The $1,000 Challenge, Part 6: Finding Big Savings in Little Purchases

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At the risk of sounding like a bad reality-TV promo, here goes: "This week in The $1,000 Challenge -- things get personal!" And by that I mean "personal spending."

As the syndicated Funny Money columnist for The Detroit News, I thought trying to cut my family's personal spending would be emotionally fraught. But when managed properly, this turns out to be the family budget category that ensures wedded and financial bliss, with no arguments about why I can't spend $30 on designer duct tape, and no accusations that Mrs. Funny Money fritters away our hard-earned dough at the nail salon. To eliminate petty squabbling, we decided that petty cash would be divided into categories of "Yours," "Mine," and "Ours."

(I'm only going to hit the high points here, but if you want more details, check out my book, "The $1,000 Challenge." In my 10-week experiment, I cut an average of $100 each per month from my 10 biggest family spending categories, saving $1,000 in monthly spending.)

A check of my sketchy bookkeeping on the personal spending category found that Mrs. Funny Money and I averaged $52 a week in personal spending on clothes, skin cream, visits to Starbucks (SBUX) and other sundries. Most of the money came out of our accounts via ATM withdrawals, to be spent in cash, but reviewing the debit card purchases at least gave me a notion of where my personal spending money was going -- and there was certainly room to save.

My biggest outflow was lunch, which I should pack, not only for financial reasons but health reasons, too, since I work just a few blocks from Detroit's two greatest Coney Island restaurants.

The ugly surprise was that I'd paid almost $10 a month in bank fees that year, for ATM surcharges or when the account balance fell to the point where I incurred a maintenance fee.

My money coach, Robin Thompson of Budget Wise Consulting in Sterling Heights, Mich., had the answer: cash.

"When it comes to debit and credit cards, I call it 'magic money,' " she says. "You never see it as spending real money." Thompson advises using the old-fashioned but reliable envelope system for any type of discretionary spending. "These variable expenses get us into trouble because they're prone to impulse spending," she says. "We don't say, 'Wow! Let me make an extra car payment!'"

The biggest embarrassment of my entire 10-week series of budget-cutting columns was the fact that I was paying about $10 a month in fees to get back my own money at the ATM. I've railed against these outrageous fees for years, and yet I still got nabbed by them. But you can sidestep ATM fees with some shopping and planning. Online banks and some credit unions will give you a set number of free ATM transactions each month at any machine, or they might rebate any ATM fees you pay. Credit unions also operate a fee-free network of machines.

Paying cash for small purchases helps you avoid another nasty bank charge -- the "courtesy overdraft" fee. It's easy to lose track of small purchases, especially if you and your spouse are making them on debit cards, and then -- wham! -- a $4 sandwich gets you socked with a $35 overdraft fee. Besides cash, your best bet is to carefully track your balance, set up account alerts if your bank offers them, and link your checking account to a savings account or credit card for cheaper overdraft protection if you happen to slip up.

The other cool part of paying with cash is that you spend less. Cash feels more "real" than paying with anything else, from a credit card to trinkets and beads. Studies have also found that parting with your hard-earned greenbacks is physically uncomfortable -- they call it "the pain of paying."

When it came to saving on lunches, I was amazed at how little effort it took to save a significant amount. A typical lunch in the cafeteria used to run me about $7. Instead, I discovered I could get a week's worth of Weight Watchers (WTW) microwave entrées, two bags of frozen mixed vegetables, and a half-dozen bottles of generic seltzer and cut my cost to about $4 a day.

Sharing a newsroom coffeemaker with a half dozen other caffeine addicts brought my habit down from as much as $3.50 a day to the price of a can of coffee once a month. It added up to savings of $50 a month on coffee alone, and even more if I watched for sales.

Now, with things like accessing cash, packing your lunch, and sundry spending, you're going to have good weeks and bad weeks, so if you're working late and run out of time to shop and pack lunch, don't beat yourself up. Look at where you went wrong and adjust. It's easier to be disciplined with these kinds of ongoing saving strategies if you set up a system, such as getting all your cash on payday, and sitting down to plan out your lunch menus at a set time each week. If nothing else, grab a pack of hot dogs and buns, a few cans of soup, and you can microwave a decent, inexpensive lunch with nearly no thought at all.

