TipThe toughest part of taking control of your finances is getting started. I recommend setting aside a single day (a "Money Day") to tackle all of your financial ch.o.r.es at once. To learn more, head to this book's Missing CD page at www.missingmanuals.com.

PartII.

Laying the Foundation

Chapter5.The Magic of Thinking Small.

"Be industrious and frugal, and you will be rich and you will be rich."-Benjamin Franklin Frugality. Thrift. Economy. Whatever you call it, the idea is the same: using your money and resources carefully. If you don't spend mindfully, your hard-earned dollars slip through your fingers and it's hard to get ahead. By being frugal, you make conscious choices that'll help you live well tomorrow and today.

As you'll see in the following pages, you can be frugal and still wear nice clothes, dine out on occasion, and buy new things. Frugality means making the most of your money by focusing on everyday expenses (as opposed to big-ticket items, which you'll learn more about in Chapter9 Chapter9) and recognizing that small amounts matter. It's a skill that anyone can hone, and it lays the groundwork for sound financial habits throughout your life. This chapter explains why it's important to cut costs on the small things-and suggests strategies for doing just that.

TipTo commit fully to changing your lifestyle and embracing frugality, you have to keep your goals in mind. (Hop back to Chapter2 Chapter2 for a refresher on goals.) If you lose track of why you're making sacrifices, frugality will become a burden and you won't stick to your plan. for a refresher on goals.) If you lose track of why you're making sacrifices, frugality will become a burden and you won't stick to your plan.

Why Frugality Matters Thrift is nothing new. In fact, it used to be fashionable-you were admired if you watched your nickels and dimes-but that's no longer the case. Over the past 50 years, frugality has gained something of a bad reputation.

Many people equate being frugal with being cheap. But there's a difference: When you eat stale crackers with your soup for lunch, you're being frugal. When you serve stale crackers to your guests to eat with their soup, you're being cheap. You cross the line when your habits affect others, not just you.

Part of the reason thrift fell from grace is that there's no profit in it. n.o.body's going to run a Super Bowl commercial to promote being careful with your money, or sh.e.l.l out for a magazine ad campaign that tells you not to go into debt. If you want to be thrifty, you have to advertise to yourself (see the box on Old-School Tools Old-School Tools).

Even though there aren't any big corporations to sing its praises, frugality is an important part of personal finance. Packing a sack lunch may only save you a buck or two each day, but when you make many small changes over months and years, they really add up.

Here are a few reasons it's important to develop thrifty habits: - Quick wins. As you learned in Chapter4 Chapter4, the two ways to improve your cash flow are to reduce expenses and boost income. Both are important, but reducing expenses offers the quickest results. It takes time to find a new job or to ask for a raise, but you can start being frugal right now.

- Lots of opportunities. Our society idolizes big winners: million-dollar athletes, lottery winners, and Wall Street billionaires. n.o.body celebrates the guy next door who bikes to work, grows his own food, shops at the thrift store, and gets his books from the library. That sort of life isn't glitzy, yet it can-and does-lead to true wealth (see the box on the next page). Of course, it's also important to save money on the big stuff, like a home or a car (see Chapters Chapter9 Chapter9 and and Chapter10 Chapter10), but large transactions are rare. (How often do you spend more than $1,000 on anything?) You have many more chances to save on the small stuff you buy regularly, like groceries.

- Small steps lead to big savings. As you'll see, small savings here and there really do add up over time. And there's an interesting side effect to making small, thrifty changes: They spread to affect all your buying decisions. If you learn to comparison shop for shoes, you can use that same skill when you buy something big, like a car. Or if you learn to slash recurring monthly payments on things like magazines and newspapers, you can apply this same principle when shopping for a mortgage.

Thrift is about more than just saving money. It also: - Highlights the value of things.

- Provides for the future.

- Lets you focus your time and money on what's really important to you.

- Reduces your consumption and waste.

- Gives you a sense of accomplishment.

When you practice frugality, you're developing habits that'll help you save money and build wealth throughout your life.

On The Money: Thrifty MillionairesSome financial gurus argue that building wealth is all about earning more. A huge income is great, but research shows it's not how much you earn that matters, but how much you spend.You'll never become a millionaire if you spend every penny you earn-or spend even more and wind up in debt. In their book The Millionaire Next Door The Millionaire Next Door (Pocket, 1998), Thomas Stanley and William Danko write, "Being frugal is the cornerstone of wealth-building." As mentioned in the box on (Pocket, 1998), Thomas Stanley and William Danko write, "Being frugal is the cornerstone of wealth-building." As mentioned in the box on How Much Is Enough? How Much Is Enough?, the three words they feel best describe most millionaires are "frugal frugal frugal." They also found that millionaires usually: - Budget. "They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way." Of the millionaires who don't budget, more than half save and invest their income first, and then spend what remains. (You'll learn about this "pay yourself first" strategy on Get in the game Get in the game.) - Track their spending. They know how much they spend each year on food, clothing, and shelter.

- Set goals. This is especially true of those who've built their wealth through frugality.

- Actively plan and manage their finances. Wealthy Americans spend nearly twice as much time planning their financial futures as the rest of us.

If you want to build wealth, copy the subjects of The Millionaire Next Door The Millionaire Next Door. The best place to start is by being thrifty.

The Power of Small Change Saving 50 cents a week on milk doesn't mean much if you do it just once, but over the course of the year, it adds up to $26. Taken together, many such small economies make a noticeable difference. Small amounts really do matter.

TipBecause you earn pre-tax dollars but spend after-tax dollars, a penny saved is actually more than a penny earned. Depending on your tax bracket, you might have to earn $111, $133, or even $150 to put $100 in your pocket. So if you're in the 25% tax bracket, saving $750 a year is like giving yourself a $1,000 raise! (You'll learn more about tax brackets in Chapter11 Chapter11.) Rather than give you pie-in-the-sky examples of how much you could save, here are some real examples from my own life. While trying to improve my cash flow and pay off over $35,000 in debt (see The Basics of Debt Reduction The Basics of Debt Reduction), I made many small changes, including: - Switching my cable TV package from $65.82 per month to $12.01 per month, saving $645.72 every year.

- Getting rid of my home phone line (roughly $46.50 per month) and my subscription to Audible.com ($21.95 per month), saving $821.40 per year.

- Cancelling my magazine and newspaper subscriptions, saving $137 per year.

- Going to the public library instead of shopping at bookstores, saving $391.95 in the first year.

- Planting a vegetable garden to grow my own produce, saving about $300 in 2008 (see box on Pay Less for Power Pay Less for Power).

With just these few changes, I boosted my cash flow by $2,281.61 per year-that's almost $200 every month.

Changes like these don't affect just your short-term finances-they also help you build long-term savings. Here's a look at the c.u.mulative gains I can expect by investing the money I've saved thanks to the changes listed above. (This chart a.s.sumes a 6% return on investment; The Power of Compounding The Power of Compounding has more on the power of compound interest.) has more on the power of compound interest.)

Monthly .

1 year .

2 years .

5 years .

10 years .

20 years .

Cable .

$53.81.

$663.78.

$1,368.49.

$3,754.33.

$8,818.35.

$24,862.42.

Phone/Audible .

$68.45.

$844.37.

$1,740.82.

$4,775.76.

$11,217.54.

$31,626.70.

Subscriptions .

$11.42.

$140.87.

$290.43.

$796.77.

$1,871.50.

$5,276.51.

Books .

$32.66.

$402.88.

$803.61.

$2,278.69.

$5,352.30.

$15,090.26.