The Spending Smart Philosophy: Controlling Spending is the Key to Building Wealth

Here's an excerpt from Living Rich by Spending Smart: How to Get More of What You Really Want, a book that I LOVED. Even a die-hard saver like myself learned a ton from the book, and I recommend it to everyone that would like to be saving more money. The excerpt that follows details the philosophy of the book and is one that I can support whole-heartedly.

Spending Smart is the only way to get out of debt and build wealth. That’s a bold, but true, statement. It’s like calories are the key to a weight-loss diet. It doesn’t matter what the new diet fad is. A diet to lose weight only works if you burn more calories than you consume. Everything else is just window-dressing and hype.

In fact, controlling spending is far more important than the amount of your debt, which investments you choose or even how much you earn. For people in debt, it wouldn’t matter a bit if somebody graciously paid off all their credit cards or they got a huge bonus at work to pay off the balances. Before long, they’ll run up the card balance and be right back in serious debt because they didn’t fix the fundamental problem, spending too much money. Americans today don’t have a problem with debt. They have a problem with out-of-control spending. Debt is simply the result.

The truth is, you can’t out-earn dumb spending. Just ask all the multi-millionaire Hollywood celebrities, sports stars and lottery winners who ended up broke. Most people become wealthy and stay wealthy because they care as much about money going out as money coming in.

Spending Smart provides both the philosophy and the details to help you care about your spending too. If you already care, it will speed your trip to financial freedom and wealth.

The Truth about Getting Rich

The basic premise of wealth must be understood. It doesn’t matter whether you earn $20,000 a year or $200,000. The only thing that makes you wealthier is regularly spending less money than you make.

That was proven in the “The Millionaire Next Door,” a tremendous best-selling book that shattered myths about who America’s millionaires really are. In fact, millionaires are not highly educated people who inherit a lot of money and spend it on obscene luxuries and pampered lifestyles.

Instead, they are hard-working people who, among other common attributes, care about what things cost and getting good value for their money. In short, America’s real millionaires – not those who just look the part – care about their spending. And you should too.

I like to think the “Millionaire Next Door” proved the philosophy, and this book provides the details.

Spending Smart is not about freeing up a few bucks here and there, but literally thousands of dollars – which compounded over a lifetime is the difference between struggling and being rich.

If getting rich isn’t your goal, you still need to spend money smarter because money gives you options. You have options to quit a job and pursue lifelong dreams, options to give money to charitable causes that inspire you and, in general, options to pursue what makes you happy.

Spending money smarter will help your relationships and maybe even your sex life. Without the desperation and fear that comes with money problems, all the relationships in your life can be more enjoyable.

You need to control spending to build wealth. It’s the only way – outside of an inheritance, lottery win or some other windfall – you’ll ever accumulate enough money to make it work for you. That means getting money to start making its own money. For most people working normal jobs, there are not enough hours in a day to build wealth simply from working for a wage or salary. Instead, you should spend less and invest your money, whether in stocks, mutual funds, investment properties, your own business, whatever. All that matters is your money is making money while you sleep.

For most people, it’s the only way to get rich.

Learning to Spend Less

“Living below your means” is a simple and often-stated concept in personal finance. But what isn’t explained is how exactly to spend money smarter, so you have some left over.

Many personal finance experts advise you to “pay yourself first,” which is now a tired cliché for socking away money before you start paying your bills. But that only works if have enough self-control not to continue spending and simply throw the charges on a credit card. That leads to the illogical situation many Americans face – saving money in the bank at less than 5 percent interest at the same time they’re paying 18 percent interest on their credit cards. Their return on that “investment” is negative 13 percent.

Ultimately, it all comes down to spending.

Standard cost-cutting advice makes sense, such as eating out at restaurants less often and forgoing a fancy coffee every morning. But it’s not nearly enough to free up the thousands of dollars you need to make a difference in your life.

What you need are both overall strategies and specific ways to reduce spending. It’s stuff you could probably research and figure out for yourself, if only you had unlimited time and access to the nation’s leading experts. With those resources, you could investigate every alternative to buying expensive ink-jet cartridges, investigate whether extended warranties are a good deal and read books on how to buy insurance.

But you don’t have that time. So, you bought this book instead. With this book, you won’t have to figure out for yourself which contradictory tips are true about saving money with home heating and cooling, for example. This book will just tell you. It will say, flat out, “This is right. This is wrong.”