Beyond bank fees and lunch, who knows how you or anyone else will manage to cut back when it comes to personal discretionary spending. Lord knows that I don't want to know what Mrs. Funny Money spends her personal cash on and how she cut back, and I'd certainly be embarrassed to have her know how stupidly I spent my cash in the past.

%VIRTUAL-article-sponsoredlinks%After weighing all the options, Mrs. Funny Money and I agreed that we could each get by on personal spending of $40 a week instead of $52 or more. If we saved a bunch, that freed up money for whatever else either of us wanted, as long as we stuck to the $40 weekly limit. If we buy something online with a credit card, we deposit cash in the checking account to cover the bill.

That saved $104 a month, with nary a marital squabble, thanks to the cooperative and understanding Mrs. Funny Money. Ideally, our new all-cash approach will allow us to find ways to trim without cutting out the things that are important to each of us.

"After all," said Mrs. Funny Money, batting her eyelashes, "new makeup and nice clothes make me feel romantic."

"Oh, sweetie," I said, handing her a martini, "that's what the gin's for."

Here's the running total for the whole series so far:
  • Week 1 - Miscellaneous Spending: $132.89
  • Week 2 - Utilities and Phones: $139.39
  • Week 3 - Transportation Costs: $41.61
  • Week 4 - Kid Costs: $114.50
  • Week 5 - Work Costs: $90
  • Week 6 - Personal Spending: $104
  • Total Monthly Savings: $622.39

Read them in any order you want -- just get in there and start saving! Check out the series introduction to get the big picture on finding big savings in your family budget. You can check here on DailyFinance.com, follow me on Twitter, or go like The $1,000 Challenge Facebook page to get a heads up whenever a new installment comes online. Or better still -- don't buy the book. WIN it free. DailyFinance is giving away 10 copies over the next six weeks, and all you need to do to toss your name in the virtual hat is follow @daily_finance on Twitter and re-tweet one of our $1,000 Challenge Giveaway Tweets. To find our tweets easily, search for #dailyfinancegiveaways.

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The $1,000 Challenge, Part 6: Finding Big Savings in Little Purchases

Nearly one in four people say they don't have money to contribute to retirement after all the bills are paid. It might feel that way sometimes, but if we can find the $50 to go out to dinner every Tuesday night, we can find $200 a month to put in a retirement account. Make this happen, even if you have to do it one dollar at a time over the course of the month.

And if you think putting away $50 a week won't make a difference, consider this: Contribute just $200 a month for thirty years, and if your money grows on average 8% a year, your total contributions of $72,000 will grow to almost $300,000 if put away for 30 years. When you think about it that way, skipping that regular Tuesday dinner doesn't seem so bad, does it?

This is one of the most seductive retirement lies. For a good long while, it is true that retirement is a ways off. (Even if you're 55, it's still at least ten years away.) But the longer you put off saving for retirement, the less interest you'll earn and the more difficult it will be for you to save.

An example: Alex and Jordan both put just over $90,000 in their retirement accounts over the years, but Alex began saving ($2,000 per year) at age 22, while Jordan began saving (about $3,500 per year) 20 years later at age 42. Even though they both put in the same total amount, Alex will have over twice as much money at retirement as Jordan will when they reach age sixty-seven (assumes a 6% annual rate of return). That's because her money had more time to grow, so it was able to make more off of itself than Jordan's.*

Seriously, you have two people who put the same dollar amount into their retirement funds. The one who started twenty years later contributed the same amount, but ended up with less than half as much.

As someone who cares about making my money work for me, this speaks volumes. It turns out that one of the smartest things you can do is simply to get time on your side. This is how you shortcut the hard work-by taking advantage of the power of compounding interest and the fact that you will only have an increasing number of financial obligations pulling at your purse strings as the years go by. So, this is not something you can keep putting off. This is something to tackle today. The time is now.

