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They say you are supposed to think before you spend. But think about what? When a salesman tries to sell you something, he has the edge. He's studied human psychology, and he knows which buttons to push to get you to part with a piece of your freedom.

And every time you're too tired to do anything else but turn on the TV, the salesmen are there, with their carefully executed pitches. These ten mental exercises are intended as tools to help you push some buttons of your own. Think of them as weapons in your arsenal of self-defense.

Mental Exercise One: Add Back in the Income and Payroll Tax. If you earn $25 per hour, how long must you work to buy a pair of sneakers for sale at $125? It's easy to be lulled into thinking that the answer is "five hours," but it depends on how you look at it. You don't get to keep the full $25, but must give up $5 or so to the government for income and payroll taxes. So it really takes over six hours of work to buy the sneakers.

I always take note of the income tax and payroll tax (not just sales tax) associated with a particular spending decision. In pure theoretical terms, you might say that this is inappropriate because the income and payroll taxes are imposed whether I spend the money or save it. But allocating these taxes to spending decisions helps me mentally assess how many hours of work it takes to pay for things. Sometimes knowing that it takes six hours, not five hours, to buy the sneakers reveals the purchase as not so "worthwhile" as it would at first seem.

Mental Exercise Two: Calculate "Small" Expenses on an Annual Basis. It's easy to see the consequences of large spending; few of us will spend $40,000 on a new car without doing careful research. But the majority of our spending is devoted to small items, not large ones. So controlling the large items leaves the bigger part of our potential savings pool undefended.

If you spend $8 for lunch at work, you are not reducing your potential savings by only $8, unless the decision is truly a one-time event. In most cases, you are instead developing a habit. And the cost of the habit is $8 times 23 business days a month, times 12 months. That's $2,200. It's this type of item that usually explains where all the money goes. Applying Mental Exercise One (described above) could bring the total cost of the sandwich, drink, and chips to close to $3,000 per year. It's a big ticket item masquerading as a "convenience."

Mental Exercise Three: Know Your "Potential Savings Pool" Amount. Forget the rules of thumb about saving 10 percent or 15 percent. Those rules were invented to distract you from what should be your goal—deciding how much saving and how much spending is in your personal best interest. It matters not what others do—it only matters what you do, and to determine that, you first need to know what it is possible for you to do.

Let's say your household income is $80,000, your basic living costs are $23,000, and your taxes are $22,000. Your Potential Savings Pool (PSP) is $35,000. It's your decision whether to save less than that or not, but there's no possible way you can save more. You have to come to terms with this number and determine how it fits into your Retire Early goals. If it is lower than you would like, you need to be that much tougher in ensuring you realize a high percentage of the PSP as actual savings.

Each decision to spend should be viewed as a step away from achieving the full possibilities opened by your PSP. Spending $2,200 on lunches at work all by itself reduces your PSP to under $33,000. It's up to you to decide whether to buy the sandwich or not, but the PSP concept can help you understand how damaging a blow is delivered by each spending choice.

Mental Exercise Four: Convert Spending Amounts Into Percentages of Annual Savings. Each decision to spend is an opportunity to save that is gone forever. Let's say that you earn $60,000 and save $10,000 a year, and you are considering a vacation that will cost $3,000. The natural impulse is to compare the $3,000 cost with your $60,000 income, and decide that an expense that amounts to only 5 percent of your total annual resources is not that big a deal.

The better comparison is with your savings figure, not your earnings. You never have any chance of saving much of your income—before you make any decisions, it is lost to taxes or to basic living expenses. But the vacation spending is truly discretionary.

Go on the vacation by all means if it is "worth it" to you. But in determining whether it is "worth it" or not, you need to know what percentage of your possible savings you are giving up. In this case, the vacation costs 30 percent of your savings for the year. That figure puts things in perspective.

Mental Exercise Five: Weigh the Lifetime Cost. In the above example, the $3,000 you pay for a vacation represents the lost savings for this year. The reality is that, if you decide to save instead, the $3,000 begins producing additional capital (if invested in stocks) or income (if invested in certificates of deposit). Even in CDs, you can earn over 4 percent per year of real return, in today's market.

Sometimes the memories created on a vacation are well worth the cost. Just be aware that the $3,000 put aside now will work for you not just one year, but for as long as you live. The cost of the vacation in present-day dollars is far in excess of $3,000.

Mental Exercise Six: Determine Your Cost of Living on a Per Day Basis. How much does it cost you to stay alive on this planet for 24 hours? It's a fun thing to know. Once you have a budget that you stick to and which includes all your spending, it's easy to convert the annual or monthly figures into daily ones. Some days you will spend less than the average and some days you will spend more. Just knowing the average enhances your awareness.

