I recently read in AARP Bulletin the 4 new rules to take control of my financial future. I'm highlighting Rule No. 2 - A Penny Earned Isn't A Penny Earned - It's More. Read more below.
Wealth, once you have met the basic needs that will make you happy, is all about time, not money. In that case, you have two ways to become wealthier: Make more money or spend the money you have more wisely. Guess which choice is easier.
Let's say you have a net worth of $200,000 and currently spend $20,000 annually above Social Security payments. You have 10 years of financial wealth. Cutting $10,000 in annual expenditures (or a little over $800 a month) by eliminating some expenses and getting better deals on others will double your financial wealth to 20 years.
By contrast, earning more money in order to maintain that $20,000-a-year lifestyle is a lot harder to sustain. Say instead of cutting your spending by $10,000 a year, you find a way to make an extra $10,000 each year. Now, you won't get all that money, because some of it will go to taxes. But let's say you are willing to work 10 more years to sustain your current spending levels. Doing that might bring in a total of $80,000 after taxes, increasing your net worth to $280,000. Sticking to your $20,000 annual spending rate, you end up with about 14 years of wealth.
Let's say you have a net worth of $200,000 and currently spend $20,000 annually above Social Security payments. You have 10 years of financial wealth. Cutting $10,000 in annual expenditures (or a little over $800 a month) by eliminating some expenses and getting better deals on others will double your financial wealth to 20 years.
By contrast, earning more money in order to maintain that $20,000-a-year lifestyle is a lot harder to sustain. Say instead of cutting your spending by $10,000 a year, you find a way to make an extra $10,000 each year. Now, you won't get all that money, because some of it will go to taxes. But let's say you are willing to work 10 more years to sustain your current spending levels. Doing that might bring in a total of $80,000 after taxes, increasing your net worth to $280,000. Sticking to your $20,000 annual spending rate, you end up with about 14 years of wealth.
Take notice: Spend $10,000 less per year, and you immediately gain 10 years of wealth. Spend a decade making $10,000 more a year, gain about four. Living smarter and more frugally has a much bigger payback than taking on a side hustle. Cutting back on spending now and committing to lower costs in the future can boost your wealth and move up your financial independence by several years.
But won't spending less make you less happy? Probably not. We quickly get used to living on less, just as we quickly get used to living on more, says Dan Ariely, professor of psychology and behavioral economics at Duke University. Research indicates that we get more happiness from experiences than buying stuff. The new luxury car may bring short-term happiness, but experiences, like taking the children and grandchildren on a modest vacation or even just taking the grandkids out for a treat, provide memories (and happiness) that can last a lifetime, says Jonathan Clements, author of From Here to Financial Happiness.
But won't spending less make you less happy? Probably not. We quickly get used to living on less, just as we quickly get used to living on more, says Dan Ariely, professor of psychology and behavioral economics at Duke University. Research indicates that we get more happiness from experiences than buying stuff. The new luxury car may bring short-term happiness, but experiences, like taking the children and grandchildren on a modest vacation or even just taking the grandkids out for a treat, provide memories (and happiness) that can last a lifetime, says Jonathan Clements, author of From Here to Financial Happiness.
So how do you know what you can cut out to bring more wealth? Start now and look at where the money goes. The biggest expense, amounting to one-third of the budget of the average household headed by someone 65 or older, is housing, the U.S. Bureau of Labor Statistics reports. Transportation, health care and food are next in line. Limiting car expenses is the easiest and least painful way to cut costs; buy a modest car and keep it for a decade or longer. Downsizing to a smaller home with lower taxes and maintenance costs, or to a rental, is a bit harder.
Cut something out for a month or two and see what that does to your happiness. Eating out once a week instead of three times, Clements says, may actually make you happier; the lower frequency will help you enjoy it more, and anticipation of the meal itself brings happiness. Try keeping a daily journal of what has made you happiest. It's far more likely to be interactions with people that cost you little or nothing than a night out at a pricey restaurant or a long walk through your McMansion.
Cut something out for a month or two and see what that does to your happiness. Eating out once a week instead of three times, Clements says, may actually make you happier; the lower frequency will help you enjoy it more, and anticipation of the meal itself brings happiness. Try keeping a daily journal of what has made you happiest. It's far more likely to be interactions with people that cost you little or nothing than a night out at a pricey restaurant or a long walk through your McMansion.
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