A dollar saved is two dollars earned. That's one of the concepts taught in David Chilton's The Wealthy Barber, which I recommended in Top Ten Personal Finance Books. I've been rereading it again lately and that piece jumped out at me. First, because it is so powerful, and second, because I'm not sure that the math works out for my family. I'm going to hit each point separately:
It's powerful: The concept is pretty amazing. Saving $15 dollars at the grocery store by checking sales and making smart choices is work $30 worth of income. Make a few adjustments to your car insurance, save $40 every six months, and it's worth $80 worth of work. PIck the less expensive apartment ($190 a month) and it is worth a second job that pays $380 each month. Suddenly, skipping that vending machine soda sounds pretty smart. Most of Chilton's book deals with the big picture stuff: paying yourself first, being appropriately insured, etc. But this little tidbit can help make a small paycheck stretch a little further.
This next section deals with what he means, and whether it is accurate. The position that Chilton is making is that by the time you take out deductions and expenses, half of each dollar that you earn is gone before it hits your checkbook. I think that is a little extreme. Here's the math: Say you make $2000 per month in pay. Social Security taxes (FICA and Medicare) will take 7.65%, and you might be in the 25% tax bracket. You're already down to $1347! If you pay state taxes, take out another chunk. Then add in any expenses that come with working: picking up lunch instead of eating at home, transportation, having special (or just decent) clothes, maybe child care. It doesn't take long before you're down to the half mark. In fact, for some people, it might be a lot less than half.
On the other hand, if you don't need child care or snazzy clothes, you bring your lunch to work, and you are in a low tax bracket (as many military members are,) the number might be a lot higher. You might be bringing home 90 cents for every dollar you earn.
Either way, it is an interesting idea and one that might help you to change your spending. What if everything suddenly cost twice what it does now? What would you cut out and what would you keep? Obviously, you would still need a place to live and food to eat. But could you live in a smaller house, or make less expensive food choices? Would that new video game be so fun if it were twice as expensive? Thinking this way would certainly help me to prioritize my spending.
Chilton's point was that you should keep any eye on expenses to maximize the use of your money. He's certainly right about that!
