Frugality: the Investment Strategy That's Easier Than You Think

When I was in junior high and high school, I used to do long distance road bike races. It's an esoteric, gear-intensive world, where weight is one of the key criteria. Improvements are measured in grams. You want new cranks, get the $150 carbon fiber ones and shave 8g off of your bike weight. One of the things I learned pretty quickly was it's a whole lot easier to take weight off of the rider than it is the bike. 

As a relatively new real estate investor, I don't have the connections with banks, lenders, private money, contractors, suppliers, wholesalers, lawyers, accountants, and marketers that most experienced investors do. Yet. But there's no shortcut to experience, and you have to start somewhere. And while I don't yet have the connections and experience with real estate, I do have connections and experience that might be useful. And why not use the experience I earned the hard way and apply it to real estate?

I am an independent musician, a songwriter, a studio owner/producer, and a nationally touring artist (you might've heard the famous four jingle I did for the BP podcast). One of the keys to being successful in that business (where "successful" means "having enough money to eat and pay bills") is by being frugal. Let's examine frugality as a concept, as I see people wrinkle their noses at it when it's mentioned, like you've suggested they give up their house and sleep in a cardboard box in order to maximize their savings rate. Frugality doesn't mean cheap; it just means you don't spend indiscriminately. 

I eat out, but not every night. 

I have an iphone, but not the newest one.

I drive a nice car with power windows and doors, but it's paid for.

I have a flat screen TV, but no cable.

Frugality means you do a cost/benefit analysis before you spend any amount of money, where you ask yourself, "If I buy this, do I get an equivalent dollar value out of it in return?" and "If I buy this, will it prevent me from buying something else that I'd rather have later?" Sometimes, wildly enough, frugality means spending more money on a high quality item rather than buying cheap crap that you'll have to replace every year (this is why I own nice tools).

Without getting into a philosophical debate on the merits of frugality (Mr. Money Mustache does a bang up job of that), what I'm gonna do instead is give you some of the tips I've used to minimize my overhead, which directly leads to more money I can use to invest in real estate, my IRA, solid gold toilets, or whatever your preference may be. The key to moving to a more frugal lifestyle involves two paradigm shifts, in my experience. One, closely examine your use of the word "need". Human beings need food, water, shelter, and community. They don't need expensive gaming rigs and weekly manicures. No one loves gadgets and good food more than me, but I understand that those things are not necessary for my happiness, but rather rare treats I can enjoy when I've earned them. Two, consider the efforts in frugality a challenge, like climbing Kilimanjaro, and not as a punishment, like you've been grounded by your parents for staying out too late.

1) Ditch the fancy cellphone plan

Man, am I thrilled with this one! For ten years, I paid AT&T over $100 a month for unlimited text/talk/data plus special monthly charges for a smartphone. Then, last year, I discovered MVNOs. Essentially we're talking about companies who purchase blocks of services from the major carriers, and then resell it, a concept I imagine all real estate investors can get on board with. 

I switched from AT&T to Airvoice Wireless, and again recently to Cricket Wireless. My phone bill went from $120/month to $35/month. And since Cricket Wireless was recently bought out by AT&T, my services and features are identical. Ok, technically my data is limited to 1GB at 4G speeds, and then throttled after, but with a little bit of data dieting I've never hit the data cap (also, you can expect most of the majors to be throttling or eliminating the unlimited data plans in the near future).

YEARLY SAVINGS: $1,020

The downside: porting your number is a bit scary when you first do it, and forget about shiny palaces of consumerism when you go visit a Cricket Wireless store. They skimp on fanciness and pass the savings on to you. You're also now responsible for buying your own phones, but this is actually a benefit, because that subsidized iphone 5 AT&T sold me for a reduced price in exchange for a new 2 year contract actually ended up costing me around 2 grand.

2) Take the knife to your insurance policies

Between car, home, health, life, and landlord or umbrella policies, you're probably paying a pretty good chunk of coin each year in insurance. While no one wants to be under-insured, I believe each of us has areas we can probably optimize in order to reallocate some cash from the insurance companies (half of whom will do their absolute best to not pay your claim, or drop you if you file one) to ourselves.

With two phone calls, I was able to get my health insurance from $200/month to $45/month, and my car insurance from $1200/year to $700/year.

My car is paid for, and I don't particularly care what it looks like, so I dropped collision and raised the deductible. I'm handy, so if anything minor goes wrong I'll be fixing it anyway. And the money I saved on premiums mean in a few years I'll have a pretty decent car emergency fund built up. 

Even if you're happy with your coverage, it's worth spending a half hour once a year calling around and getting some quotes. My regular agent quoted me a policy for the property I'm closing on next week at $1300/year, and another broker got me similar coverage for $750/year. That's bonus cashflow with a ten minute phone call.

YEARLY SAVINGS: $2,360

The downside: As with much of investing, this is about risk tolerance. I have no pre-existing medical conditions, no allergies, good hearing, good vision, and an uncle who is a dentist. I spent one night in a hospital in college after being in car accident, but otherwise never a hospital visit and never a broken bone. I haven't been to a PC physician for an illness since 1999. So I feel comfortable going with a high deductible major medical only plan. I understand for some, or perhaps even many, this isn't something they would feel comfortable with. Do what's right for you and your family.

3) Say goodbye to cable and satellite providers

Honestly, in 2014, I assume that everyone who still has television service is basically ok with paying a convenience tax for the terrible content that's beamed directly into your frontal cortex. And that's not to knock those who do this: a huge chunk of my friends and family do this still! Not coincidentally, every single one of them is wage slave who's planning to work until they drop dead at their desks, hopefully many years from now. Not really the life I'm looking for. 

I understand how much it sucks going from 500 channels of programming (where, still, nothing good ever seems to be on) to just the streaming options on a tablet or laptop. But luckily, we live in the future and there are amazing solutions out there. 

Personally, I live in a major city, so I use the killer combo of HD antenna ($20 bucks on amazon) for free, HD, over the air broadcasts from the 4 major networks (you can also link this with a DVR, so you can still record your shows) + netflix/amazon prime streaming + chromecast. This combo gives me a nearly unlimited supply of movies and TV shows (netflix/amazon prime), live sports (HD antenna + friends/sports bars), and youtube and ESPN app (chromecast), all shown on my lovely 42" flat screen (bought on sale three years ago). I have so much content I could spend four months never leaving the couch except for bodily functions and have barely tapped the surface of it. "BUT I NEED TO WATCH MY SHOWS RIGHT WHEN THEY AIR!" I hear you yelling, Mom (seriously, the queen of DVRing five shows every night). If you have an addiction you cannot break, or you want to just taper off of it, you can find most of the content streaming on the network website the day after it airs. HGTV, HBOGo, CW, and all the majors. You can have it all, for so much cheaper!

For advanced students, three words: Plex. Media. Server. You're welcome.

YEARLY SAVINGS: $800

The downside: none. Seriously, I've been without cable or satellite for 13 years now, and my life has been 0% the worse for it. The internet has everything you could possibly want, and when you get bored with that, go outside!

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With just those three tips, I saved almost $4,200 per year ($4180, to be exact). To put it in RE terms, that's $350 per MONTH in extra cash flow! If you found a way to squeeze an extra $350/month out of a property, imagine how thrilled you'd be?! If you want to maximize profits, whether it's because you want to acquire more properties, work less/retire early, or look great to investors, this is an easy place to start trimming some fat.

Comment and tell us what tips you've made good use of!