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Tip #29: Stop being a loser and pay money to save money

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This is Tip #29 of of the Save $1,000 in 30 Days Challenge. (See past tips.)

Today’s tip is to spend money on things that will save you money in the long term.

buy-a-book.jpg

Too many people think that “saving money” is about cutting costs relentlessly until they can cut no more. And then…what? Who wants to live like that? Reading some of the frugality sites, it becomes clear in about 2 minutes that you can’t outfrugal a nutty frugal person. And as they say, if you win the rat race, you’re still a rat.

I’ve been crystal clear that when you buy things you want, you should focus on the value, not the cost. That’s why I bought a new (not used) car. It’s also how I distinguish cheap vs. frugal people.

“Saving money,” as I’ve described in this Challenge, is about cutting costs, earning more, and optimizing your existing spending. Instead of constantly looking for ways to cut your spending, sometimes it’s ok to actually spend more in the short term if you’re saving in the long term. This is a bewildering and frightening thought to many people, most of whom don’t read personal-finance blogs, leaving me free to mock them openly.

A great example of this is something like the Entertainment book (or any coupon book). I bought one a couple weeks ago because I can make the $20 back, guaranteed, plus much more. The key, of course, is actually using the coupons when you would ordinarily be going out anyway.

Save on all the things you love to do!

In this simple example, it’s easy to see that the money you spend will be directly made up. Still, many people don’t even want to spend for something where the ROI is so clear. For many people, buying something to save money down the road is unfathomable, confusing, and just plain weird. Those people are crazy and need to understand that long-term savings are still savings, even if you spend a little money right now.

That’s also why this lady who once sat next to me would have been 100% right to pay $2,000 for a computer class.

A fun example of nutty cheap people
To get myself geared up to write this post, I checked out one of my FAVORITE old posts: Stop Being Cheap and Go Buy Something Valuable Today. I had done an earlier webchat and told people I might be starting a paid podcast service. People freaked out:

person1: don’t charge though
person2: yeah, please don’t charge
person3: I have universtiy debts to pay for… =… O(
person4: It feels punitive
person5: your good karma will come back to you muliplied if you do not charge
person6: because people dont want to pay lol my guess is you will lose many readers if they have to pay
person7: No charge….comeon! you cant ask us to pay to learn saving 🙂
person8: one thing that would concern me if you charged is that the quality of material would need to match the fee
person9: i think you should charge. you weed out the ppl who aren’t willing to make basic investments in their investments
person10: dont charge
person11: frankly your latest work hasn’t been great ;(
person12: we cheap 😛 don’t charge. we hear to save money here XD
person13: suze orman does not charge for her show
person14: Dude, there are people who CAN’T pay. (Me, for example, here in Bangladesh, I don’t have a way to pay for stuff in the web.)
person15: you’ve been giving out quality information for free, i think i’ve gotten used to it…
person16: Charging is not a succesful business model for editorial content on the web, currently
person17: people dont know what the advice is worth before getting it but you have to pay first
person18: you will NOT attract new audience members by charging….existing ones, maybe
person19: Payment is a barrier between the reader and the important information; I would think you of all people would understand how dangerous it is to erect even minor barriers for people.

You really should check out the entire post.

These are exactly the kind of people who are overly focused on cost, not value. They see something that costs $10 and fail to realize that they could save $500, or $10,000, with the advice inside. Do you think any of them have ever bought a book on personal finance? Or attended a course to learn something after they graduated from college?

Of course not. Because it’s transparently easy to see money going out of your pocket right NOW, but it’s harder to understand that you’re actually investing in yourself. And when you invest in yourself, there’s no upper bound on what your return can be.

Applying this to your life: Paying for something that will save you money
Let’s get tactical. What can you buy that will save you money over the long term?

I’ve subscribed to a magazine called Before and After, which gives you great tips/advice on making beautiful designs for websites, graphic design, etc. It’s helped me take some drab stuff that I came up with on my own and make it look a lot better. And based on the rates I pay professional designers, I’ve saved over $800 for the work I’ve been able to do.

