Wednesday, December 9, 2009

DISPOSABLE INCOME and Cost Cutting

Further to my previous entry regarding Disposable Income and Part Time Work, it is worthwhile to explore the same concept with regard to cost-cutting of your personal overhead.

Many folks, reading a blog like this, will get impatient and say "Well, I make a lot of money, so I don't have to worry about that! Why should I worry about saving $100 when I can go out and make that much money in a couple of hours!"

And it is true, if you are making $100,000 a year, you are making the equivalent of $50 an hour. That's a lot of money. And when you think in terms like that, it seems that an expense of $5, $10, or even $50 is pretty trivial in the greater scheme of things.

Well, "making" $50 an hour is not quite right. You are costing your employer (or your customers) that much, if not more (with employer matching funds, every dollar you make costs your employer $1.15). That annual salary number represents your gross pre-taxable income. Once you deduct Federal and State Income Taxes, Social Security payments and Medicare payments, you'd be lucky to take home half that much.

But as I illustrated in my previous example, most people have fixed expenses that cannot be cut too much. You have to make the mortgage payment, pay home owner's insurance, property taxes, maybe car payments and car insurance. And you have to buy food and clothing for you and your family.

So, when you deduct all those taxes and all those "fixed" expenses, it leave you with little in the way of disposable income. Maybe 1/10th of your income is really spendable (or savable). You might be making $100,000 a year, but you get to "spend" only $10,000 of it, in terms of money in your pocket.

So even assuming you are a big-shot with a six-figure salary, saving $100 on some expense is a big deal. Because to "earn" the same amount of additional disposable income, you'd have to increase your salary by 10 times as much - or $1,000.

Would you turn down a $1000 raise? I think not! Yet many people will shrug off an unnecessary $100 expense as merely the cost of doing business or a trivial amount not to be bothered with.

If you can cut some expense in your life, it is a big deal. And if you think creatively and continue to think creatively about your spending habits, you can live a better life for a lot less money.

Today, for example, I called the utility company about my bill. They charge me a minimum of $25 a month for the electric service for my lake cottage, even in the dead of winter when the power is off. I asked if they could disconnect the power without a service charge, and lo and behold, I discovered that they could - with no re-connect fee, either. For the six months I am not there, I will save $150 in unnecessary expense.

That may seem like a trivial amount, but it equates to an increase of gross income of $1500, if you think in terms of Disposable Income versus Gross Income.

A five minute phone call is all it took - and I am sorry I did not think of this five years ago! I would have $750 more in the bank by now. And for subscription-type services (where you are billed monthly over time) savings do add up over time as well. So saving $10 a month on your phone bill might not seem like a big deal, but over a year, that is $120, and over a decade, $1200, not including interest. It adds up, and if you can squeeze a dollar here, $5 there, or maybe $10 somewhere else, it can end up putting thousands of dollars in your hand, which effectively would be equivalent to tens of thousands of dollars in a pay raise.

Unlike increases in income, cost savings are not taxable. So every dollar you save goes right into your pocket. A big salary and a big pay raise is nice, but one thing you discover quickly about the big salary is that you don't feel much richer as a result of it.

So the next time you hear someone say "Well, it isn't worth it" to cut expenses and save money, don't listen to them. Chances are that person is broke, and they have no idea why...

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