Save $6,000 by paying attention

By Scott Burns

Yes, there is a silver lining in the gigantic cloud that surrounds us. It's small, but it has a value far greater than most people realize.

I call it the Power of Attentive Spending.

Today, many people are worried about losses in the stock market. They are fretful about low yields on their bonds and certificates of deposit. They are anxious about the value of their homes. And they are grating their teeth about whether they will ever see a pay raise again.

Basically, we're surrounded by an infuriating collection of things we can't change, influence or control. That's more Maalox moments than most of us can handle.

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But all of those miseries increase the value of something we can actually do: spend the money we have with care and attention. The August issue of Consumer Reports, for instance, says a typical household can cut its expenses by $500 a month. And it can do so by examining the cost of only six items.

Some households will save more, some less, but the magazine estimates that a typical household can save:

• $65 monthly by getting cheaper car insurance.

• $110 by optimizing its life insurance.

• $200 through smart food shopping.

• $35 in phone costs.

• $25 in bank fees.

• $65 by paying off credit card debt.

That's a lot of money.

It's also important to note that this isn't "belt-tightening." It isn't the kind of spending reductions that mean a drop in your standard of living. It's efficiency, not penny-pinching.

Better than a raise

With a household income of $31,987, that $6,000 a year in savings is better than an 18.8% raise for the median American household. That's nearly six years of income increases, according to the wage figures for the average private-sector worker tracked by economic indicators. (The average worker's weekly wages were $606.94 in June, and you have to go back to November 2002 for the average weekly wage to be $510.89.)

Why is the gain from attentive spending better than an 18.8% wage gain?

Simple. That $6,000 in savings is after-tax income, not pretax income. Spend a few hours -- even a few days -- looking at alternatives, and a typical household can find economic benefits that are literally worth weeks of job-time work.

What you'd have to invest

The benefits are even more interesting if you ask what you'd need to have in investments to produce $6,000 in after-tax investment income. Do that and you learn that your attentive-spending "portfolio" is greater than the amount most people have accumulated in their retirement plans.

Suppose, for instance, you have the good fortune to live in a no-income-tax state and want to get all your return from a portfolio of common stocks. At a 15% tax rate on dividends, you'd have to collect gross dividends of $7,059 to net $6,000 a year. With the S&P 500 Index yielding 2.29%, you'd need to have $308,246 in your portfolio.

That's a very impressive number.

Indeed, it compares favorably with the financial assets most households accumulate over an entire career. A recent study done by Ernst & Young for Americans for Secure Retirement, for instance, found that households with $50,000 in income had an average of $105,000 in financial assets as near retirees (age 55 to 59) and $175,000 in financial assets as new retirees (age 60 to 64). Households with $100,000 in income had $280,000 as near retirees and $585,000 as new retirees.

Since a household income of $103,000 puts your household close to the top 10% of all households in America, it's pretty safe to say that nine out of 10 households would benefit greatly by paying careful attention to how they spend their money.

Published Aug. 13, 2008