What books have you bought to help you save money? Have you picked up something from Suze Orman? Here’s an entire list of books I recommend. Or maybe a book on your job. Come to think of it, when was the last time you asked your boss to attend a conference or buy you an industry publication? At work, I encourage our employees to ask for any resources that will help them do their job. One person asked to attend a conference, which paid for itself in about 4 days when he presented what he’d learned.

The other day I was at Border’s Books and I bought my first audiobook. I forced myself to skip the business section (my friends always make fun of me because I have a bookshelf overflowing with business books, which all look the same to them…they just don’t understand). I bought Madeleine Albright’s Memo to the President Elect CD: How We Can Restore America’s Reputation and Leadership to try to learn from a true leader. It cost $40, which seems outrageously expensive, but there was one line in there that will probably save me tens of thousands of dollars over a lifetime if I apply it. Paraphrased, she said, “It’s sometimes worth trading off efficiency to get others involved and do the right thing.” I had never thought of it like that, and you can bet I’m applying it in business.

Or a trip — when was the last time you invested the money to go meet someone interesting for business? When I was in college, I cold-emailed Seth Godin and told him I wanted to be his intern. I pushed hard to meet him in person and told him I would fly out to New York anytime. He invited me, I bought a ticket, and the rest is history. How much was that $300 plane ticket worth? Over my lifetime, from the things I learned from Seth and the connections I made (including my book agent), it will probably be over $250,000.

Paul from ResultsJunkies puts aside thousands of dollars each year in a “networking budget,” which he uses to meet interesting people, take them out to dinner, etc. This is similar to my idea of The Best $20 You’ll Ever Spend, which is literally the easiest way to invest in yourself.

If it were me starting to think about how to spend money to save money for the first time, this is what I would do:

1. Pick an amount for your “Strategic Spending-to-Save” account. For example, I might start with spending $50 each month on anything that I think will eventually help me save (books, courses, taking someone else out to lunch).

I logged into Mint and added a category: “Spend to Save”

set-a-spend-to-save-category.jpg

2. Spend the money! Do it each month. At the end of the month, you should end up with $0 in that account. Don’t let the money accumulate. In fact, just like hitting on a girl in a bar, if you don’t do it in the first minutes, you probably won’t do it at all. In the first 5 days of each month, commit where you’re going to spend that money.

I set up a budget for $50/month:

set-a-spend-to-save-budget.jpg

Ironically, unlike the rest of your budget, if you are under your target of $50 for the “Spend to Save” category, you’re doing something wrong. Spend the money to save!

You can open a Mint account here.

3. Come up with a crisp list of things you will spend on. Not sure where to start? Check out the Personal MBA list of 2008 books and the I Will Teach You To Be Rich bookstore.

3. Don’t lie to yourself. Don’t rationalize that buying jeans is going to save you money because you’ll hold it for the long term. No you won’t. You bought those Sevens last year and here you are buying new jeans. Buy something that you could show to your mom, dad, or high-school teacher and say, “I’m buying this to invest in myself and save money.” If you can look them in the eye and say that, it’s probably a pretty good purchase. Books are always a good bet. Courses too. If you have other ideas, leave them in the comments!

4. Apply what you learned. There are millions of people who buy self-help book after self-help book and never apply what they learn. If you do one thing, do this step. Apply just one thing and you will win.

Total savings: Unknown at first, but $50 to $1,000 per month once you start applying it.

Last thing to do
1. Check out the other tips in the Save $1,000 in 30 Days Challenge
2. Leave a comment on this post describing how much you’re saving with this tip and any unusual techniques you use to make this tip work.

If you liked this tip, check out my Premium tips — one long, tactical tip per week. Save money or get a 100% refund.

scrooge

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82 Comments

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  1. Ramit, this post is just very well-timed. I always wanted to buy one of these entertainment books, but I never saw the advantage until now. I just went over to the site, and saw that they were $10 off the regular price, so I am now waiting for my new 2009 book to arrive. Only $15, with FREE SHIPPING!

  2. I completely agree with your rationale. There is a very thin line between being frugal and cheap, and sometimes that line gets blurred. Your mention of your trip to Borders is a prime example. All of the “frugal” bloggers claim that buying books(even finance books) is a waste of time, that it is cheaper to go check it out of the library. I see it as being cheap, and that buying the book provides more value in the sense that it is available for reference at any given moment and you can mark it up by highlighting certain passages, dog-earing pages, and writing notes in the margins without worry. As it turns out, I, like you have an accumulation of business books which I either purchased online at deep discounts or from Borders using the coupons they e-mail every week or so, and find myself going back to them relentlessly for inspiration, tips, and ideas. Basically I see the value of many purchases rather than the costs associated with them.

