I'm convinced that more people would achieve financial success if they managed their home economics as if they were running a small business. As a business owner, you do snap cost/benefit analysis on nearly every decision you make, but for some reason this intellectual rigor gets tossed out the window when it comes to personal finance. We frequently fall into the trap of expending a great deal of energy for a small financial payoff. Here are some examples.
Small Wins
Daily victories. Welcome to the bread-and-butter of personal finance: easy and quick decisions that yield small rewards. I'm talking about clipping coupons, brown-bagging your lunch and buying used instead of new. These daily victories matter, but let's be honest: It takes a long time for them to have any sizable impact on your wealth.
Pyrrhic victories. On paper, these decisions sound smart, but when executed, they suck up an unacceptable amount of effort without yielding an equivalent payoff. On a personal level, these are things like making your own laundry detergent (seriously) or raising chickens and selling their eggs for extra cash.
Ongoing projects. Like Pyrrhic victories, these require a lot of time, but they can actually provide a major payoff. For instance, last year I organized and sold my collection of comic books. This took more than 100 hours of tedious work but brought in $25,000. A more obvious example: going back to school for a professional certification or degree that can lead to a higher income as its reward.
Big Wins
The above strategies have their merits. But if we want major financial boosts, we need to suss out the big wins--those opportunities that can supercharge long-term wealth. Here are a few ways to do that.
Downsize. The typical U.S. household spends $1,408 on housing each month, or about one-third of its budget. Reduce that by 30 percent, and you'll save more than $5,000 per year. Let's face it: If you're like many Americans right now, you probably have more space than you truly need. Move into a smaller, cheaper home either by selling your current one or renting it out and pocketing the difference.
Drive less. Transportation is the second-largest expense for the average family. Act accordingly: You can save big by walking, carpooling, taking public transportation or choosing a used car with good gas mileage over the premium model that needs premium fuel.
Earn more. Easier said than done, I know, but taking several extra minutes to negotiate better terms with your customers and vendors will do more to boost your wealth than years of scrimping and saving at home. Remember, you can cut costs only so much, but your earning potential is theoretically unlimited.
It doesn't make much sense to concentrate your energies on making your own detergent while you still have a huge mortgage--that's like Microsoft trying to boost profit by spending less on pencils instead of selling more copies of Windows. Sure, the small stuff forms a great basis for behavioral change, but it's the big things that may, one day, make you rich.