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This chapter is from the book

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 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.

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