Tough Times Series: Live Simply to Reap Savings

There is a movement underway to simplify our lives. Magazines, television programs, and Web sites offer devotees "101 Ways to De-clutter Your Kitchen" and "Tricks for Cutting Your To-Do List in Half." While these and other tips may fix what's ailing in a room of your house or in your daily schedule, one piece of advice has the power to both simplify and transform your life: Live beneath your means. Spending less than you earn results in less stuff and less stress.

Though the wisdom of adopting a live-beneath-your-means approach to personal money management may seem obvious, rising credit card debt, extensive home equity borrowing, and an alarmingly low consumer savings rate are evidence that frugality--defined in the cult classic "Your Money or Your Life" as a "high joy-to-stuff ratio"--must be a bigger challenge for Americans than one would expect. In fact, observers note that rather than socking away that annual raise, many U.S. workers simply increase their spending to match any growth in earnings--make 10% more, spend 10% more.

Still, if you're eager to get off the earn-and-spend treadmill and start living beneath your means, you can make the shift to a lifestyle that embraces moderation and eschews excess.

A successful transition requires a change in both your spending habits and your relationship with money. And changing your thinking is always more challenging than de-cluttering your kitchen.

Real change only possible with new mindset

In their best-selling book, "Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence," co-authors Joe Dominguez and Vicki Robin explore the role of money in our lives and its power over us.

Among other distressing observations, Dominguez and Robin note that Americans "project onto money the capacity to fulfill our fantasies, allay our fears, soothe our pain, and send us soaring to the heights....We buy everything from hope to happiness."

Funny thing, spending as a means to achieve greater fulfillment doesn't seem to work. Various formal and informal surveys, including one conducted by Dominguez, conclude that consumers on the higher end of the middle-class earning and spending scale are not any happier than those on the lower end.

So why do we keep spending beyond our means? Habit may be partly to blame. A daily routine that includes latte, lunch, and snack purchases could have you spending $10 a day without prompting a second thought.

To avoid mindless spending, Dominguez and Robin encourage consumers to ask of each expenditure whether it brought "fulfillment, satisfaction, and value in proportion to life energy spent?" "Life energy," a concept presented in their book, is the work it takes you to pay for a purchase. When you realize that two hours at a fancy restaurant will cost you nine hours of your energy, you start to analyze your spending choices more critically.

Alan Seid is president of the board of directors of the New Road Map Foundation, a nonprofit organization in Seattle that fosters sustainable ways of life and teaches the "Your Money or Your Life" nine-step program. Seid says that while the point of the book and course is not specifically to spend less money, expenditures just naturally tend to level off once people figure out that they do not need to spend more to maximize their quality of life. The key is figuring out what is enough and what is just excess.

For those who tend to overspend in a big way--say, frequently upgrading to a new car, taking lavish trips, amassing a wardrobe that fills three closets, or always having the latest and greatest "toys,"--Seid suggests asking yourself what need you are trying to fulfill through your strategy of buying. Whatever it is--acceptance and self-esteem, for example--"you need to find a way to get fulfillment from something cheaper."

"Once they've made a healthy distinction between the ways they try to meet deeper needs and the needs themselves, they free up some creativity to explore the many, many strategies possible to meet any need. This alone can help us save lots of money," says Seid.

Another important shift in mindset that needs to be made before you can switch gears from spender to saver: Stop viewing spending as a reward and saving as deprivation. That outlook will doom any attempt to apply the tips and tools that will help you live beneath your means. Instead, see overspending as depriving you of the freedom to make choices about how to live and work, and see living beneath your means as the path to such rewards as peace of mind, financial independence, and the opportunity to do what you want with your life.

Straightforward steps reduce spending, increase saving

The point of living beneath your means is to avoid debt and save for what is most important to you--homeownership, freedom to spend time with your kids, early retirement, or whatever makes you look forward to getting up in the morning. Keeping your reward in mind will make adopting these tips and techniques for frugal living perfectly painless.

Make saving automatic. According to David Bach's book "The Automatic Millionaire: A Powerful One-Step Plan to Live and Finish Rich," the key to accumulating wealth is to pay yourself first, automatically. That's easy to do: Just ask at your credit union to set up a funds transfer from the account where your paycheck is deposited to a savings or investment account. You choose the day and the amount. If you do this, and you don't use credit or tap savings, you'll automatically be living beneath your means.

Track your spending. The point of writing down everything you spend is not to make you obsessive about your money, it's to make you aware of your choices. "It's easy to run on automatic," says Seid, who has been tracking his expenses in a small notebook since 1992. Your routine--do you go out to dinner every Friday and Saturday night?--may be one of the biggest obstacles to reducing your spending.

Challenge every expense. Compile a list of everything you spend money on. Then look at every essential expense, from housing and food to transportation and phone service, and determine how you might be able to reduce each one. Then make a list of your nonessential spending (for example, entertainment, meals out, and vacations) and determine which expenditures deliver the greatest bang for your buck and which may be enjoyable but not essential to your happiness. Continue spending only on those things that are most important to you, but brainstorm ways to save money in those areas too. For example, if you love eating out, you could substitute a less-expensive brunch for dinner.

Avoid temptation. The easiest way to do that is to abandon shopping as a recreational activity. It's harder to ignore the media. Many celebrity and style magazines have more pages of luxury-item ads than they do editorial content. And Juliet Schor, in her book "The Overspent American: Why We Want What We Don't Need," concludes that the more TV a person watches, the more he or she is likely to spend. It's not all because of commercials. Schor says we're no longer striving to keep up with the Joneses, we're emulating the lifestyles portrayed on our favorite programs. Relatively few Americans can live beneath their means and still afford to keep up with the characters on shows like "Frasier" and "Sex and the City."

If you're looking for a way to simplify and improve your life, put the kitchen cabinets and your to-do list on the back burner for a while and work first on living beneath your means. You'll be surprised, once you achieve that, how many other things in your life will just fall into place.

Published October 31, 2009, Reviewed January 4, 2010