Danielle McCarthy

Retirement Income

How to really stretch a dollar

How to really stretch a dollar

Some 'rich' people appear extremely well off. They earn a lot of money, drive expensive cars and live in gorgeous houses. What you may not realise is that a large proportion of these people are living on credit, or relying on the astronomical incomes to continue indefinitely. Or both.

When something goes wrong, the car goes back to the lease company. The house goes mortgagee. Their clothes are worthless, their luxuries reduced dramatically in value and all they really have left are photos and memories - and the urgent desire to go back to their old way of life.

I have seen this happen so many times. Twice with families that have won first division Lotto. Within a handful of years they were broke again. Why? They take pride in how much they paid for things and in being able to afford whatever they like and let tomorrow worry about itself. 

The other kind of 'rich' person actually has money in the bank. They are less likely to drive sports cars or head overseas for holidays. But they own everything they have and continue to build on it.

If something goes wrong, no-one is going to walk in and take the house. In fact, you will probably find they have a back-up plan to tide them over if need be. These people take pride in how hard they worked for their money and in how hard they made their money work for them. They are also very aware of where they want to be when tomorrow comes.

Here are some tips to help you save.

1. Don't pay interest.

You are essentially paying (a lot) for the privilege of not waiting. If you can't afford to save up for something, you can't afford the repayments. As a bonus, your savings earn you interest. If you have no choice but to borrow, look for no interest deals, or shop around for the best rates and make paying the debt off you top priority.

Penalty fees for late payment on bills does count as interest, as does interest on overdrafts (get rid of them) and credit cards (if you can't pay the entire balance every month reduce the credit limit to what you can pay or cut it up).

2. Investment or expense?

Whatever you are buying, consider whether it is an investment or an expense. Consider cost vs usage, quality, warranty value, running costs. Paying 20 per cent more for something that lasts twice as long is an investment. Paying more for a pretty colour is not.

Paying $100 for a quality outfit you will wear every week is more of an investment that $30 for something you will wear twice. When considering a freezer I compared cost and running expenses with savings from bulk buying and resale value. This helped us decide what we were prepared to spend, and whether it was an investment.

Don't assume that just because something is branded or expensive it is well made. Likewise with things that are cheap. Observe and research.

3. Shop around.

Compare prices, brands, quality. I essentially got a free bottle of milk each week by going to one local dairy instead of the other. Loose carrots are usually cheaper than bagged. Meat in bulk from the butcher and fruit from the markets cut a third off my weekly food bills. It all adds up. Assume nothing, and do the math yourself.

4. Waste not want not, as Gran always said.

Known these days as Reduce, Reuse, Recycle. Do you need to buy something new? Look at buying second hand, or even better, re-purposing or fixing something you already have.

Recovering an old lounge suite is cheaper than buying a new one, and will probably last a lot longer for being better made in the first place. Most of our furniture is second hand, or off the road side. Fixed up, no-one can ever tell - even people who used to own it.

Trade kids clothes with friends. Make your scraps into compost and grow veges, or pinch cuttings to grow for your own garden. Replace the buttons that make your jacket look dated. Reuse wrapping and ribbons and make old greeting cards into new ones. Throw leftovers in the freezer for quick and easy meals.

Most important and easiest of all - look after what you do have. The actual multimillionaires I know do these things, and yet most of my 'broke' friends seem embarrassed to.

5. Alternative methods of acquirement.

Ask for something (or money towards it) for birthdays and Christmas. Whether it's a fancy beauty cream, new tool, whatever. When we were kids Santa would often pop new lunchboxes and stationary for the coming year into our stockings. Santa was still cool. Vouchers (even home made ones) for outings the kids have been begging for also make great gifts or rewards, and kill two birds with one stone.

6. Buy your own house.

Accommodation takes the largest portion of your weekly income, and when it's paid to rent you get no return on that money at all. Save up as much as you can for the deposit, and choose carefully. It is the biggest investment you'll ever make, but don't expect the first house you buy to be the one you spend the rest of your life in. View it more as a stepping stone, with the long term resale uppermost in your mind.

You can insulate, change the interior decor and landscaping, or possibly renovate to increase value. You can't change the area it's in (or local plans for that area), the local schools or environment, or where the sun rises and sets. Look harder at the area than the house, but ensure the house is solid and sunny. The costs of renting far outweigh the interest costs when the resale value is taken into account, and the long term security is priceless.

Essentially, stop worrying about what everyone else has just bought and take the long term view on life. There are hundreds of ways to stretch a dollar, most of them without any compromise to your current lifestyle. It doesn't matter how much money you have at the moment, start to take pride in making your money work for you and it will grow.

Anyone can do it, I know a lot of people who have.

Do you have any money saving tips you’d like to share?

Written by Marie Barclay. Republished with permission of Stuff.co.nz.