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There are so many ways to save money. You can spend less on just about anything without giving up either the pleasure you take in buying or the quality you get from your purchases.
Instead of buying new clothes that will be out of style in a year, buy vintage clothing that looks great and distinguishes you.
Instead of signing a lease for an expensive car you canít afford, find something old but still good that has a personality.
Step 3: Develop Wealthy Habits 85
Instead of going out to lunch every day, eat a can of tuna at your desk. (This is one of the things I did. By eating a can of tuna every day instead of going to lunch with my coworkers, I saved almost $2,500 in a single year. Plus, I went from staff editor to publisher by applying that extra lunch-hour time to improving the business.)
Donít worryóIím not going to try to turn you into a miser. The purpose of spending less is to have more. I enjoy the luxuries that wealth can bring, butóas Iíll explain lateróI donít believe you have to spend a lot more to get them.
Youíll have your cake and eat it, too. Youíll spend less, waste less, save more, and have plenty left over to enjoy life.
7. WEALTHY PEOPLE PAY THEMSELVES FIRST
Many financial advisers recommend sticking to a budget. By categorizing expenses and limiting spending, they argue, you can have enough left over every month to save money and grow rich.
The trouble is that budgeting almost never works.
Budgeting is like dieting: Itís enormously sensible but almost never effective. Iíve tried budgeting myself a dozen times. Iíve also made the mistake of encouraging others to keep a budget. I canít think of a single case where it worked.
The problem is that when you budget, you pay everyone else first. As best-selling author David Bach says:
[You] pay the landlord, the credit card company, the telephone company, the government, and on and on. The reason [you] think [you] need a budget is to . . . figure out how much to pay everyone else so at the end of the month [you] will have something ďleft overĒ to pay [yourself.]
So at the end of the month, you have nothing left to put in the bank. You promise yourself youíll do better next time, but you never do. There are always unexpected bills to pay, unanticipated sales to take advantage of, and that impossible-to-figure-out $200 or $300 that seems to fall through the cracks.
Budgeting doesnít work. But there is something that does: putting
86 AUTOMATIC WEALTH
some predetermined percentage of your income into a savings account each month before you pay any of your bills.
Think of yourself as a personal corporation and the money you save as your personal income. All the other money you spend on house and car payments and so forth are the expenses of your personal corporation. Only the portion that goes into a savings account is really yours.
Of course, itís not enough to simply think of your income this way. You must actually do something to effect a change. You might, for example, have a portion of your paycheck automatically deposited in your savings account each monthóas soon as the check is deposited.
Paying yourself first in this sense (i.e., saving before you pay bills) is actually, as Bach points out, paying yourself second. He reminds us that withholding taxes are the governmentís way of paying itself first. Before your salary is deposited into your checking account, the government has already taken its piece.
You can put yourself ahead of the government by setting up a pretax retirement account. Among the best known are IRAs, SEPs, 401 (k)s, and 403(b)s. Table 3.2 shows the differences among these plans.
401(k) and 403(b) Plans
These plans are designed for employees of midsized to large companies. Contributions are deductible from current taxable income and sometimes the employer makes a matching contribution. Check your employee handbook to learn what your match percentage is and if there is a vesting period. There's no good reason not to contribute 100 percent of what your employer will match. It's like doubling your money for nothing. When you are retired, you'll appreciate that free money from your employer's contribution and the compounding it may have produced. The maximum pretax amounts you can add are as follows:
YEAR LIMIT 401(k) LIMIT 403(b) OVER-50 CATCH-UP BONUS
2004 $13,000 $3,000 $500
2005 $14,000 $4,000 $1,000
Step 3: Develop Wealthy Habits 87
Traditional IRA and Roth IRA
You may open one of these tax-qualified accounts at any bank or financial services company (e.g., a brokerage firm or an insurance company). There are income limits that may prevent higher income tax payers from taking a full deduction on their contribution. A key advantage in this type of plan is that you have a much broader selection of investments that you can choose to put the money in, including individual stocks, mutual funds, and other financial tools. You also have flexible withdrawal options without penalties that are not permitted for 401(k) plans. These include