Want to really save? Take a look at how you spend and change it. Quit smoking, take in a roommate, park the car -- and you'll save as much as $12,000 a year. It's getting harder to blame savings shortfalls on your measly pay stub.
In fact, how much you save has little to do with your income, research by economists Steven Venti and David Wise shows. It has more to do with whether you want to save and are willing to adjust to boost your saving.
Ventis and Wises 2000 study, "Choice, Chance and Wealth Dispersion at Retirement," found a wide range in how much people at the same income levels were able to save for retirement. The study also pointed out that it wasn't just the higher income folks who managed to save the most. Indeed, people in the lowest income groups were able to save more than some of their middle-income peers -- by about $100,000. (See link at left to read the complete study.)
Their conclusion? "Persons with little savings on the eve of retirement have simply chosen to save less and spend more over their lifetimes."
The key, then, is spending less than you earn.
Tahira Hira would agree with this conclusion. A professor of personal finance and consumer economics at Iowa State University, Hira has spent more than 25 years studying how and why people spend, and why some people get into financial trouble.
"We don't stop and think that earning money is only one part of financial health," Hira says. "The other part is learning how to manage money."
Many people don't have a clue
A big source of money problems, Hira says, is that people just don't know enough about their own financial reality. "They don't know what they earn, they don't know what it takes to live, and they don't know their discretionary income."
Her advice? Educate yourself. Sit down with your monthly bills and statements and figure out your income and outgo. Then, decide if you like the picture you see. If not, you'll need to create a plan for changing it.
To help with the process, Hira recommends asking your self these three questions:
* Who am I? What's my current financial picture?
* How do I want to live? How do I want to use my money?
* How can I make the best use of my money?
Treat managing your money like you would any other household task and allot enough time for it every month.
Hira notes that many of the financial tools that have made life more convenient -- such as credit cards -- can promote bad financial habits and prolong debt when misused. Credit cards should be used as the cash-management tool they are, not a borrowing tool, she says.
"We're spending tomorrow's money when we put things on a credit card," she says. "You keep locking yourself up and losing your freedom." Her bottom line on financial health? "Stop spending."
7 radical savings tips
To help curb the consumer in you, we've come up with a few of admittedly drastic savings strategies, along with some ballpark figures of their savings potential. (If you're looking for a real no-brainer way to save, arrange to have a certain amount of your paycheck automatically deposited into a savings account. Then, sit back and watch it grow.)
* Hold the mother of all garage sales. Cast a critical eye on the stuff at the way back of your closets. If you haven't used it in six months, chances are you can do without. Same goes for all that junk in storage. (See "The hidden costs of too much stuff." ) Annual savings? Depends on how much junk you have, of course, but one coworker guessed he had at least $5,000 worth of stuff he could get rid of. I'd put my own garage sale potential down at around $1,000. Thats a good number.
* Quit smoking. Pack-a-day habit? In Washington state, that's easily $5 a day -- or about $1,800 a year -- that can go right into your savings, not to mention what it saves you on insurance and health care.
* Tame your driving addiction. In other words, carpool or use public transportation. This saves on gas, insurance and maintenance costs -- not to mention any money spent on aspirin. Using the IRS's 2002 mileage reimbursement rate of 36.5 cents per mile as a proxy for the cost of commuting, you could save $1,141 a year by driving half the time for 50 weeks a year (based on a 25-mile roundtrip commute). For an even more drastic approach, consider getting rid of your car if you live in the city. Some cities are now implementing progressive programs that allow you to have access to a car without the ownership hassles (e.g. "Flexcar" in Seattle, Portland and Washington, D.C. For more on Flexcar, see link at left.)
* Buy used. The average consumer spends about $1,750 a year on clothing and its upkeep, according to the U.S. Bureau of Labor Statistics' most recent Consumer Expenditure Survey. You can potentially cut that in half by shopping at consignment shops and auctions, though the life of the goods may be less than buying new. To account for that, the annual savings may only amount to 25%, or $437.
* Become a homebody. At just over $1,800 a year on average, entertainment spending has a way of quickly eating through the best-planned budgets. Consider the library for books, music and movies. Eat out less often. The average person spent $2,276 a year on eating out in 2002. Try cutting your spending in half on both areas for annual savings more than $1,900.
* Cut your housing expenses. While a move across the tracks may save some money, moves are expensive in themselves. Consider renting out a room. The average housing costs per person in 2000 were just over $13,200. In metropolitan areas such as Seattle, rooms easily go for $400 a month. Figure about $20 of that goes to increases in utility costs, and you've still got an annual savings of more than $4,000 before any income taxes.
* Cut up your credit cards. Build an emergency fund first to handle most unexpected expenses. This allows you to become your own lending agency. (OK, if you're chicken, try cutting up all but one.) Credit cards can be a cash-flow management tool, but paying only the minimum will keep you in debt for years. If you're the average American with at least one credit card, you probably have close to $8,523 in credit card debt, according to industry research group CardWeb.com. At an average APR of 14.4%, it could cost you as much as $1,100 a year in interest alone. By simply waiting until you've saved enough money to make purchases, you could eliminate those interest payments entirely.
If you're really ambitious and follow all the above tips, you could be looking at savings of nearly $12,000 a year. Figuring you can invest it at the historical rate of return at 10% your savings will start to compound nicely -- and rapidly.
From MSN Money
By Jennifer Mulrean