Markets & Finance

Three Cheers for the Cheapskate


Spending money now can be fun, but it can hurt your future financial well-being if you don't save enough. Here's how to cut back

Higher gas and fuel prices are making it harder for Americans to do something they're not too keen on anyway—saving for the future. Even before the recent economic slowdown and spike in commodity prices squeezed household budgets, Americans were spending too much by many measures. The national savings rate has hovered just above 0% in recent years, even as a generation of baby boomers quickly approach retirement. The rate was more than 10% as recently as the 1980s.

Now that economic times are tough, many Americans are looking for ways to cut back spending. The accompanying slide show provides many suggestions for reducing expenses.

Those tips can help cut monthly bills, but financial advisers say permanently cutting spending and increasing savings also requires a shift in attitude. For example, let's get one thing clear: By cutting back, you're not really giving up anything. The money you save will still be available for future needs. Plus, if given enough time to compound, those savings double and triple in value when invested properly—giving you even more to spend later.

Ramen in Retirement?

Financial planners often run analyses to demonstrate how overspending today makes it impossible to achieve dreams tomorrow—whether the goal is a major purchase, an early retirement, or an adequate income in retirement. "Humans are really good at understanding the costs and consequences of short-term" decisions, says financial adviser Chris Long of Long & Associates in Chicago. "We tend to discount long-term costs."

Save enough now so you can maintain the same standard of living throughout your life, planners say. "We don't want [clients] to retire and all of a sudden [have to] live on Ramen noodles," says Stephen Lukan of John E. Sestina & Co. in Columbus, Ohio.

To persuade clients to reduce expenses, planners also analyze exactly how the money is being spent—information surprisingly few initially grasp. People "have an idea of how much they spend," Lukan says. But "they don't know where it's going."

Match Goals to Spending

Everyone will choose to adjust their spending in different ways. But planners advise clients to make sure their spending is matching their goals and values. "All you're doing is aligning your spending with what you think is really important to you," Long says.

The process of cutting spending "really makes you look at what you want to get out of your life," says Liz Cauble of St. Louis-based Cauble & Harre Wealth Management. With this perspective—thinking long-term and focused on what really matters to you—cutting expenses can be easier.

"We are all in control of our spending," says Karen McIntyre of Vantage Point Advisors in Lower Gwynedd, Pa. Controlling spending requires extra thought every time you open your wallet—being an educated, responsible consumer, she says.

It can take some time to adjust to a tighter budget. Extra measures are usually needed to help people stick to a new spending regime. Lukan compares it to a diet. "If you don't focus on it, it won't happen," he says. Just as dieters need to step on the scale and tally up their calories and exercise each day, spenders must track expenses carefully.

Don't Neglect Essentials

McIntyre says a strict, formal budget is usually unnecessary for her clients. Long advises clients to set up special bank accounts, accessed through a debit card, out of which all discretionary purchases must be made. Clients are forced to constantly monitor the account's balance and "if they spend too much, they're immediately aware of it," he says.

Is it possible to go overboard with the cost-cutting? You're cutting too much if you're neglecting essential needs. For example, you should never go without health insurance just to save money, Cauble says. Also, "you don't want to be feeling like you're depriving yourself," she says, "because then you're not going to stick to your goals." Cauble advises setting aside a little bit of money each week, perhaps $10 or $20, for small luxuries. "Everyone has their little guilty pleasures," she says.

And that's the whole point of cutting spending: The goal is to save money now so you can continue enjoying your money—on both essential and frivolous expenses—for decades to come.

For more on saving tips, see BusinessWeek.com's slide show.

Business Exchange related topics:

Recession Spending and Investing

Retirement Strategies

Saving for College

Credit Crunch

Recession Proofing Your Job

Steverman is a reporter for BusinessWeek's Investing channel.

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