It's Good to Save Money: Here's Why!

We all know that wasting money on unnecessary things is bad for cash flow, but few stop to consider that there is also a negative effect on net worth.

I had a three year contract with my cell phone provider that recently expired, so I canceled the service, saving an average of $35/month. I hardly ever used the phone and don't miss it at all.

Eliminating an unnecessary expense does the same thing to your bottom line that increasing income does–there is more cash available–but with one major difference: reducing expenses doesn't take any time. To increase income you generally have to work longer hours. Cutting expenses produces the same results with no effort. So, in essence, when I slashed my cell phone bill I created $35/month of “passive income” for myself.

Passive income is income that doesn't use up time to produce. Interest, dividends and royalty payments are examples of passive income. Passive income is generally produced when you invest in an asset such as a stock, mutual fund, Guaranteed Investment Certificate (GIC), or real estate.

If I “created” $35/month of passive income, what is the equivalent amount of an asset that would pay me that much money? Well, where I live at this time a typical GIC rate is 4%. $35/month = $420/year. How much would I need in a GIC to produce $420 at 4%? $10,500! I therefore conclude that, in essence, I have increased my net worth by $10,500 with one measly phone call. Astounding!

What other expenses can I cut? I think tomorrow I'll pack a lunch to work!

Comments

[Kevin]

A very thought-provoking article, Brad. Here are my provoked thoughts.

In calculating the money saved, shouldn't you also:
- deduct the cost of calls you make now that you would have made with your cellphone (or did it include free calls?)
- calculate the lost value of the extra time you take finding (or borrowing?) a phone to make calls now that you would have otherwise been able to make more conveniently
- factor in the loss of value to you of not being able to make calls in an emergency

I dare you to go to the bank and ask them to increase your line of credit, based on the fact that your net worth is now $10,500 more than it was last week!

If you hardly ever used your cellphone, and don't miss it, I would say that it was foolhardy to sign a three-year contract. You could have been worth $10,500 three years ago. Which, at 4% would have increased your net worth to $11,811 today!

[Brad]

Thanks for your perspicacious points!