We’ve spent a lot of time talking about saving, and about how to trim your budget down to size. But sometimes there are areas that you just aren’t able to sacrifice. For some, it’s buying quality coffee instead of the canned stuff. For others, it’s buying fewer nice clothes instead of a lot of not-so-nice clothes. Or shoes. Going to concerts.

How do you make the decision to splurge in one or two areas?  More importantly, how do you justify it?

Being frugal is about spending your money wisely, rather than nickel-and-diming everything you look at.  What are some things you won’t compromise on?

Someone recently asked me what is in a credit score.  Although I had a vague idea — that the credit score is based on your past credit behavior and is an indicator of your credit-trustworthiness — I had to look further to learn more.

Turns out, there are five main components to a credit score:

1. Your payment history.  Do you pay bills on time?  Do you have bankruptcies in your past?  Paying bills late hurts your score.  This is about 35% of the calculation.
2. Your current balances.  How much do you owe?  Are you using up your available credit?  If you use a higher proportion of the credit available to you, it hurts your score.  This is about 30% of the calculation.
3. Length of your credit history.  A longer credit history is typically linked to a better score.  If you’ve got a relatively new credit history, though, and are using it responsibly, you can get a high score here, too.  This is about 15% of the calculation.
4. New credit.  Applying for several credit cards at the same time? This will actually lower your score.  This is about 10% of the calculation.
5. Other factors.  This is where the types of credit you use comes into account.  If you’ve got a mortgage, a car loan, and a credit card, and have good payment history on all of them, this can increase your score slightly, because you’re effectively managing several different types of credit.  This is about 10% of the calculation.

Why does this matter?

In a nutshell, higher credit scores mean better loan terms, or lower interest rates.

• If you’re looking for an apartment and have a low credit score, which indicates that you don’t pay your bills on time, you probably won’t get the apartment of your dreams.  If you do, you may pay a higher deposit to justify the risk the landlord’s taking on you.
• If you’re trying to buy a cell phone, the cell phone company may collect a deposit from you at the beginning of your contract.
• If you’ve got a credit card, your lender may look at your credit score before changing your interest rate (up or down!) or your credit limit.

Your credit score will fluctuate over time, based on your spending habits and your payment habits, as well as your credit applications.  It will also vary from credit agency to credit agency.  The three major credit agencies are Experian, Equifax, and TransUnion.  Each of them uses their own data to arrive at your credit score, and each uses a slightly different scale, although all are based on the information above.

What is a good score?

The FICO system uses a scale of 300-850, with 850 being the best, and 300 being the worst.  Most people score in the 600’s – 700’s.  Most lenders view scores above 700 as a sign of good financial health, and view scores below 600 as a high risk indicator.  Typically, these scores will result in a rejection of credit or in very high interest rates.

Check your own score!

It’s worth taking the time to check your credit history regularly.  You can do this at www.annualcreditreport.com, where you can get each agency’s credit report for free each year.  Knowing what lenders see when they look at you, and making sure it’s accurate, is important!

Let’s face it, saving for concrete goals is hard enough. The dress, the vacation, the new house — all of those are things you can envision in the face of temptation. And still, it can be hard to delay gratification to get there! So saving for an “emergency,” one that you can’t picture, is even harder, even though it’s arguably more urgent than the “wants.”

But it’s important to have a stash of cash for the inevitable “needs.”  The car breaks down, the furnace dies, and you need to deal with this in order to be able to go to work or live safely.  (This is different from the 3-6 months living expenses that experts recommend — we’ll talk about that another day.)  For many starting out, even a $500 cushion for unexpected “needs” is difficult to save.  So, how do you do it?

With determination and a plan, you can do it.  Start by transferring $100 to your savings account right after you get paid.  (If it’s not in your checking account, you can’t spend it.)  Repeat for a few more pay cycles, and you’ve got your cushion.

Is transferring as much as $100 too hard?  Try doing it in smaller chunks.  Also, a recent MSN Money article gives several suggestions for scraping together the money.

Now, you need to remind yourself to keep that cushion.  For many people, having it in a linked savings account (which you can easily access with an ATM card and easily transfer funds back to checking) is overly close.  You can ask the bank to limit your access to this account, or you can put it in another bank to make that transfer a little more difficult.  This will be a bit of a psychological barrier, too, against using the funds for non-emergencies.

An MSN Money article about successful saving strategies has many good tips for making savings a priority. While the article acknowledges that it can be hard to save for the abstract when confronted with an immediate desire, it likens the disciplined approach to saving to putting your alarm clock out of reach to avoid snoozing.

Tips we’ve heard before include making it automatic.  Setting up automatic transfers from a checking to a savings account and using your employer’s direct deposit system to send money directly to your savings account really do work.  If it’s set up automatically, you don’t have to think about it, and the money’s out of the easy-to-reach checking account.  The article discussed one woman who had one dollar a day transferred from her checking to her savings account.  That’s not much, a dollar a day.  But $30 a month and $365 a year makes quite a difference!

The article went beyond the expected and advised defining your motivation to save.  As it noted, an interview suit fund that gets $10 a week is much easier to envision than a nebulous goal that gets the same amount, and is much more concrete when you’re up against instant gratification that conflicts with it.

Tactics to keep up the momentum include telling people what you’re saving for (creating accountability), using your enthusiasm to act now, and removing yourself from temptation.  Also, one of my favorite points:

Save your savings. While conducting a study of how consumers think about saving, Peter Tufano, a professor of financial management at the Harvard Business School, realized that many people confused discounts on merchandise (e.g., “My coat was 50% off!”) with saving actual money. Skip the misguided spending-to-save routine and instead focus on saving your savings, he says. For example, if your grocery receipt shows that you “saved” $7.49 on items you bought that day, go home and put that money aside.

These good points break saving into baby steps, and remind us that saving starts small.

With all the “green” items gaining so much press, it’s tempting to pitch everything that isn’t green and replace it with a more earth-friendly alternative. But wouldn’t that be counterproductive?  Let’s see: you’re (1) wasting the unused stuff (whatever it was) you had previously, and (2) spending money you didn’t need to spend to get the new stuff.  As you use up cleaning products that aren’t so environmentally friendly, look for Green alternatives, by all means.  You could even make your own, if you like!

The older generations had it right, although they didn’t call it “green:” use what you have as long as you can.  Reuse items like bottles, cups, and cloth napkins and rags, instead of the pricier disposable alternatives.  Turn off the lights when you’re not in the room.  Looks like, many times, being Green is also being frugal.  And who doesn’t like saving the environment along with saving money?