Penny Pinching: A Game of Inches

"Penny pinching" is an old phrase dating back to the days of Ben Franklin when a penny had actual value and wasn't thrown into a jar or left on the counter.

Because of inflation old Ben's "penny" is worth a lot more than you might think today.

For most financially successful people, accumulating savings and wealth generally is done "by the inch," not by striking it rich with one big score. This is as true today as it was in Franklin's time.

Read on to find out how Ben's wisdom translates today:

In July 1998, Michael Leonetti of American Association of Individual Investors published a great article called, "Building Your Savings by Controlling Your Spending."

This article contains great information on penny pinching, saving money, and reducing spending, but the most important point in the article is demonstrated in the differences between buying a car for $25,000 versus one costing $15,000. Most of us would look at this choice as a $10,000 difference. But, for most of us, the difference would actually be $253 per month due to the extra financing costs.

If you are a financial planner, actuary, or other type of number nerd, the decision is not just a $10,000 short term decision, but a $1.3 million dollar long term decision!

Stay with me…Here is the logic from Mr. Leonetti's article:

If you have $253 of discretionary income you can choose to spend it to finance a higher priced car, or you can choose to buy the less expensive car and invest that $253 each month.

Saving or investing $253 per month with an 8% return for 35 years will give you a future value of $580,352.

At the end of that time, you can withdraw $4,479 per month over a period of 25 years for a total of $1.3 million in payments.

Frankly, few of us have an extra $253 per month to save. Few of us are struggling to decide over whether or not to spend an additional $10,000 to buy a car, and most of us aren't thinking past next payday let alone 35 years into the future, so let's add another assumption. You only have 20 years until retirement.

However, many of us make $25 per week decisions all the time without giving them a second thought.

Let's face some facts. There are a lot of ways we thoughtlessly spend $25 a week -- that's $5 each weekday. Instead of spending that money, start penny pinching!

Here are a few ways you might be spending $25 without giving it a second thought:

  • For those who have kids - how about those unplanned stops for fast-food on the way home from the soccer game, just to get everyone to keep quiet?
  • How about a pizza, soda, and a rented movie?
  • What about buying your lunch rather than brown-bagging it?

What decisions do you make that can save you $25 per week?

Now, using the same logic as above, what is the lifetime value of investing $25 per week?

$148,506! Won't that help in your retirement?

Here's how that breaks down: Saving or investing $25 per week with a return of 8% over 20 years will accumulate an amount equal to $64,137 (the power of compound interest!)

At that point you can then withdraw $495 per month for 25 years in retirement. The total you will have received is $148,506.

Can $25 per week significantly impact your financial future? Yes.

You can penny pinch for retirement or penny pinch your way out of debt as well.

If you think that having $64,137 set aside for retirement is insignificant, consider the statistics released by American Savings Educational Counsel 2009 Retirement Confidence Survey.

The survey indicates that 64% of those surveyed have less than $50,000 saved for retirement and it appears that 25% have saved nothing.

Small decisions have large impacts and the best way make sure you are saving all you can is to make a budget and win one inch (or $5) at a time.

Move on to Budgeting!

Go From Penny Pinching to Family Budgeting