot of times, things like food and beverages affect more than just your wallet – they can affect your weight and longevity, too. Cutting out the junk food moves the volume from your waste to your wallet.

I don’t deserve to live like a king

I realize there are mixed thoughts on this point. Some will say that if you’re earned it then you deserve it. I’m not going to argue that, but I will point out that the reason you’re reading this article is because you want to increase the size of your money pond. And you can’t do that if money is flowing out of your pond (expensive living) as fast as it’s coming in. If you want to be actionable about your desire to increase the size of your money pond then ask yourself what you can cut out.

For me personally, a Christian, others are more important than I. There’s no reason I should live like a king if people around the world are living in poverty. Why should I eat out if there are people who can’t even eat in? Why should I have a new car if some people can’t even have a bike?

Conclusion

You would be surprised at what you’re capable of. Can you delay the gratification this year to get twice the gratification down the road? Is it efficient? What other effects will it have? Perhaps the answer will be: don’t buy it.