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Investing and frugality

This is a guest post by Annie Logue.

I write about all things financial. I keep two blogs, one on high finance - hedge funds, emerging markets, economics - The Root of All,  and another low finance -how to save money every day - at Chicago on the Cheap. Sometimes people ask me why someone with an MBA is writing about museum free days and buying store brands at the grocery, but to me, it's all the same. It's all about getting the most value for your money.

There are three ways that being frugal can make you a better investor:

1)      You need money to invest. If your paycheck can't cover your bills, you'll have nothing to put in your 401(k) or to set aside for a long-term goal. Being frugal can help you find the extra money you need to put into your retirement fund or your emergency fund. Even a few bucks a week can add up over time. Financial advisors often talk about the "latte effect" so much that it's exhausting. The idea is that you give up buying one fancy coffee a day and set that money aside for savings. If your drink costs $2.00 and you do this every workday, you can increase your retirement contribution by $50 a month. And is the office coffee really that bad?

2)      You want to buy low and sell high. The discipline of looking for the lowest price can help you find investment opportunities that are low-priced. After all, the name of the game is buying low and selling high. If you're used to looking for the best time to buy a car or the best price on holiday decorations, you'll have a built-in advantage when looking for markets that have good long-term appreciation potential.

3)      You want to get the job done at the best possible price. Looking for a bargain means looking for a low-cost investment, an easy way to improve returns.  It's not a surprise that investment managers charge for their services. Some charge a fair price for the results that they deliver, and others charge more than they have to. If you're choosing between two similar investments, the one with the lowest annual cost will usually be the best option. For a mutual fund, this number is the expense ratio, which you can find in the prospectus and marketing materials. Morningstar, a major investment research firm, found that the best indicator of a fund's performance was its expenses. Less-expensive funds tended to outperform more-expensive ones, even if the more-expensive funds were rated more highly by Morningstar's analysts.

The secret to getting ahead financially has two parts: living on less money than you make and earning a return that beats inflation. Being frugal helps with both.

Image thanks to ota_photos on Flickr.

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