Build wealth by downsizing spending

Last week you read in this column about meeting yourself halfway by downsizing your eating. The same principle applies with spending to help you build wealth and decrease debt.

If you want to build wealth, downsize your spending. This does not mean being deprived of things that you enjoy. A financial example is reducing spending on “discretionary” expenses such as meals eaten away from home, clothing, and lottery tickets. In other words, not cutting out these items completely but spending half of what you did before. Any reduction in spending, to save money or reduce debt, is a step in the right direction and the “meeting yourself halfway” strategy can make a real impact over time.

Cut your discretionary expenses in half. Spend less so that you can save more. This strategy of “finding” money to save by reducing small expenses has been referred to as The Latte Factor by David Bach in his book The Automatic Millionaire. “The Latte Factor” is a trademarked phrase that uses fancy $4 coffees as a metaphor for all types of frivolous discretionary spending that adds up over time. In the book, Bach describes a former student, Kim, with a $5 a day double nonfat latte and nonfat muffin habit. Figuring a 10% annual return on this money, if it were invested instead in a 401K with a 50% employer match, Kim who was 23 at the time, could have about $1.7 million at age 65.

Financial experts recommend tracking household spending for a month or two to identify “leaks” and to “find” money to save or to reduce debt. Because we spend money daily, most people do not have an accurate record of where all their money goes by the end of a month. An average person spends money 3 to 5 times a day, or about 120 times monthly. This includes small purchases, such as a pack of gum, as well as larger expenses, such as a mortgage payment, a car payment or rent.

One way to understand how you spend money is to keep an account of every transaction. Keeping track of the small items you buy will provide an accurate expense record. Many small cash purchases, such as lottery tickets, parking meter money, train tickets, coffee break items, gum, and cigarettes, can add up to considerable monthly amounts. Categorizing expenses will help you see the different areas in which you spend money. You can also calculate what percentage of your income is spent on various items.

Review the additional strategies below to “meet yourself halfway” to increase your wealth.

• Every time your salary increases, contribute half to a 401k, or other employer savings plan, and keep half as a pay raise. Saving half of a 4 percent raise, for example, will increase your payroll contribution by 2 percent. As soon as a raise becomes effective, sign up to “save half and spend half.”

At the beginning of each year, mark your paydays on a calendar and identify the months with “extra” paydays. If you paid weekly, there are four months with five payday. If you are paid biweekly, there are two months with three paydays. Monthly expenses usually don’t increase much during these months, so use at least half of the “extra” income to increase savings or reduce debt.

• Review expenses deducted automatically from your checking account, such as gym memberships, telephone calling features, and premium radio and television channels, and decide whether you’re getting your money’s worth. If not, e.g., you haven’t been to the gym or watched a movie in four months, select a reduced cost option or eliminate the expense entirely.

• Save at lease half of all windfalls, e.g., tax refunds, or use them to pay down outstanding debt.

• Track spending by writing down every cent you spend and then identify daily discretionary expenses and cut them in half.

• Check the Web sites www.AMERICASAVES.ORG and www.66WAYS.ORG for money saving ideas

• Institute the “24 Hour Rule.” For any expenses over $50, delay spending to give yourself a day to think about it. Ask yourself: “Is this expense a need or a want?” and “How do I plan to pay for it?”

Susan M. Jackson is the Harvey County Extension agent, family and consumer sciences and community development.