Wednesday, February 13, 2008

Save Money With Small Changes

It isn't easy to find money for savings. Most budgets are stretched already. The rising cost of food and fuel make it that much more difficult to find any extra funds in your budget. But if you want to save more money or to add to your debt snowball a review of any frequent small expenses can be a good place to start.

Small expenses that are repeated frequently can add up to a lot of money. The "latte factor" is a well known example where giving up your daily latte can save you a significant amount of money over time. But maybe you're not a coffee drinker so you ignored this advice. But maybe there is another small item that you repeatedly pay for that you haven't evaluated yet? Do you pay a daily toll that you could avoid by driving an extra 5 minutes? Do you treat yourself to a daily candy bar as an afternoon pick me up? For me, my daily small expense is Diet Coke. A lot of Diet Coke. This is an area where I could definitely save money.

I go through about five 12 packs of Diet Coke a week. (Waaay too much!) Although I do try to buy it on sale, I spend, on average, $15 a week on this expense, or roughly $60+ per month. If I were to instead put that $60 a month into a mutual fund earning 12% interest (a supposition that is often asserted as possible by Dave Ramsey), after 25 years I would have $112,863.99! Now I really like Diet Coke, but not to the tune of over a hundred thousand dollars!

Now just because giving up a frequent small expense will save you money, doesn't necessarily mean that you should feel compelled to give it up. You should evaluate your small recurring expenses in terms of value.

The first question you should ask yourself is "Is this spending in line with my values?".

For me, drinking Diet Coke is not in line with my values. It has no nutritional value and has been linked with medical problems (including possibly cancer). Your small expense might be perfectly in line with your values and wouldn't necessarily be on the chopping block for this reason.

But, next you should ask yourself "Do I derive sufficient value for this expense in terms of how much life energy I am trading for it?".

This is an important question raised by Joe Dominguez in his amazing book, Your Money Or Your Life. The book points out that we all have a limited amount of time here on earth and asserts that money is something we trade our life energy for. Therefore, you should evaluate your spending to be sure that you feel you are getting sufficient value for the amount of time (life energy) that you are trading for it.

To get a realistic assessment you need to calculate your real hourly wage. This involves figuring out how much time you give to your job (including commuting time, decompressing time, etc.) and how much you earn (subtracting taxes, money spent commuting, money spent on work related expenses, work lunches, convenience foods, etc.). For my family, our real hourly wage figures out to $23.50 per hour. My spending on Diet Coke costs my family more than 2 1/2 hours of life energy a month. Not horrible, but we wouldn't mind getting back an additional 2 1/2 hours from work time.

In the end, only you can evaluate if your spending is in alignment with your values and if it is providing you with sufficient value. What will pass the tests for one person would be considered ridiculous by another. Personal finance is personal, after all.

The important thing is to take the time to evaluate your spending. Small changes can save significant money.


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Read more on this topic in Your Money or Your Life (Part 1), The Daily Tracking of Expenses Experiment is Over, and Trouble With Tracking.