This book won’t give you dozens of dopey ideas on saving a few pennies here and there – no tips on making your own laundry detergent or reusing dryer lint.

We’ll cut to the chase and whack out the biggest offenders of wasteful spending and highlight the easiest cost cuts to make.

Spending Smart is Not About Deprivation

Spending Smart is not a “live cheap, die loaded” plan or some exercise in fiscal anorexia.

Diets don’t work if you’re constantly hungry. And a plan to cut spending won’t work if you have to say no to buying things you really want. The goal is to reallocate spending to satisfy all your needs and many of your wants.

You do that by plugging the leaks of wasteful spending, and forcing your dollars to go where you want them to. It’s about spending on purpose rather than by accident and habit.

Who cares which phone company is providing your dial tone? Switch to a lower-cost carrier and save hundreds of dollars per year. Insurance policies are generally the same. They guarantee a certain payout if bad things happen to you, a car accident, house fire, even death. Why would you pay more for one policy over another? And does a jar of sale-priced Skippy Peanut Butter taste any different than if you paid full price?

Life is full of spending choices, and making smarter decisions time after time adds up.

The average four-person household spends more than $62,000 a year, according to government statistics. Cutting spending by just 10 percent reaps a cool $6,200 a year, or $517 a month. That would go a long way toward paying off debt. Or, you could redirect that money into buying a nicer car or pay for a home improvement.

Or, if you started investing that money, you’d save more than $300,000 in cash in 20 years, assuming a modest 8 percent return.

That’s the power of not spending.

Why Cutting Spending Works

In the short term, not spending a buck beats earning a buck every time. Here’s why:

• 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.

• Speed. Cutting spending is faster. 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 may be months before you can get a pay-raise at work, and overtime hours may 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.

• 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.

• Time well-spent. If you think you don't have time to reduce spending, convert the time you spend on cost-cutting to an hourly wage. A 2002 study at Virginia Tech University used students to comparison shop for various purchases. In one case, 16 minutes of comparing prices on the same model of color television saved $100. Converted to an hourly wage, that's $375 an hour. And if your total tax bite with Social Security amounts to 40 percent, it’s the same as earning $625 an hour, or $1.3 million a year. Using the same math, spending three minutes clipping and using $10 worth of coupons pays $333 an hour. Taking 10 minutes to mail in a $50 rebate on a new computer printer earns you $500 an hour.

For those who enjoy sports metaphors, spending is like defense. Ask a knowledgeable fan of any major sport to identify the most important factor in winning, and you should get the same answer. “Offense is more exciting, with the home runs, the touchdown passes, the slam dunks,” the fan will say. “But defense wins championships. It always has.”

And so it is with money. Earning, the other major component to money, is more exciting and sexier, like offense. But for average people, winning with money ultimately depends on spending, your defense. It always has.

It’s true that cutting costs is not a substitute for growing your income over the long term, but it allows you to get the most out of the income you have, whatever it is, today.

Spending Smart: A Proven Plan

Too many financial books are glad to tell you what to do with all your extra money, but how do you get that pile of cash in the first place? You spend your money smarter.

I know, because I’ve written more than 175 newspaper columns about spending money smarter. The columns appear in newspapers that together have millions of readers. Over the years, hundreds of readers have e-mailed and called to tell me how useful the tips were to them. Some gush about how easy it was to spend less money, all because they had the power of knowledge. Besides doling out advice in the newspaper column, I’ve also talked about Spending Smart on television, radio and in my Web log, or blog.

I’ve interviewed the money gurus, from Suze Orman and David Bach to Dave Ramsey and Jean Chatzky. I’ve talked with Thomas J. Stanley, whose book “Millionaire Next Door” changed our notions about the rich in America. And I’ve tapped the expertise of those who are not household names, but experts in their field, whether that’s about manufacturer’s coupons, emotional spending or auto insurance.

And I’ve put these principles and tips into action in my own home, freeing up money to spend on things my family really cares about.

This book is organized into chapters with sections, each easily finished in a short sitting. Sections are essentially independent. You can read them in any order you like, with no plot or running theme to remember.

And don’t be overwhelmed by the sheer volume of information and advice in this book. While it won’t nearly cover all areas of spending in your life, it does provide literally hundreds of actionable tips. You don’t need to implement all of the Spending Smart advice right away, but you do need to get started today.

