As a seasoned veteran of Frugal Investors, I am going to show you why saving money is something that you can start doing today, regardless of who you are or what kind of background you come from.
One of the concepts I’d like to introduce is what we call ‘internal efficiency in business process re-engineering. In the past departments have asked me to come in and to find a way to get them operating better and more efficiently. This doesn’t mean job cuts: often these teams have fixed headcount and fairly stable running costs. Senior management aren’t looking to make cuts, they just don’t want to invest any more money in them. Primarily what they need are changes to their attitude and behaviour, training or systems and work processes.
The same can be said of your personal spending habits. Instead of externalising the challenge – like I don’t make enough money, or I have too many expenses – why don’t we see what we can do to ‘sweat the assets’ you’ve got and clear up capital in order to have money to invest in the first place?
Believe it or not expenditures like clothing, technology in the form of laptops and phones, and even children’s toys are assets that we should be getting far more use out of. In turn there are £1000s you could unlock by doing so.
Why bother? Well, the planet needs us to stop throwing things away and instead to conserve the resources we have. If that is not enough for you, then there is a stronger incentive: I intend to show you how an average income earner can save £1000s a year by better-using the things that they buy and own.
To do so we need to consider where the average person spends their weekly money and what, on average, they tend to spend it on. Turning to the Office for National Statistics we get the following fairly straightforward breakdown for average spending:
Rather than cover everything we are going to focus on two categories:
- Transport spend (highest at 14%)
- Clothing and footwear (modest 5%)
Let’s have a look underneath the hood and see what we can find in terms of savings.
Transport
This really depends on where you live, because of course especially in cities like London the cost of commuting to and from work can be excessive and as a result a significant portion of your monthly expenditure.
The ONS very helpfully breaks it down further for us and shows where this 14% is derived from:
The expense sits with operation of personal transport, and of that £20.70 is spent on petrol or diesel. In other words filling up our vehicles and funding our vehicles are the two major expenses.
When it comes to filling up, there is a lot that is within your control. I was amazed to find that the all-in cost of driving from the north of my city to the city centre for work was £7.75 (£5 parking and £2.75 in diesel).
Applying a bit of Frugal Logic, I found that a weekly bus ticket works out at £15.50 or £3.10 per day. Instead of spending £1705 driving into work and parking, I can save a cool £1023 per year and take the bus. Better yet I now use the time on the bus to read books and develop myself, including to work on building up Frugal Investors!
Taken one even more Frugal step forward, I found that on occasion I work from home on a Friday and I also travel for work. So on weeks when I spend less than 4 days in the office I buy single tickets instead of weekly passes. That saves me another £185 per year.
Next let’s cover the car itself. My wife recently said that she needs a new car, but we’ve agreed that instead, she can use my vehicle while I’m at work and save us the necessity of buying a new second vehicle. In a roundabout way that has saved us approximately £18,000 by avoiding the cost of buying a people carrier for our growing family.
Take a wider look and the vehicle decision itself could yield you savings over the longer term. Why lease a vehicle? Generally speaking you save money by purchasing a car rather than leasing it. This is a hot topic and there is a lot of detail that sits underneath it, however by way of an example:
Assuming you lease a Ford Fiesta 1.1 3 dr Hatchback, you would pay £1152 upfront and £191 per month for 35 months. At the end of the 3 years you have spent £7837 and you give the car back because you do not have any equity in it (they own the car).
Buy a Ford Fiesta outright in 2019 and expect to pay £15,850 for a decently specked model. The cost if purchased using a loan is £188 down payment and £188.93 per month for 4 years. The cost in total is £6989 for the 3 years (comparing like for like).
That represents a saving of £847.52 over the three year period for the same car by simply buying it and financing it instead of leasing.
If you take that a step further, why not get a used Ford Fiesta instead of a shiny new one? You can finance a 2014 Ford Fiesta for £140.40 per month and you would pay £5054 over three years. That’s a saving of £2782 if you can put up with a slightly older car.
The final step further would be to save for that 2014 Ford Fiesta and to buy it for £5495. Use that car for 6 years and you’ll spend only a meagre £916 per year on your vehicle.
