Control Spending to Boost Savings and Investments

The third most important pillar in reaching financial independence is spending, specifically reducing and controlling your spending. No amount of money is enough if you're going to spend it all away. In yesterday's discussion, I talked about good saving habits. The best saving habits actually involve saving money before it reaches your checking or savings account.

The best spending control habits that have worked for me, and for many of my friends, focus on the biggest saving opportunities. One of the largest opportunities for reducing spending for me was buying used cars. We never bought a new car until I turned 38. Until then, every car we bought was used. A car payment of $500 versus $200 is substantial; that extra $300 a month goes into your investing or brokerage account and can add up to a significant number.

The second opportunity could be refinancing. If you have a mortgage, consider refinancing to a cheaper interest rate, as rates will likely decline in the next two to three years. My wife and I go through our credit card statements, as we typically make all our purchases through a single credit card, to look at broad spending trends. We flag any item over $100 and scrutinize it.

I'm not one to be penny-wise and pound-foolish. We focus on the big items and reducing those does most of the work for us. Whatever technique works for you, reduce your spending. Reduced spending means increased savings, which in turn means increased investing. Increased investing leads you closer to achieving financial independence.