Comments

["Mo" Money]

What a great post! I found it so interesting that I read and then reread the article. I like the comparison of saving to a diet, both tasks must have self-discipline. I plan on getting the book to find more helpful hints.

[Susan]

Excellent read, thank you so much. I plan to review the book ASAP. My personal experiences with debt resolvement have made a believer out of me.I don't really think it can be emphasized enough, that spending is something we can control on a daily basis, but the control of the amount of our income is limited, therefore, optimize what we can control.

[Cara]

I'm VERY interested in reading this book in total. Too bad I'll have to wait until it comes to my library network. ;-)

[Trent Hamm]

I just started this book and I agree - it's pretty good. This excerpt is tasty, too.

[Jeff]

Excellent post, spot-on information. Of course it's not the spending that inherently causes the problems, it's the uneducated and undisciplined spending choices that advertising drives the consumer to.

[foreclosurefish]

Good post, especially about cutting costs compared to making more money. Too many people are trying to figure out how to make more money, when they can easily increase their income relative to expenses by dropping unnecessary costs. Dropping the 900 television channels you never watch, or giving up the expensive gym membership when you never go, or turning down the heat a few extra degrees and putting on an extra shirt are easy, immediate actions that can be taken.

The book sounds like it should be an interesting read if it has much more common sense information. Even with such seemingly apparent information as saving money and cutting costs, there is always something to learn.

[Thejapchap]

Along this topic of controlling spending, a good alternative we've found to going to the movies (or even renting from the local video store, for that matter!) is with Redbox, that vending machine for DVD's... It's $1 per night and it makes sense for us because we only ever watch movies once and return them the next day anyways. Even more, you can find quite a few promotion codes online that give you free rentals if you punch them in at the Redbox machine!

Basically, by using a little bit of patience and waiting for the movies to come out on DVD, we can watch 15+ new-release movies for the price of one visit to the theatre. PLUS, the popcorn and drinks are a fraction of the cost! :-)

[Dividends4Life]

A lot of good information and wisdom there. Thanks for sharing it!

Best Wishes,
D4L

[Howie]

"... assuming a modest 8 percent return"

And where would one get this "modest" 8% return in this day and age? We keep our money in a savings account that, as of now, has a 3.05% return. I'd LOVE to see bloggers actually say "... assuming a modest 8% return that one could easily get via Vanguard's such-and-such fund" instead of always hearing about this imaginary (seemingly) 8% return. Hell, why not assume a 30% return while you're making up numbers?

[FMF]

Howie --

I'm sorry, I assumed (and I'm sure the writer did as well) that anyone reading a financial blog would know that an 8% return over the long-haul with stocks (not in the short-term with CDs/savings accounts) is a very reasonalbe estimate. Consider the following:

From http://www.freemoneyfinance.com/2007/02/the_stock_marke.html :

"Since 1927, the S&P 500 stock index has gained 10.4% a year on average."

A similar thought was here http://www.freemoneyfinance.com/2008/01/keep-investing.html :

"From 1982 to 2001, the S&P 500 gained a 11.8% per year."

For specific funds see this http://www.freemoneyfinance.com/2008/02/kiplingers-love.html :

"When it comes to indexing, the expense ratio is the biggest factor in separating winners from losers. The E*Trade S&P 500 Index fund (ETSPX), for example, charges just 0.09% annually for expenses, and its annualized return over five years to December 1, 2007, is 11.4%. The Dreyfus S&P 500 index fund (PEOPX) costs more than five times as much -- 0.50% annually -- and not surprisingly, it has produced a smaller five-year return (11.1%). The difference may seem insignificant, but for a $10,000 portfolio, the cheaper fund puts $1,000 more into your pocket over ten years."

[Liz]

Just finished reading the book (quick read, esp. if you are already familiar with some of the material from blogs/books/life).

I agree with FMF that even die-hard savings experts can learn something practical from the book. I think this book would be great reading for those who have already read books like "Millionaire Next Door," "Rich Dad, Poor Dad," "Automatic Millionaire," and "Total Money Makeover." Because this book assumes that you have already already "caught" the spending smart bug, I recommend this book to those who are already familiar with and committed to the personal finance theories in the books previously mentioned. Those books are the why and partially how, this book is the details.

[Scott Richards]

Havent read the book yet,but this was informative and makes sense.