Looking at Debt Backward
An Interesting Approach to Financial Freedom
By Mandy Karlik
Which is easier? Making more money or spending less?
Judging by the number of folks who play the lottery and people who daydream over pay raises, most of us think that the key to wealth is making more money. But for every family that thinks they could make it "if only" they earned 15% more a year, there is another equivalent family already earning that amount, thinking they could make ends meet "if only" they earned 15% more a year.
While income is undoubtedly important and no one should scoff at the opportunity to ethically and honestly increase earning power, what we take in is somewhat out of our control. If you work for somebody else, your pay is based on a number of factors, including overall business performance and market conditions-two things you don't have much influence on. If you work for yourself, your business depends on competition, market conditions, and how well your potential customers are doing. Again, these are things that are largely beyond your control.
However, most of us have tremendous control over what we spend. We don't usually care to exercise this control and, in fact, our sense of mastery in this area has probably atrophied. But we can all restrict our spending, sometimes in ways that have startlingly little impact on our lifestyle.
Lee Iacoccoa, former president of Ford and later turnaround boss at Chrysler, once wrote that he could trim 10% out of any budget anywhere without any noticeable pinch. Most of our household budgets have a lot more fat in them than a lean-mean business budget.
Trimming expenses means evaluating expenses in view of the fact that every cut you can make will increase the amount of money you get to keep for yourself. If you spend $40 on a cell phone, $45 on cable Internet, and $90 for cable TV, you are spending $175 a month for those services. If you could consolidate them and get the whole package for $99 a month, you get to keep $76 for yourself.
Most people who are spending that way don't bother to save, because they don't think of that $76 as something they could rightfully keep. And don't just think $76. In a year, that's $912. In five years, it's well over $4,000.
One way to cut the fat out of your budget is to look at everything you spend and see where there is overlap (are you a member of two gyms? Do you have too many phones?) or ways to consolidate services into packages that offer better deals.
But that's just the beginning. Look at other things you spend and start to see where you can whittle down the spending. For a lot of people, food is a huge item on the budget. Eat out less often and you'll save money. If you already eat mostly at home, start cooking more from scratch and less from packages and you'll spend less.
The famous "tightwad" Amy Daczycn (Tightwad Gazette) once wrote that the food budget was one of the areas where frugal masterminds could keep exercising continuous improvement. Almost everyone can cut expenses here. Strangely, some of these cost-cutting efforts will result in better, healthier eating.
Can you reduce what you spend on utilities? There may be ways to use less air-conditioning or reduce your water bill-without your even noticing!
Look at other areas where you spend a lot. Clothes can be a huge expense, particularly if you're outfitting lots of school-age kids, but if you can deal with the garage sale scene, you can cut your clothes bill to a tenth of what it used to be. Granted, working the garage sale circuit takes time, nerve, and the ability to get up early on weekends. Some people dislike the whole notion of the garage sale wardrobe and I certainly don't advocate buying all your clothes used. But if you can get a decent pair of jeans for $1 or some gardening shorts and tees for a quarter apiece, why spend more? Kids outgrow their clothes so quickly that most families are quick to use hand-me-downs. Garage sales just expand the hand-me-down universe!
If you just save for saving's sake, you can end up getting burned out quickly. You need to figure out a way to "count" your newfound wealth. If you've got debt, funnel your savings as quickly as you can into paying down high-interest loans. If you're debt free or close to it, you may want to take your savings and put them in a savings account. For instance, if you've figured out a way to trim about $30 off your electric bill and $50 off your food bill and $20 off your cell phone bill, take that $100 and put it aside. Use it to fluff up your savings account or start a specific savings fund (for college, a new car, or whatever you figured you were going to take out a loan to get).
If you play the lottery, here is a great and easy way to start saving. I once worked with a bunch of folks who bought group lottery tickets for $5 a week plus many of them kicked in another $5 a week for a football pool. Lots of my colleagues were throwing away $10 week in, week out, with little return and a lot of good humor.
I started to do the same, except I didn't go in on the lottery or the football pool. I took $10 a week and put it in a jar at home. I put my money in the jar every Friday night, faithfully, and in a year, I had over $500. I used that to help fund my vacation that year. The idea that I was visibly saving the money and had a purpose mapped out for it made it not only easier to save, it got to be fun.
Earning more money is always a good way to increase your wealth, but most of us ramp up our spending as our income goes up. Reducing your spending is a great way to increase your wealth and, best of all, you have a lot more control over how much you spend than you realize.
You can even get radical and decide you don't need cable TV, a lawn guy, or designer handbags. But even people not prepared to make a major overhaul in lifestyle can still reduce about 10% of their household budget and not even miss it. If you earn $50,000 a year, that's $5,000 more in your pocket in just a year!
If you're faced with overwhelming debt or just believe that you could manage lots of smaller debts better, check out how to consolidate debt at http://www.debt-consolidation-diva.com .