Sunday, May 27, 2007

Give Yourself a Raise: Best Saving Is Not Spending

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How To Give Yourself a Raise: The Best Saving Is Not Spending

You generally have more control over decreasing your spending than you do over increasing your income, so lower spending is the best way to give yourself a raise.

Minimize Fixed Overhead, the 800lb Gorilla

The most important way to lower expenditures is to minimize your fixed overhead, i.e. regular expenses. Housing might be necessary but your current housing cost might not be necessary. Utilities might be necessary but your current cable and cellphone plans might not be necessary.

The magic part: lower spending (1) creates wealth and (2) reduces the need for wealth at the same time

Minimizing expenses is your most powerful tool because it has a double benefit and creates a virtuous cycle: Lower costs this year to increase your savings this year, so next year you have higher savings against the continued lower costs, so your financial buffer will last even longer if you do have an emergency. This type of “compounding” is as good or better than compound interest, especially since you pay taxes on interest earned but you do not pay taxes on money not spent.

Next: Steps to Financial Freedom: How long a vacation can you take?

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