Rachel and I gave a talk at Stanford University last year where we discussed some basic but not obvious financial thinking. One of our claims was that people who share our spending philosophy will be more satisfied and more wealthy. Our philosophy is basically this: each time you buy something, consider whether you want to trade up or trade down. If you trade up every time, you will likely find yourself with very little savings. If you trade up part of the time and trade down part of the time, you will see your financial situation improve. We think that trading down every time would be better financially but is not practical since all of us want to splurge on ourselves now and then.

We gave specific examples of trading up and trading down and what impact this would have on one’s IRA in 30 years. The numbers can be huge, especially on large ticket items.

So when you go to make that next purchase, consider whether you want to take this opportunity to trade down and save money or if trading up is worth the cost. If you want help figuring out how to make the calculations or if you want to explore how this thinking will dramatically help your bottom line, just contact me and I’ll walk through the numbers with you. cvanemon@opesadvisors.com

MONEY; Cutting Costs While

Appearing Savvy

By FRED BROCK

Published: April 10, 2007

If you have been whipsawed by the stock market and have seen the value of your house plunge, you might be looking askance at your retirement plans. If you are already retired, you may be worried about staying that way without looking for a soup kitchen.

Well, try to relax and remember something important: you can increase your income by cutting expenses, which could save your retirement.

We live in such an affluent society that you can eliminate plenty of expenses without becoming a cheapskate. You don’t have to reuse tea bags or make guitar picks from expired credit cards. The goal is to be economical. Combined with retirement, this can lead to a simpler life, which many baby boomers say they seek.

It’s also important to think both big and small.

Consider, for example, where you live. This can make a huge difference in how much you will need to live on in retirement. If you reside in an expensive, high-tax area, you can lower your expenses a lot by moving to a less expensive place. If you want to stay put or you already live in a cheaper area, you may want to move to a smaller house or increase your income with a reverse mortgage, which can allow you to tap the equity in your home to create an income stream.

Two Web sites, BestPlaces.net and RetirementLiving.com, can be helpful in sorting this out. Best Places compares housing and living costs among different towns and cities in America; Retirement Living looks at state taxes. AARP’s Web site (aarp.org) is a good source of information on reverse mortgages.

If you decide to move to a cheaper area, your house can become a virtual money machine because of the astonishing differences in housing prices nationwide. Home prices around the country are mostly down, although they have rebounded in some places, including Manhattan. If you’re willing to move, however, it’s the relative difference in values that is more important.

Consider someone who lives in San Francisco and plans to retire to Tucson, a popular retirement city. For ease of calculations, let’s assume a pre-retirement income of $100,000. Let’s also assume that the retiree will move from a median-priced home in the San Francisco area that is paid for to a median-priced home in Tucson.

First, according to Best Places, this person will need only $50,971 a year to maintain the same standard of living in Tucson that he had on a $100,000 income in San Francisco. So it is 49 percent cheaper to live in Tucson than in San Francisco. That comparison assumes a mortgage and work-related expenses. Without those, it is even cheaper.

The median price of a home in San Francisco is $750,000, according to Best Places. The median price of a home in Tucson is $202,400, below the national average of $217,200. If the retiree sells the San Francisco home and pays a 5 percent real estate broker’s fee of $37,500, he can walk away with $712,500. Suppose the seller uses $250,000 of that to move to Tucson and buy a house. That leaves $462,500. At 6 percent through long-term investments, that amount would yield an annual income of almost $28,000, without touching the principal.

The next big expense most of us have to deal with is parked in our driveway. Cars offer a great opportunity to cut expenses and increase income.

First, try to get by with one car. This can be difficult for working couples or families but should be relatively simple for retirees. If you sell your second car, you not only eliminate a monthly payment or free up money if you paid cash for the vehicle, but you also reduce insurance bills.

When it comes time to replace that car, should you buy new or used? In most cases, the most expensive thing you can do is buy or lease a new car every two or three years. The least expensive route — which can save thousands of dollars a year — is to buy a used car, especially one that is only two or three years old and may still be under warranty.

There is also a middle way: buy a new car and run it until it dies. With proper maintenance, keeping a car for 10 years or more does not necessarily mean big repair problems, because cars are built so much better nowadays than they were in the past. If you don’t think so, find a collector with a well-maintained 1955 model and check out its fit and finish. If the collector will let you, take it for a spin. You’ll happily go back to the future.

The main advantage of buying a used car or keeping a new one for a long time is that you save on depreciation, which is much higher during the first year or two of a car’s life. On many cars, depreciation can run 20 percent or more in the first year alone. If you buy a used car, someone else has absorbed that cost; if you drive a new car a long time you minimize its depreciation by spreading it over many years.

A good place to check all this out, right down to the exact model you’re considering, is Edmunds.com. At the bottom of the home page, click on True Cost to Own to see the effects of depreciation and other expenses.

Now it’s time to sweat the small stuff.

Most of us overspend on little things. We think: Why not? It’s only a dollar or two. But you need to consider the cumulative effect of saving on small items. Again, this does not mean giving up the things you like; it just means getting them smarter and cheaper.

Do you spend $2 twice a day on a fancy cup of coffee that you could make yourself for pennies? That high-priced coffee totals about $60 a month, or $720 a year. If you invest $60 a month at 6 percent interest for 10 years, you’ll have almost $10,000. And you haven’t given up coffee.

If you go to the movies several times a month at $5 to $12 a ticket and drop $5 or $10 on overpriced popcorn and junk food, consider joining a DVD service like Netflix, which allows an unlimited number of movies each month for a flat rate. Buy a popcorn popper and watch the savings grow.

Ditto if you spend $1 on sodas from machines. You can buy the same soda at a discount store by the case for about 25 cents a can. The savings on two sodas a day is $10.50 a week, or about $42 a month. At 6 percent, that turns into almost $7,000 in 10 years.

Cutting back on restaurant meals is another way to save.

These suggestions only scratch the surface. If you search for ‘’cutting expenses'’ on an Internet search engine, you’ll find hundreds of ideas to consider. Two interesting sites are bloggingawaydebt.com and mightybargainhunter.com.

Tricia Sperry in Calumet, Mich., runs the first site. It allows you to see the details as she and her husband cut expenses and save money to pay down their credit card debt. The second is operated by John Wedding in King George, Va., who works as a physicist. He loves figuring out ways to save money.

‘’My parents were frugal,'’ he said. ‘’I guess it rubbed off on me.'’