As I mentioned earlier, Consumer Reports makes it sound easy for the average family to find $500 a month in saved expenses. Scott Burns calls this the “power of attentive spending.” Pay attention to the little details and you can end the year with $6,000 more in your pocket than you would have otherwise.
The $6,000 in “found money” is tax-free. By reclaiming money you’ve earned but might have spent, you’ve basically increased your income without adding any extra tax expense. It’s not technically correct, but it’s an interesting way of looking at saving money. Think of what else you could do to increase your *after-tax income* by $6,000.
You could get a raise or a promotion, but usually these things have to be deserved. Working harder at your day job may inspire your boss to reward you with a bonus, raise, or promotion, but to make that $6,000 increase in your pocket, you may need a $10,000 increase in your paycheck. Scott Burns points out that a $6,000 increase represents *six years of typical annual increases* for the average employee.
It will be just as difficult for many people to generate that same additional annual $6,000 through investments.
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.
You might fare better in interest-bearing savings accounts. In the 33% tax bracket, you would need to earn $8,955 before taxes in interest income. Earning an annual 3.5% which is possible right now in a few high-yield savings accounts, you would need a starting balance of $255,864 to end up with $6,000 in taxes. That would be an additional $255,864 above what you have saved now.
Looking at these numbers, finding possible savings within expenses looks like a good option.
Published or updated August 13, 2008.