A different school of thought, one that I see mentioned far less often than the "leaky bucket" theory, is the Pareto Principle--a.k.a. the 80/20 Rule. Applied to personal finance, this approach focuses primarily on reducing one's largest two or three expenditures. The idea is that those two or three expenditures tend to comprise, say, half or more of the total. Therefore, reducing them instead of the dozens of other, much smaller expenditures provides the maximum savings "leverage" for the least amount of effort. My kind of strategy!
The following two actions probably go just as far--if not farther--towards making ends meet than obsessive penny-pinching:
- Housing (typically the largest expense): Live in a modest home that is comfortably below one's means. Also, live close to work. This reduces one's fuel expenses and provides at least some insulation against future oil price spikes (which will most likely occur).
- Transportation: Purchase vehicles with cash, not loans. If you don't have the cash, don't buy the vehicle; take public transit until you have the cash. Also, drive practical, reliable vehicles rather than status symbols, and drive them for as many years as possible before replacing them.
On the other hand, I do realize that the house one lives in and the vehicle one drives are two of the most important determinants of one's perceived "social status," and most people are social beings who find it difficult to completely ignore status. Plus, people will often live in homes they can barely afford so that they can send their children to a nice public school away from violent neighborhoods. But on the whole, I get the impression that the main reason people tend to get into debt up to their eyeballs has more to do with social status than with the well-being of their children.
How about all of you? Do we have more "leaky bucket" folks on this forum, or is the "80/20" crowd alive and well?