If you are a family who have signed for a lease car more than once, well, let’s compare signing two 3-year leases for a Fiesta back-to-back, versus buying a 2014 Ford Fiesta and using it for six years. That would save you £10,179 over six years apart from the cash you spend on servicing the older vehicle.
If you really want to be Frugal try beating my wife: she spent £5000 on a VW in 2010 and as of this year she’s got an average per-year expenditure of £582 (including a recent £535 bill for repairs).
The savings are greater for more expensive cars as well: because they depreciate less and hold their value, you are better off buying an exec car for 6-8 years, rather than driving the latest model for 3 years and sacking it off.
Clothing and Apparel
I came across this article two years ago and it really surprised me to find that Brits spend over 5% of their annual income, on average, on clothing:
Source: The Telegraph
According to the Great British Wardrobe Report, British adults spend on average £1042 per year on clothing. Individually, not including joint households. So although it is only a paltry 5% of annual spend for the average household – it’s easy pickins’ for a bit of Frugal Fine Tuning!
The report was based off of 2500 interviewees and concluded that woman spend, on average, £100 per month while men average a slightly more humble £74 per month. This tots up with the high level figures, too: British women spent a combined £29.4 billion in 2018 on fashion retail and just one woman in twenty didn’t buy any new item of clothing in that financial year. Given that there are 19.1 million households in the UK that works out to £1539 per household, and it’s a pretty large figure compared to mainland Europe and other parts of the world.
So: why do we do it? I think YouTube, Instagram, and even Facebook have their cross to bear. People don’t feel as comfortable as they perhaps once did wearing older clothing and instead want the big confidence boost that comes from wearing what’s marketed and touted as new.
The problem is, if we don’t let go of any of these habits, then we’ll work until 75 to pay off what we spend now. I know which path I prefer.
The total ‘opportunity’ for saving is approximately £2088 per household
There’s a lot you can do about this and it starts with having a hunger and a desire to save and get ahead. After all, the £2088 you spend is more or less a sunk investment. That’s between 5% and 5.5% of annual income for some. For others – you may be surprised to find this – it’s as high as 15%.
Yes, you may be buying clothing for a big interview, or perhaps your job or earning potential is somehow wrapped up with fashion. But for the vast majority of us hunkering down and wearing a top for perhaps more than a year just makes good financial sense. I see all of you at the gym with your expensive kit!
Clothing is an area I have long since pared back on. Famously within my family – I haven’t purchased any clothing for 2 years. It has been eleven years since I spent more than £50 in any given quarter.
If you managed to put your mind to it and reduce that expenditure by 50%, you would pocket a cool £1044 per year as a household and not really be much worse off for wear (I know, terrible pun).
Our annual expenditure – practicing what we preach – is a very conservative £325 per year for a family of four. That works out to £1763 less than average, which means close to two thousand pounds more to invest and save for the future without breaking a sweat.
Going on holiday? Don’t rush to go shopping – bring what you need. Christmas coming up? Consider more cerebral gifts, and perhaps save buying the things you want until the holiday season rolls around – delayed gratification is a life-skill and will make you rich.
Frugal Investors – £104,724
I genuinely celebrate the fact that my dear wife’s battered VW costs us very, very little to run and manages to give us the convenience of having another vehicle to manage the family with. She’s chuffed that her yearly expense is so low, and so she should be. We don’t go for little trips to the store often and we try not to make a habit of long drives with the kids over the weekend unless we have a specific and targeted place to go. As a result our fuel bill is low and transport costs are kept down.
While on the bus to work I read, on average, 2 books per month. That means I am developing myself at a decent pace (for a working father of two!) and advancing my career at the same time. Check out my reading list to get a sense of where you can start if you want to swot up on investing.
With that extra £2000 you are saving by reducing your expenditure, invest in a passive portfolio of stocks and bonds. At a 6% rate of compound growth and assuming you save £2k per year, you’ll end up with a pot of £104,724 within 20 years. That’s a tidy sum for putting up with an older car and wearing your clothing a bit longer.
