Scott Burns

Efficient spending, not belt-tightening, can produce large gains in after-tax income

Email|Print|Single Page| Text size + By Scott Burns
August 13, 2008

Today, most people are worried about stock-market losses. They fret about low yields on their bonds and CDs. They are anxious about the value of their homes. And they are grinding their teeth about whether they will ever see a pay raise again. That's more Maalox moments than most of us can handle.

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 - by examining the cost of only six items. The magazine estimates a typical household can save:

  • $65 monthly by getting cheaper car insurance.

  • $110 by optimizing life insurance.

  • $200 with 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 important to note this isn't belt-tightening. It doesn't mean a drop in your standard of living. It's efficiency, not penny-pinching.

    With a median household income of $31,987, that $6,000 a year in savings is better than an 18.8 percent raise for the median US household.

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

    Simple. That $6,000 of savings is after-tax income, not pretax income.

    Ask what you'd need to have in investments to produce $6,000 of 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 of your return from a portfolio of common stocks. At a 15 percent 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 percent, 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 for Americans for Secure Retirement, for instance, found that households with $50,000 of 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 of 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 percent 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.

    Scott Burns is a syndicated columnist. He can be reached at

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