- What Is Spending Smart?
- When to Spend Your Money
- Why Pay Attention to Spending?
- What to Spend Discretionary Money On
This chapter is from the book
This chapter is from the book
This chapter is from the book
Why Pay Attention to Spending?
Most personal finance books, including the get-rich-quick books, all want to focus on one side of the household ledger—the earning side. “Get rich in real estate!” “Become a millionaire day-trader!” “Wealth through ostrich farming!”
But how do you accumulate a pile of cash in the first place so you can take advantage of wealth-building advice? You pay attention to spending. In the short term, not spending a buck beats earning a buck every time.
These concepts about why spending is important come from my previous book, Living Rich by Spending Smart. But they’re so fundamental, they bear repeating.
The following descriptions tell you why.
1. Magnitude
You keep 100 cents of an unspent dollar but maybe 60 to 75 cents of an earned one, after taxes, Social Security, and the other deductions take their bite from your paycheck. Cutting out a $50-per-month cable TV bill is the same as a $30,000-a-year worker getting a year’s pay raise of 3.3 percent, or $1,000. Benjamin Franklin said, “A penny saved is a penny earned.” But that was before the era of income taxes. Today, a saved penny is worth far more than an earned one.
2. Speed
Cutting spending is faster than earning money. You can cancel an expense, such as your gym membership, and start saving money today. You will be instantly better off. But it takes a long time to change your income. It might be months before you can get a pay raise at work, and overtime hours might be sporadically available. The only immediate thing you can do about income is to get a second job that starts this week. Or, as many Americans do, you can use fake income, such as a credit card that gives you an illusion that you have more cash. Of course, that just creates a crisis later on when the credit card bill arrives.
3. Control
You have more control over spending than income. You make dozens of spending decisions a day, from a morning mocha latte at Starbucks to whether you turn up the heat an extra degree in your home. However, your decisions about income are few on a daily basis, outside of resolving to get up and go to work so you aren’t fired.