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Spending smart the only way to get out of debt, build wealth
By Wu Jiayin |
February 28, 2009, Saturday
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THOUGH it sounds like an exaggeration, the argument that spending smart is the only way to get out of debt, in fact, makes a lot of sense.
This is the central idea that Gregory Karp conveys in "Living Rich by Spending Smart."
Given the current rough economy, the idea is extremely valuable, not only to people with small incomes but also to those with considerable wealth.
Recently, my attention was drawn to a report by International Finance News titled "The 'Miserable' Life of One with an Annual Income of US$500,000 in New York."
Early this month, US President Barack Obama imposed a salary cap of US$500,000 for top executives at companies that receive large government bailouts.
This report discloses the "miserable'' life those top executives are expected to lead since such a "meager'' annual income will make it difficult for them to make ends meet if they continue to live in New York.
According to the report, for one with an annual salary of US$500,000 before taxes, the after-tax income is about US$269,000.
By comparison, the average family expenditure of those executives in New York may add up to over US$790,000, which includes an average flat in the city, the children's education fee in private schools, payments to drivers, maids, private fitness coach, at least two family travels, etc.
Holly Peterson, the author of "The Manny," describing life on the Upper East Side of New York, noted that even bankers there with an annual salary of US$2-3 million may end up saving no money at year's end after clearing their credit cards and other debts.
This echoes what Karp reiterates in his book: "Controlling spending is far more important than the amount of your debt, which investments you choose or even how much you earn.''
And in some sense, people with large incomes may be in more urgent need of knowledge on how to control their spending than those with an annual salary of, say, US$50,000.
Karp offers many practical strategies for saving money, which are useful to everyone, rich or otherwise.
To save money, start by cutting constant expenses, say, "FIT'' costs - "food, insurance, and telecommunications,'' and unnecessary household expenses.
Consumers almost always can achieve substantial cuts in these areas without radically altering their lifestyles. But cuts in constant expenses add up to big savings over a lifetime.
To control spending on major purchases, such as a home, car, medical expenses, you should first make sure that you do need it and then make sure that you spend less than you make.
To illustrate, Karp suggests that when buying a house, you should keep your monthly payments on a 15-year mortgage less than 25 percent of your net monthly income.
Cutting purchases that make no sense is important. For instance, half a liter of water packaged in chic bottles can cost up to 10 yuan (US$1.50) in China, far more than the price of half a liter of gasoline.
By comparison, ordinary bottled water (as long as it passes strict testing standards) of the same amount costs much less, not to mention that tap water is even cheaper.
Perhaps the most valuable idea Karp provides is that to save money, you must "know thine enemy,"
He points out that people routinely make conceptual errors that keep them, if not poor, then at least struggling financially.
He cited an example.
Most people say that they would walk five blocks to save US$25 on a pair of US$75 shoes. However, the same individuals will not make the same five-block walk to save US$25 on a US$2,500 set of living room furniture.
Karp defines it as schizophrenic mental accounting, as the US$25 you can save on the living room set is the same as the US$25 you'd save on the shoes.
Indeed, different people make senseless spending in different areas for various reasons, and only by identifying their errors will they spend smart.
This is the central idea that Gregory Karp conveys in "Living Rich by Spending Smart."
Given the current rough economy, the idea is extremely valuable, not only to people with small incomes but also to those with considerable wealth.
Recently, my attention was drawn to a report by International Finance News titled "The 'Miserable' Life of One with an Annual Income of US$500,000 in New York."
Early this month, US President Barack Obama imposed a salary cap of US$500,000 for top executives at companies that receive large government bailouts.
This report discloses the "miserable'' life those top executives are expected to lead since such a "meager'' annual income will make it difficult for them to make ends meet if they continue to live in New York.
According to the report, for one with an annual salary of US$500,000 before taxes, the after-tax income is about US$269,000.
By comparison, the average family expenditure of those executives in New York may add up to over US$790,000, which includes an average flat in the city, the children's education fee in private schools, payments to drivers, maids, private fitness coach, at least two family travels, etc.
Holly Peterson, the author of "The Manny," describing life on the Upper East Side of New York, noted that even bankers there with an annual salary of US$2-3 million may end up saving no money at year's end after clearing their credit cards and other debts.
This echoes what Karp reiterates in his book: "Controlling spending is far more important than the amount of your debt, which investments you choose or even how much you earn.''
And in some sense, people with large incomes may be in more urgent need of knowledge on how to control their spending than those with an annual salary of, say, US$50,000.
Karp offers many practical strategies for saving money, which are useful to everyone, rich or otherwise.
To save money, start by cutting constant expenses, say, "FIT'' costs - "food, insurance, and telecommunications,'' and unnecessary household expenses.
Consumers almost always can achieve substantial cuts in these areas without radically altering their lifestyles. But cuts in constant expenses add up to big savings over a lifetime.
To control spending on major purchases, such as a home, car, medical expenses, you should first make sure that you do need it and then make sure that you spend less than you make.
To illustrate, Karp suggests that when buying a house, you should keep your monthly payments on a 15-year mortgage less than 25 percent of your net monthly income.
Cutting purchases that make no sense is important. For instance, half a liter of water packaged in chic bottles can cost up to 10 yuan (US$1.50) in China, far more than the price of half a liter of gasoline.
By comparison, ordinary bottled water (as long as it passes strict testing standards) of the same amount costs much less, not to mention that tap water is even cheaper.
Perhaps the most valuable idea Karp provides is that to save money, you must "know thine enemy,"
He points out that people routinely make conceptual errors that keep them, if not poor, then at least struggling financially.
He cited an example.
Most people say that they would walk five blocks to save US$25 on a pair of US$75 shoes. However, the same individuals will not make the same five-block walk to save US$25 on a US$2,500 set of living room furniture.
Karp defines it as schizophrenic mental accounting, as the US$25 you can save on the living room set is the same as the US$25 you'd save on the shoes.
Indeed, different people make senseless spending in different areas for various reasons, and only by identifying their errors will they spend smart.
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