When it comes to your personal finances, the best way to make the greatest improvement to your bottom line isn't necessarily the sexiest.
Saving money often takes a back seat to investment strategy when the conversation turns to wealth creation, but it shouldn't. Most people would find their personal finances in much better shape if they spent as much time learning how to save money as they do investing.
Most people consider "saving money" the simple act of placing whatever money is left over at the end of the month into a savings account. When viewed from this perspective, saving money doesn't seem to offer much in the effort to create wealth. However, when saving money is actively pursued by analyzing your current budget and creating strategies on how to reduce the amount you're spending, then the practice has great potential to increase your wealth.
Reducing the amount you spend has some inherent advantages over investing:
Easy to implement: Learning how to reduce the amount you spend doesn't require any extensive study or require a huge time commitment on your part. Saving strategies can be found in numerous places on the Internet at no charge. While some advanced tactics require technical knowledge, most are so simple, practically anyone can implement them.
Money saved can also be invested: Basic investment knowledge is essential to improving your finances, but it shouldn't take a lot of time. Once you have basic knowledge, all the money you save through reduction in spending can be placed into investments that will provide returns on top of the amount saved. These include investing savings in your 401(k) plan (if your company matches contributions), an IRA, a stock index fund or even paying off credit card debt. All these investments are simple, requiring little study time. And when the returns are added to the amount your were able to reduce in your spending, it is unlikely you'll get a better return, no matter how much time you spend on your investment strategy.
Low Risk: The risks associated with reducing the amount you spend are far less than the risks to get a comparable return while investing. Even though it is possible to lose money when trying to save money, saving is a safer bet.
More predictable, quicker returns: When reducing the amount you spend, you are able to predict your return much more accurately than you can with many investments. Returns for stocks, for example, can vary greatly year to year. While you can make a prediction over the long term, short-term gains (or losses) are difficult to foresee. The return on the money you save by reducing expenses, on the other hand, is apparent right away in many cases, rather than over the course of the year.
No taxes: When you invest, most of the time any gains you receive are taxable. That is not the case with the money you save through reducing expenses. One of the wonderful aspects about saving money is that none of it -- except for interest earned if you stick it in a savings account or CD -- will incur taxes on the federal, state or local level. Saving money is one of the few tax-free opportunities you have to increase your wealth.
Investing may seem sexier than saving money. But until you have built up a large amount of money in your basic investment accounts, the free time you spend working on strategies to reduce spending will help your finances much more than an equal amount of time spent on investment strategies. The good news is that once you have optimized strategies to reduce the amount you spend, you will have more money to work with when looking at more advanced investing strategies.
Jeffrey Strain has been a freelance personal finance writer for the past 10 years helping people save money and get their finances in order. He currently owns and runs SavingAdvice.com.