Frugality the path to prosperity

The NZ Herald recently ran an interesting article about a young lady from Auckland, who despite the stories of housing un-affordability has, at the age of just 24, managed to own a property in Auckland and a batch in Pauanui.

How did she do that? “…it wasn’t having rich parents that got her there – she’s worked since she was 13, sacrificed nights out and saved like crazy – even putting food low on her list of priorities.”

The back story is interesting, but essentially it comes down to a strong work ethic and putting savings first. She said he grandmother taught her how to budget and she had a unique way of deciding what her necessities were.

“First you work out what it costs for all your needs…Once you have calculated your basic needs, you decide how much you ideally want or need to save…Then what ever is left over after that is left for food. Cereal bread and milk doesn’t cost the world, and neither does a can of tuna or a bag of rice.”

The other important thing is she took control of her husband’s spending! “He only has a bit of spending money on his card for buying a cold drink on a hot day… otherwise he just can’t help himself but swipe away on things he doesn’t need like bakery food and energy drinks. When we first got serious I went through his bank statements and added up that he had spent over $60 that week on just on bits and pieces from the dairy and bakery.”

There you go – frugal living, and controlling your partner’s spending habits, is a great way to get ahead.

If you really want to accumulate significant wealth, there are actually three areas to focus on: making money (getting a good job or jobs or starting a business), saving it (putting savings ahead of spending), and investing wisely (like buying bricks and mortar rather than Lotto tickets).

That’s also a good “recipe” for businesses success. Forget about the fancy offices and the perks. What really matters is the bottom line of the revenue statement – that is, what’s left after everyone else has dipped into your bank account.

A reader writes, “I have introduced an oily rag mentality throughout my business. Everyone in the business has benefited. I have shared the rewards with staff so they are now being paid more, and with the business more profitable, their jobs are more secure. I am doing better too, so it’s a win-win.”

Let’s not forget that cutting costs produces an instant increase in profit and is a lot easier than trying to win new business. For example a business that adds a 25% margin to the cost of goods needs to increase sales by $15,000 to add $3,000 to the bottom line.

There’s an oily rag saying that goes, “It’s not over until the Big Fat Lazy Costs stop singing”. BFLCs are costs that contribute nothing to the success of the business but sit around because no-one has taken the time to review them. In one case a business was able to save $3,000 a year by putting its cleaning contract out to tender. That Big Fat Lazy Cost was outed and a $3,000 saving went straight through to the bottom line – where it should be.

A small company we looked at recently cut its advertising budget by 75% after it reviewed the effectiveness of their spending. They surveyed new clients to find out how they came to know about the company. Of the $20k annual spending on advertising, they found $15,000 did not produce a single enquiry! By cutting that spending the money went straight into the bottom line (and was put to good use by the owner).

They also took a machete to subscriptions, travel, and storage costs. The result was the owner’s profit went from next to nothing to a worthwhile return on their risk and effort.

Just goes to show, frugal living is good for businesses as well as households.