  3. Ah, but you’re promoting a false dichotomy. For example, you may very well get tens of thousands of dollars in value from Albright’s book (though I doubt it). But that doesn’t mean you need to spend $40 to get it. Why not wait until it’s available at your local library?

    As for Paul’s networking budget, I think it’s just an excuse to spend money. I get plenty of networking in, and never pay a dime.

    Yes, you can get value by spending money, but it’s not an if and only if. You can get value without spending money, and spending money is no guarantee of value.

  4. This post sounds like a rant…a really awesome rant. Some people read the blogs and talk the talk, but never walk the walk. I admit that I am like that sometimes (I have pretty cheap moments), but the more you act, the less you will be in your situation…or regret that even if the investment failed, you took a shot instead of sitting in a corner being scared to spend the money hoping it will work.

    Waiting for something to be free can be a potential time waster. What is that book never goes to the library? Maybe you’d feel better if you had a coupon at the minimum.

  5. I agree with the spirit of this post.

    Here’s a real life example of “Spend to Save” in action.

    Last year, my energy costs were out of control. My electricity bill in September 2007 was over $450. I have a 1500 square foot home in northwest Houston, TX and we kept our thermostat at 85 degrees. Lots of ceiling fans and desk fans helped keep the house tolerable.

    My wife and I decided that we had to do something – our A/C unit was undersized for our meager house and the insulation was non-existent over the kitchen and over the garage.

    We opted for a complete A/C replacement and re-insulation of our attic.

    The A/C cost $6000 and the insulation cost $1200. We also replaced all of our incandescent bulbs with CFLs (cost about $200 total) and started unplugging appliances/etc when not in use.

    Total out of pocket expense: ~$7400.

    September 2008 bill was $112.

    Savings (for that one month) = $338. Granted, we had Hurricane Ike come through that month so we were actually without power for 36 hours… but still, that’s a huge amount of savings for a single month.

    It won’t take long for us to completely recoup the out of pocket expense and actually “get ahead”.

    Moral of the story: Don’t be afraid to drop some cash in the short term if it will save money or earn money in the long term. 😀

  6. I guess the lesson to be learned is that sometimes spending a little bit of money can lead to an opportunity that is not financially measurable.

  7. I have a good example of a perceived savings. I do like to read, especially history. On occasion, I do purchase a book from a major book chain.

    At the checkout counter they always ask if I want to join their book club and receive 10% on all my book purchases. It sounds great until the details are brought to light.

    The book club has a yearly membership fee of $25.00. I would have to buy $250.00 worth of books just to break even! I always politely decline.

  8. I always look at the cost benefit when offered these types of memberships/books. one that came to mind not too long ago we were looking to buy a new TV shopped around and decided we wanted to go with the Vizio 42″, after doing the research I found that the best price on it was at sams club, I didn’t have the membership, without it they would have added 10% to the price on a large purchase that can be quite a bit, in this case was about $50, the membership only cost $25, so no brainer got the membership first and then bought the tv. Still came out cheaper with the membership than buying it anywhere else…also added bonus you can get refunded for your membership if your not happy, which we ended up doing just before we moved to the UK Since they don’t have any stores on this side of the pond.

  9. I can’t wait to see you try to charge for podcasts. There is nothing unique on your site that can’t be found elsewhere on the web for free. I think your opinion of your own self worth is a little bloated. You may have a lot of readers but thats because you work in a free medium. Charging for extra ‘added value’ content is like demanding more milk out of the cash cow that has been visiting your farm for free.

  10. Ramit –

    I can’t watch your readers keep spending on the Entertainment Book when they can actually *make money* to get it! Please tell your readers they can actually buy the 2009 Entertainment Book FOR A PROFIT!!!

    Now there is no excuse not to save.

    See directions on how to do it (very simple) at Choyster Cash

    http://choystercash.blogspot.com/2008/12/update-up-to-650-profit-on-each-2009.html

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