My wife and I have calculated that we spend roughly $1 each on each of the three meals of the day. If she is able to find the ingredients for a meal in the dented-can bin at the supermarket, we are usually able to keep spending well under $2. But on Saturday nights, we usually spend more (perhaps $4) to create a "special" night for ourselves.

We can have homemade pizza for well under our usual $1 per meal target. Knowing that makes us a little less willing to pay Pizza Hut prices and to write it off as the cost of convenience. On rare occasions, we do it. But it's hard to justify paying $15 for convenience food when the food portion represents only 1/15 of the total expense.

Mental Exercise Seven: Translate Spending Into "Lost Freedom Days." Once you have enough savings that the earnings from your savings equals your annual spending, you are financially independent. The best way to give this idea day-to-day significance is to consider each spending decision as a step towards this goal or away from it.

Let's say you need $600,000 (at a 4 percent earnings rate) to finance your $24,000 annual budget. Further assume that you are $200,000 from your goal, and saving $50,000 a year. You've got four years to go, as things now stand.

But you've got that $3,000 vacation expense noted above. And a $2,000 sandwich and chips expense. And maybe a $1,000 gourmet coffee tab, and a $2,000 convenience pizza category. You like the things you buy with this money. But you want to know how much they really cost you. The least meaningul answer to this question is "$8,000 a year."

The more enlightening answer (and this idea is the core breakthrough idea of "Your Money or Your Life") is "the life energy you give up making the money to support these habits." Now that you have a financial independence plan, you can assess these costs in terms of how much they delay the onset of your personal Independence Day.

How long is your freedom being pushed off by $8,000 of spending? First of all, to refrain from these purchases would speed up your saving. In three years, you will have $174,000 of added savings, not $150,000 (and this doesn't even count the earnings on these amounts).

More importantly, the goal becomes a much easier target. With $8,000 cut from your budget, you now need only $16,000 to live on. That means you need only $400,000 to be free, not $600,000. Do the math! You're there, buddy!

Mental Exercise Eight: Put the Most Effort Where You Have the Most Influence. There are many roads to financial independence. Some think the key is to earn lots of money. Some think the key is to earn high returns on investments. Those are both very good things to do.

For most of us, though, there is a limit on how much we can earn at our jobs, and in many cases we are earning not far from that limit already. There's probably more room for improvement in the area of investments. But here too there is a limit on what we can expect to earn that we hit not long after devoting enough time to learn the basic principles.

Spending, though, is an area a where high percentage of us can make large strides if we care to do so. The magic of spending cuts is that this is an area almost completely under our control. We can try to influence whether we get a promotion or not, but we can't control the outcome of our efforts. We can invest intelligently, but the most intelligent investment plans at times go awry.

We don't have to get anyone's approval to cut spending, though. And the results of our decisions in this area don't depend on the ever-changing moods of Alan Greenspan. If I want to cut spending, I just do it. And my freedom gets closer each time I do.

Mental Exercise Nine: Determine the "Lifetime Cost" of Each Budget Item. This mental exercise was discussed in a post by CindyC72 (#4597). She described how she took each of her monthly spending categories, annualized the figure, and then determined how much savings it would take (presuming a 4 percent return on investments) to "fund" spending on that item. This is a great way of using concepts of financial independence to clarify our thinking about spending.

CindyC72 noted that, at the time of the post, she had enough to pay for her newspaper, her internet connection, and her water bill. So for the rest of her life, she needn't worry about reading, surfing, or drinking!

Mental Exercise Ten: Develop a Short-Term Goal. The reason why spending wins out so often in our thought processes is that spending creates a short-term jolt of pleasure. To combat this, we need to be sending out some short-term jolts of our own. Knowing that some day you would like to retire early is not enough. You need something that is going to happen within the next few years for the force of the jolt to be strong enough to counter the forces of advertisers that want you to spend.

If you are within two or three years of financial independence, that alone is goal enough for you to win most battles. If the ultimate goal is farther off, you need some intermediate goals to get you through the rough patches.

Let's say you are six years away from complete financial independence. Perhaps you could run the calculations on what it would take to "retire" into a part-time job. If this partial goal could be reached in two years, make it your short-term goal. When you reach it, you can develop another intermediate goal.

Following this approach, s series of two-year steps will eventually get you to the point at which you are within two years of the final target--complete freedom from wage slavery. Freedom, it's a mental thing.
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