Trouble Saving Money? You’re In Luck

How the tax law changes make it impossible for you not to save money

This time of year almost everyone has money on their minds. Many of us have spent the past several weeks blowing out our budgets to buy our loved ones holiday gifts. I’ll save my ranting on that topic for another day. And, with the start of the new year, we have our resolutions to save more money or pay off debt or whatever else firmly in place.

It’s that time of year when we want to do all the right things like spend responsibly and save. That time before the drudgery of actually doing the right things takes hold and people give up on their resolutions. When they realize doing the right things is much more difficult than just talking about doing the right things. (more…)

The Best Way to Save More Money

Except from The Modern Day Millionaire

This week’s blog post is an excerpt from The Modern Day Millionaire, my guidebook on setting and achieving your financial goals in the modern, social-media age.

A Thin Blue LineYou can pick up your copy from Amazon, Barnes & Noble, and most other major retailers.

A Thin Blue Line

Save More Money

How to save more money? That is the question. It doesn’t take a nuclear physicist to realize that is a good idea. The difficulty lies in the details of making it happen.

Your first thought may be that you should focus on cutting expenses. Our culture has a history dating back to the Great Depression of holding frugality in high esteem. Sayings like “tightening your belt” and “waste not, want not” embody this mindset.

Spending modestly is often viewed as financial priority number one. For most people, this notion is primarily inherited from their parents, who often learned it from their parents, who may have actually lived through the Great Depression. All of these folks have carried that mindset of scarcity and frugality with them throughout their lives. These ideas get passed on through generations, not necessarily because they’re the most effective financial practices, but, rather, because of generational inertia.

Popular personal finance gurus also promote this mindset when they go on and on about how your profligate spending habits will ruin your financial future. Authors and speakers like Dave Ramsey, Suze Orman, and David Bach (author of The Automatic Millionaire, a personal finance guide to becoming a millionaire simply by cutting out $4 lattes) extol the virtues of frugality to their thousands of followers.

Don’t get me wrong, minimizing wasteful spending does rapidly accelerate your savings. It’s just not nearly as powerful as that other, frequently overlooked, savings lever: income.

Think about it: Would you rather save an extra $500 per month by spending $500 less or by earning $500 more?

The answer is obvious, right? All else being equal, spending $500 less per month would require a significant cut back in your lifestyle. You spend money on things you enjoy, so cutting back your spending means less of what you enjoy. Increasing your income allows you to save more without having to cut back spending. Yet 99% of popular personal finance advice focuses almost exclusively on the expense lever.

Why? Well, for one, cutting expenses is much easier to conceptualize than increasing one’s income.

Let’s say I want to save $200 more per month. If I do this by earning $200 more per month, I create difficult questions, the answers to which will be very individualized. Questions like:

Where will I earn that money?

Can I get a part time job?

Should I start a side business?

If I do, what product or service would I sell?

Where do I even begin? etc.

Keep in mind, I’ll need to earn more than $200 to actually save $200 because of taxes, but the same logic applies.

On the other hand, if you want to focus on the expense lever, the questions are much easier. Even if $200 is a huge cut to your budget, you understand easily enough that the process entails identifying $200 of expenses that you can cut out of your regular spending. The plan is simply to identify expenses you can reduce.

On top of that, once you do identify unnecessary expenses, you can see the impact immediately. If you decide to save $200 by canceling your gym membership and lowering your cable package, after two quick phone calls, you are done. Reducing expenses provides quick results. No need to worry about taking an extra job, sacrificing nights and weekends to build a business, or learning to negotiate a raise – things you’d need to do to make more money. We all know how much our society loves a good quick fix, so expense-focused planning is easy to “sell.”

Budgeting advice is also popular because it’s universal. If I’m someone like Suze Orman, and have a financial advice radio or TV show, I can easily spout advice on cutting expenses that applies to anyone: bring your lunch, use coupons, don’t buy new cars, etc. This advice draws the largest audience because it’s so generic and universal. I’m going to draw a larger audience – and more money from advertisers – if I focus on advice that won’t be irrelevant to large segments of the population.

If, instead, I focus as a financial personality on increasing income, I run into marketing problems. Take the advice: “Earn $500 more per month by negotiating a raise.” This advice doesn’t apply to self-employed business owners; they earn more by growing their business or improving its profitability. It doesn’t apply to commissioned salespeople; they earn more by selling more. Even though advice to increase your income may be more beneficial in the long-term, compared to reducing expenses, advice about increasing income will simply not appeal to as broad an audience or draw as large a following.

Or take the advice: “Earn $500 more each month by starting an online business.” Again, this only applies to a subset of people, in this case, entrepreneurial-minded individuals. If I’m a big shot financial guru with my own weekly TV show, I want my advice to speak to everyone, so I can cash those big-time advertiser checks.

Although it may seem like it from reading financial advice websites and magazines, cutting expenses is not the be-all-end-all of financial advice. It’s just that expense-cutting advice speaks to a larger cross section of potential consumers.

More Income is Not a License to Spend Freely

I’m not suggesting you can spend money indiscriminately and everything will be fine because you can simply earn more money. There are substantial benefits to be gained from minimizing wasteful spending, and, a financial plan would not be complete without making that effort. I’m saying to cut back on wasteful spending after getting your “income lever” moving. Make increasing your income first priority for improving your financial plan.

Making more money is not a cure-all fix for every financial problem, however. As I mentioned earlier, it’s a more complicated process than cutting expenses. It also has its own drawbacks.

One such issue is the significantly longer lead time before your efforts produce meaningful results. Again, this is a major reason that a focus on “budgeting” is the more popular financial counsel: cutting expenses as part of a budget generates measurable results immediately. Tomorrow you can simply skip going out for lunch and BAM, you’ve saved money, whereas working to get a raise or promotion – or on landing that big client – may take months of sustained effort before showing results.

Now, nobody likes a good “quick fix” more than me, but, as is the case with most quick fixes, a long-term effort to increase your income will be more beneficial than the quick fix of cutting your budget. This requires thought up front in order to develop a plan for increasing your income, followed by a determined and sustained effort to carry out that plan.

More involved than reducing expenses for sure, but ultimately much more rewarding.

Making more money improves your financial situation exponentially – and without having to give up the simple joys of Starbucks, Chipotle, or your gym membership. In fact, your gym membership probably saves you money in the long run by keeping your body from atrophying into a decaying husk that requires thousands of dollars in medical bills each year to keep functioning – assuming, of course, you actually use it.

That’s why, when it comes to the Modern Day Millionaire approach, the focus is on increasing income first before worrying about cutting expenses.

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Projecting Your Savings

See where you're headed, quickly

Ever wonder how much money that monthly savings of yours will be in the future?

Here’s a three-second financial tip to find out.

Do you ever struggle with sticking to a savings plan? Or try to cut an expense out of your budget then relapse after a few weeks? Frequently this happens because the future seems so far off and saving money now for the future can feel like throwing money into a hole – a hole that you hope money will come back out of down the road, but a hole nonetheless.

One thing that can help you stay motivated is actually estimating how much money you’ll have in the future from what you’re saving today. This makes the future seem more tangible. You can actually see how big of an impact increasing your savings a little bit today can have. (more…)