Personal Finance: Leave-it-to-Fate Vs Self-Discipline Approach

What could you do if you could earn 10% more? Think about it for a while. If you got a raise tomorrow with a 10% bump in your salary, what would you do? If you are a business owner and if your business income rose by 10% how would you spend it? Would you pay off your debt a little faster? Add more to your retirement account? Add more to your kids’ college education fund? Start a new car fund?

Now think about this, how much control do you actually have in making your earnings go up by 10%? Let me use my own example. I am a software engineer. Last year with less than one year at my new work place I qualified for a measly 3.33% raise. This year, since I have been in the company for over a year maybe I will qualify for a higher raise. “Qualify” does not necessarily mean that I will actually receive that raise. My manager gets allocated a certain percentage that he can give to the engineers as performance based raise and in order to justify me receiving a higher percentage, I need to work hard. So, if I managed to spend *much* more than 40 hours a week at work, and am careful not to screw up throughout the year, then may be I will qualify for a 7-9% raise. Add to that the potential “extra” money I can make through this blog and maybe, just maybe, I will be able to make my income go up by 10%. Note that none of this is really under my control, it is just something I can hope and work hard for.

Now let’s look at it from a different perspective. I am sure all of you have guessed by now where this is going :) What could you do if you can save 10% more? Potentially the same things as above, except that we have a much better control over the money now. How much we earn is not something that we can determine. But how much we spend, and hence can save, is a lot more in our control. We may not always exercise this control, but we do have it.

If you spend $50 per month on a cell phone and $50 per month on a land line, can you get rid of one of them to be able to pocket $50 per month? $50 may not sound like much, but we have been landline-free for over 4 years now and the savings over that period is $2400 (I don’t remember exactly how much we paid for land line, so I am using a rough estimate of $50 per month for the calculations here). That’s a hefty chunk of change to be thrown at the debt. Or into a retirement account – imagine how much compound interest it can generate over the next 30 years!

What about eating out? How often do you eat out? Can you reduce the number of times you eat out? Or find alternate places that are less expensive? Less expensive does not always mean unhealthy. When we started looking in this direction, we were surprised at how many places we found which serve relatively healthy food for under $10 per person – sometimes as low as $6 per person. Our favorite is a healthy Wok place that offers a Mongolian style wok dinner where you pick your own vegetables and meat and they stir fry it for you, but with little or no oil, so the food is very healthy. And the cost per person is $6 - $10 depending on whether it is a week day, weekend or when they have a sea food special (Sunday night only). It is a completely nondescript place in a strip mall in a residential area. Finding such places is not easy, but if you are willing to experiment a little and keep your eyes and ears open, they are not very hard to find either. We have a list of about 4 - 5 such places in our neighborhood ranging from soup/salad places to Chinese to Thai to Indian food, but all of them healthy and cost under $10 per person for dinner (much lesser for lunch).

There are many, many ways that you can trim the fat in almost any budget. If you cook at home all the time, then cooking from scratch can save a bundle compared to cooking from packaged food. If you have a coffee/cigarette addiction, then reducing the number of times you get coffee/cigarette or switching to a lower priced brand could save some money. Shopping for used items, using coupons, picking up some skills to manage DIY projects… I could go on and on, but you get the point. Almost any budget has some room for trimming. Apparently, Lee Iacocca, responsible for the turn around of Chrysler once wrote that you could trim 10% from any budget without going through too much personal hard ship. If he can do that for a corporate budget, shouldn’t we be able to do better on a personal budget?

The approach 1, where we wait for a raise or increase in income to be able to meet our goal is a perfect example of the “Leave-it-to-Fate” approach. The approach 2 where we trim the fat off our budget either by living frugally or cutting some corners is a perfect example of the “Self-Discipline” approach. Obviously, the “Best” approach would be to combine the two. Here is a visual that explains what I mean.