Suze Orman, talk show host and money expert, does a segment on her show on CNBC called “can you afford it”.  She takes calls from people who want to buy something and then she does a rundown of their financial picture.  She then tells them whether they have been “approved” or “denied”.

I find myself in agreement with her most of the time.  If you have never seen it before, she might surprise you.  I have seen people call in with a net worth of 6 figures, yet get denied for something that might only be a couple of thousand dollars, or even less.  This is particularly common for older people. You might have someone who has a net worth of $150,000 and is 55 years old.  Suze would deny the person on most luxury expenditures because she would say that the person should have a bigger retirement nest egg at that age.  She is correct.

She will also deny most people that call in who have credit card debt.  Again, she is correct.

I have had my criticisms of Suze Orman before.  She is certainly not a libertarian.  She does not understand monetary policy very well, unless she has changed recently.  This makes some of her investment advice somewhat suspect because she doesn’t completely understand the need to hedge against inflation and how to do it properly.

With that said, I think most Americans would be better off if they listened to her.  She gives some great advice when it comes to money, saving, and spending.  She seems to generally understand the importance of compounding interest.

I think investors often forget about the importance of saving.  Of course, to invest money, you first have to save it.  There are basically three ways to make your bank account grow more.  You can earn more, spend less, or get a better return on your investments.  It is often difficult to directly control how much you earn and what kind of a return you get.  You generally have greater control over spending.

It is good to measure prices in terms of the value of your time.  If you make $25 per hour and you want to have a nice date night with your spouse and spend $100, then ask yourself if half a day’s worth of work is worth it to you.  If it is for a very special occasion like an anniversary, then perhaps it is worth it.

The other important thing about spending is that you get more bang for your buck when you cut back.  If you buy an item for a hundred dollars, it will probably cost you around $107 with sales tax.  And for you to earn enough to spend that much, you would actually have to earn maybe $130 or $140, depending on the type of income and what tax bracket you are in.

Another thing to consider is that you can be more conservative with your investments if you continue to save money.  If you are worth $100,000, then saving an extra $1,000 per year is like getting an extra 1% return on your investments.  This can make a significant difference over time and it allows you to take less risk.  You can focus on the preservation of your capital and not on making big returns.

In conclusion, it is fun and challenging to seek ways to earn more and make bigger returns on your investments.  But oftentimes, cutting your expenditures is far easier and probably doesn’t cost you more time.  You should constantly be asking yourself: can you afford it?  Or maybe the right question is: is it worth it?