'Saving $5 to $10 a day can literally change your life'

Cutting your spending can build wealth faster than working a second job

Your Money

January 04, 2004|By Gregory Karp | Gregory Karp,MORNING CALL

Benjamin Franklin is credited with the saying "A penny saved is a penny earned."

That was true when he wrote it in his Poor Richard's Almanack in the 18th century. But today, it vastly underestimates the power of not spending.

Cutting spending - through comparison shopping, resisting impulse buys and finding ways to reduce day-to-day expenses - paves a quicker route to financial security than trying to eke out a few more dollars on the job, say financial experts and professional cheapskates.

That's because of income taxes, which didn't exist in Franklin's day. Today, most Americans take home just 50 to 60 cents for every extra dollar they earn in a paycheck.

On the other hand, if you make an effort to not spend a dollar, the whole buck is yours, and Uncle Sam can't touch it.

Cost-cutting doesn't mean scrambling to save just a couple of hundred dollars a year. In many households, it can lead to thousands of dollars in freed-up cash.

Household cost-cutting changed the life of Jonni McCoy, 45, of Colorado Springs, Colo.

She quit her job at Apple Computer Inc. to stay home with her son, even though she was making more than half the family income.

She was able to do it by cutting costs.

"A lot of people don't think it's worth it; they don't think you can come up with that much of a savings," McCoy said.

Today, she shares her experiences through her Miserly Moms Web site (www.miserlymoms.com) and her books, including Frugal Families: Making the Most of Your Hard-Earned Money.

As many financial authors like to point out, being a smart spender, coupled with being a smart investor, can make people of average incomes rich.

David Bach, author of such books as Smart Couples Finish Rich and The Automatic Millionaire, points out that a $3.50 latte at Starbucks each day costs more than $12,000 over a decade, and smoking a pack of cigarettes a day can cost more than $25,000 in some states.

"Saving $5 to $10 a day can literally change your life," Bach said. "It can get you out of debt and help you become a millionaire."

If you think you don't have time to reduce spending, convert the time you spend on cost-cutting to an hourly wage.

A study in March used researchers to comparison shop for various products. In one case, 16 minutes of comparing prices on the same model of color television saved $100, according to the study by Consumer Literacy Consortium.

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.

Maybe the most important concept about cost-cutting is that frugality doesn't mean deprivation.

The idea is to spend money on what you truly care about and plug the leaks of careless spending: subscriptions to magazines you never read, the gym membership you don't use, paying 10 cents a minute for long-distance calls when you could pay half that, or overpaying for insurance.

Watch this space each month for tips on cutting spending in your life.

Gregory Karp is a personal-finance writer for The Morning Call, Allentown, Pa.

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