By: Tim Michaelis, Ph.D.; Assistant Professor of Management, Northern Illinois University
It’s a new year, which means you’ve likely been inundated with articles on how to better yourself and how to achieve your goals in the new decade. Naturally, a lot of these articles focus on how to build wealth. This is a good thing and a real problem. According to the American Psychological Association, money is the #1 source of stress for working Americans (1).
How to solve this problem? The good news is that research suggests a household in the US only needs between $50,000 to $75,000 to maximize happiness (2). However, while I trust this research holds for the majority of people, I also believe that it should be possible to reach one’s maximum happiness on much less than $75,000 a year. The core philosophy for building wealth:
Learn to live below your means without sacrificing happiness and invest the rest.
Here are some practical things to help you in 2020
Frugal Tips to Build Wealth in 2020:
1. Eat cheap and healthy. Decrease food expenses as much as you can without sacrificing your health or happiness. I personally enjoy reading through r/mealprepsunday, r/sousvide, and r/eatcheapandhealthy on the website Reddit. In short, I have a sous vide for chicken and fish (frozen bag from Costco), frozen veggies, beans, and a rice maker. Generally, my meals cost $1 – $3.
2. Avoid paying interest at all cost. Most American’s don’t think about how interest rates affect their lifetime cost to own an object. For example, buying a house with a 15-year fixed mortgage rather than a 30-year fixed mortgage at 3.25% interest will save you approximately $75,000.
3. Cars may be the second biggest expense for many Americans. If you’re not obsessed with cars, buy a used one… why? The difference between buying a new and used Honda Accord is about $15,000, which investing this amount over 10 years (assuming a 7% return) equals to a net loss of about $29,500.
4. Sign up for high yield checking and savings accounts. Alliant and Ally are typically the best options. Second, sign up for a 2% cash back credit card like Citi Double Cash with no annual fee.
5. Control leakage on entertainment. Get rid of cable, rotate between streaming services, use the public libraries for free movies/tv shows/books. Lastly, use Google voice for your cell phone plan ($1 – $5 a month) and purchase a used (but high-end) cell phone like OnePlus or an iPhone.
6. Buying used stuff. Try your best to buy everything used for the things that you don’t necessarily care about. Also, attempt to buy everything for life (www.reddit.com/r/buyitforlife).
7. Trust in the future – the efficient market hypothesis argues that organizations will continue to provide their customers with excellent products and that more will succeed than fail. Over long periods of time, a 7-10 year period, the stock market has returned approximately 7% annually.
8. Invest the rest. Learn to invest yourself and focus on tax advantaged accounts. Advisors tend to take 1% or more of your earnings, which equates to taking about 20% of your wealth over 20-25 years.
9. Automate and enjoy life. Payroll deduct your savings into whatever retirement account your company offers. Now enjoy life, find things that make you happy, and spend the rest!
A lot of people get stuck in the weeds with their finances. My advice is to keep it simple. Stay the course. And, focus on what really makes you happy.
