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Reaching the Point of Financial Freedom


How many ways are there to painlessly cut your expenses?


There is no shortage of famous and timeless wisdom on the subject of money, especially as it relates to the saving of it. Charles Dickens was most eloquent in David Copperfield, whose lead character explained:

"Annual income, twenty pounds; annual expenditure, nineteen six. Result: happiness. Annual income, twenty pounds; annual expenditure, twenty pound ought and six. Result: misery."

Benjamin Franklin was perhaps most succinct when he said:

"If you would be wealthy, think of saving as well as getting."

The notorious rascal Errol Flynn was a bit coarser:

"My problem lies in reconciling my gross habits with my net income."

Recognizing the growing problem of financial illiteracy in the modern world, Adlai E. Stevenson once observed:

"There was a time when a fool and his money were soon parted, but now it happens to everybody."

Putting a touch of humor on the subject, E.E. Cummings concluded:

"I'm living so far beyond my income that we may almost be said to be living apart."

Humans have struggled to save money for centuries. It is a constant problem. Yet, as Dickens explained, it really just boils down to earning more than you spend. Or, putting the onus where it belongs, spending less than you earn. (Most of us have far more control over what we spend than what we earn.) Getting this basic equation into balance is the first step toward a bright financial future.

Only then can you begin to invest and enjoy watching your money grow, and eventually reach what I call the point of financial freedom, where you have enough assets to handle anything life can throw at you and thus are free to pursue your dreams, whatever they may be. Far too many young people run up their debts in college and take years (and sometimes never are able) to dig out of.

If you spend more than you earn (plus whatever you may be given) it's virtually impossible to build a nest egg-even if you are a diligent investor. Why? When you invest while carrying debts you are essentially investing borrowed money. Your investments must earn more than the cost of your loans in order for you to come out ahead. If your debts happen to be to a credit card company you may have to earn 18% or more on your investments just to break even. Not very likely.

Pay those cards down before you start plunking money into the market (other than through something like a 401(k), which has tax advantages and usually a company match as well). Learn how to live on less than you make. That's where the road to financial freedom begins.
So, how do you spend less? There are limitless ways to cut expenses. Stick to a budget. Pay yourself first, then your monthly bills. Automate contributions to a savings account and payments to your credit cards. When you pay yourself first and/or go automatic paying down debts you'll quickly adjust your spending to what's left-not to what you earned.

But there are everyday solutions too. What can you do everyday that will add up nicely over time? You'd be surprised how much you could save by cutting your cell phone bill by switching to the right plan, by eating out less, by not smoking, by skipping the Starbucks (SBUX) run, by doing larger loads of laundry less often and using half as much soap.

I run across ordinary excess in my own life far more than I should admit. One of my pet peeves is all the paper plates we use in our house. First of all, using any paper plate is a waste (and bad for the environment to boot). But let's face it, sometimes the dishwasher is full or you just don't feel like cleaning up. OK. But could you take the time to use just one plate, instead of the two or three that might be stuck together?

At my house we go through a package of paper plates every week ($4). That's $208 a year we could save (OK, less a few bucks for dishsoap) by using regular plates, or $104 to $137 a year if we simply made sure that we used only one plate at a time. Am I crazy? My family certainly thinks so. But I see this potential savings as 10 free trips to the movies each year. If you find enough of these painless ways to cut small costs, pretty soon you're saving enough to fully fund an IRA or make a car payment.

Author David Bach famously refers to what he calls the "latte factor." By his math, saving $5 a day (the cost of a Starbucks trip) and putting it in a 401(k) account with an employer match will produce $1.7 million over 40 years. I explore this concept deeper in my book, The Power Years: a User's Guide To The Rest Of Your Life (with co-author Ken Dychtwald), where we conclude that "Thanks to the power of compound returns, if we cut our daily expenses by even a small amount we can save a lot of money over time, and this plans works no matter how much we earn."

What do Minyans have to say?

Now it's your turn. What are some of these painless cost cutting tips? I've mentioned a few. I'll share the larger list sometime down the road. Send me your responses and include your age with a brief description of the waste you've found and how much you believe you could save over 12 months. If nothing else, the exercise will get you thinking about your "gross habits," in the words of Errol Flynn. And that's a big step.

Send your replies to

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