The 5% Solution To Financial Freedom

Conventional wisdom says "save 10% of your income to achieve financial security". This little piece of advice has become conventional wisdom because it's true. However, many people struggle to pay their bills every day and see saving 10% of their income as a fairy tale - an insurmountable hurdle that makes them give up before they can save any amount at all. However, a new twist on that traditional advice may make that savings goal more achievable. Instead of saving 10% of your current income, another alternative is to focus getting that 10% from two sources: 5% by making extra income and 5% by lowering expenses. The key is to make small but concise financial moves - and avoid counting on striking it rich with one big payoff, such as by winning the lottery. Read on for some ideas on how to find an extra 10% to save for your future financial security.

Cut Spending by 5%
A spending cut may seem old-fashioned and trivial, but remember that many fortunes have been made by those who simply spent less than they earned and invested the difference in assets that increased in value over time. Small savings will add up quite a bit over the course of a year and, more importantly, over your lifetime.

You may scoff at the idea of cutting spending as a strategy, but it works. It should come as no surprise that some very well-off members of society still clip coupons. For them, of course, it's a matter of principle, but for you, those little savings add up and, more importantly, your efforts become part of your money habits. These habits determine your future. Maybe you or your kids will someday be billionaires who still use coupons. (To lean more, read Warren Buffett: The Road To Riches and Downshift To Simplify Your Life.)

Start With Household Bills
Utility bills come every month like clockwork and can add up to a hefty sum by year's end. To lower these bills, consider switching to providers that offer better rates, or cutting unused services. There are hidden benefits to making these changes as well. For example, most of us will become more active when we cut our cable and head outside to occupy our time, which may lead to lower medical bills in turn. Getting all those premium HD-channel packages can add up to quite a bit. According to MSNBC, the average cable bill was around $60 in 2006. Don't let yourself think, "Cable's not that much money, so why bother " Instead think, "No one watches that tier of TV channels, and cutting it will leave me with 1% to save."

If you're planning on saving energy (and therefore saving money on your electric bill), there are a lot of little things you can do around your house. Unplugging unused electronics, switching to energy-efficient light bulbs, using sunlight to your advantage for heating and lighting, and many other techniques are just a start. And, if you're making some long-term plans, consider installing energy-efficient appliances for additional savings. (For more insight, see Ten Ways To Save Energy And Money.)

Save on Insurance
Insurance companies typically offer discounts if a consumer buys multiple types of insurance (such as both auto and home insurance) from the same provider. Likewise, having one's spouse go under the same insurance provider for auto insurance may result in a discount to the policy's premium. Advertising claims shout that you can save hundreds by switching our car insurance company, but you should consider shopping for homeowners insurance (a.k.a. property insurance) as well. Due to differences in insurance underwriting, there is potentially a lot of variety in rates and coverage between the major insurance companies, so shop around. (To learn more about underwriting, see Is Insurance Underwriting Right For You )

Taxes Are an Easy Target
By knowing legal deductions available ahead of tax season, you could save hundreds or even thousands of dollars by making smart decisions that lower your tax bill. For example, some retirement account contributions qualify for a tax credit, not just a deduction, for those under certain income limits. (See IRS Form 8880 for details.) It is at least $200 per person per year and in some cases can be up to $1,000. This is only one example, but every public library and major bookstore should have a good tax guide - get one and read it! is also a good source of information. Tax savings can mean big money for you. (For more insight, read Give Your Taxes Some Credit.)

Professional Services Can Add Up
Many people simply have a certified public accountant (CPA) prepare their taxes without drawing on their expertise to actually save on taxes. If you use a high-end CPA to prepare your taxes when a standard tax preparation firm could give you the same service for less, it could cost you $500 or more per year. Determine whether you really need a CPA. If it makes financial sense, hire one and hire a good one. (To read more on this topic, check out Crunch Numbers To Find The Ideal Accountant.)

Consider what you pay for other professional services as well. For example, some doctors will give discounts for payments made upfront, presumably to prevent having to wait for insurance companies to pay them weeks or months later, if at all. If you have a major medical bill that you'll have to pay out-of-pocket, consider asking for a reduced fee for early payment. The worst they can say is no.

Increase Your Income by 5%
Most people think that in order to really save money, they'll need to increase their income by about 50%. If you are convinced this is true, and no amount of reasoning will change your mind, then you'll need big changes to get there. These changes include earning advanced degrees and changing jobs, or even careers.

However, many people overlook some simple ways to earn more. Here are a few to consider.

Get Your Company's Retirement Plan Match
This is free money - take it! You only need to contribute enough to get the full match. If your employer matches your 401(k) or other retirement-plan contribution dollar-for-dollar up to 3% of your salary, then you need to contribute 3%. It's just like a 3% cash bonus, but you'll have to wait until you turn 60 to cash the check. Later on, you can evaluate how much more to contribute above and beyond the company match, but the first priority is to get that match. (To learn more, read Making Salary Deferral Contributions.)

Add to Your Workload
If you're an hourly worker and can work an extra hour or two per week, go for it. Working an extra shift once a month accomplishes the same goal. Both are a big boost to your income, anywhere from a 1-5% boost in the average month.

Add to Your Skill Set
Instead of just demanding additional pay, ask your employer what additional skills or certifications (think online classes or vocational school) could lead you to higher pay, even if it's only 1-2% more annually. Put yourself in your boss's shoes. Your boss wants more profit than he or she can produce independently - that's why you were hired. When you can earn additional profit for your company, you command more in pay. Helping others reach their goals can reap big rewards for you.

Create Multiple Sources of Income
Besides serving as an insurance policy if you happen to lose your job, a part-time job or even freelance work can help you to get to the goal of an extra 5% income. It can also be a nice change of pace from the daily routine.

These steps, if taken singularly, appear insignificant, but collectively they lay the groundwork for your personal financial success. No drastic changes are needed, only a little conscious effort. Most people make changes only if they can easily save 10-20% of their income or get a big raise, but financial success rarely works that way. If you don't have a plan after that big raise comes, you will find that your newfound cash quickly disappears. More income isn't always the answer - it's good habits that will lead to financial security.

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