* Note: This is illustrative and is not reflective of guaranteed profits over time. Actual results may fluctuate based on market conditions.

I bet all the married people reading this are having a good laugh right now. Marriage does not automatically make your financial life easier. The effect of marriage on your finances depends on a host of factors: Do you both work? Do you both make enough to support yourselves? If one or both of you got laid off, could you still afford your rent or mortgage? Are you honest with each other about your spending? Do you agree on your financial goals? Will you have children? If so, do you make enough that one of you can stay home with them? Bottom line: This is an outrageous excuse, and now I am drinking wine.
Maybe today's retirees can say this. But the future of Social Security is uncertain. Anyone retiring in the coming years should not rely on this as a be-all and end-all. If the system doesn't go bankrupt and you get to plan B? I don't know about you, but that's a risk I won't take.
I hear you. But saving for retirement versus enjoying life now is not an either/or proposition. You can do both. Also, let me put it this way: Yes, you deserve to enjoy

your money now, but you also deserve not to count pennies when you're old.

This is a case of counting chickens before they hatch. You never know what could happen to the inheritance (it could be devoured by medical bills, it could dwindle away in a financial crisis, or you may need it to pay off debts or taxes of the estate). Sure, it would be nice to inherit a windfall and be able to put it toward your retirement, but counting on doing so is not a plan-it's a gamble at best. It's far safer to plan to fund your own retirement and then enjoy your inheritance as a bonus if you do indeed receive one.
Yes, the market is unreliable from year to year, and yes, the value of your investments will dip in a down market. But downswings don't last forever, and historically, over long periods of time, the market has shown solid returns. While past performance doesn't reveal future returns, the S&P 500, for example, has averaged 9.28% annual returns over the last 25 years.

Alternatively, let's say you leave your money under your mattress or even in a savings account bearing 1% interest: You're going to lose the purchasing power of those dollars due to inflation (which is estimated at 3%). Yes, with the market, you're opening yourself up to some risk -- but with risk comes reward.

No one can predict the market. No one. So while it's true that you cannot time your investments perfectly so that they only ever go up, history has shown that if you invest regularly over decades, your investments should experience more ups than downs. So invest for the long haul, and don't fret over minor dips now. If you do, you'll be missing out on an opportunity to amass money later.
Sure, selling your home will free up lots of cash ... but then where will you live? And what if the market is down when you want to sell that home? Remember the housing crisis a few years ago? The one where tens of thousands of near retirees were left without nest eggs after the values of their homes plummeted? This is not your smartest game plan.
Yes, college is a big expense, and you should definitely save for it-that is, once your own retirement needs are taken care of. If you're a parent, it's a natural instinct to put your children's futures before your own. But think about it this way: If you don't save the full amount for your children's college education, you can always fall back on financial aid, grants, scholarships and student loans to help pay your children's way. When it comes to your retirement, however, there are no loans. Let me repeat: There are no loans. All you'll have to live on is what you've saved. For that reason, saving for retirement should be your top financial priority-always. I get that you don't want to saddle your kids or future kids with loans- what parent would?

But remember that if you pay for your children's college and then cannot afford your retirement, you will end up burdening your children all the same. They will feel obligated to help you out-at a time when their own families need them financially.

You may love your work, and it may be the kind of work you can even imagine yourself doing well into your seventies or eighties. But while that's easy to say now, what if you can't find work at that point in your life, or what if you have health problems or family obligations that prevent you from working? While there is nothing wrong with hoping for a best-case scenario, it isn't wise to plan around one. Sock away some money now so you're ready for whatever may come your way. The last thing I ever want you to deal with is a health issue and money concerns at the same time.


Reprinted from the book "Financially Fearless: The LearnVest Program for Taking Control of Your Money" by Alexa von Tobel, CFP®. Copyright 2013 by Alexa von Tobel. Published by Crown Business, an imprint of the Crown Publishing Group, a division of Random House LLC, a Penguin Random House Company.

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