Your Dam Retirement

Have you ever stood at the top of Hoover Dam? It is huge. Pictures don't do it justice (though you can look at some anyhow). I love heights; I pole vaulted in high school and college. I've taken a trip in a hot air balloon, jumped out of a plane, and parachuted off a cliff next to the Neuschwanstein castle. But of all those experiences, standing on the precipice of Hoover Dam made me the most nervous. Maybe it was all the churning water at the base, but I felt I was going to get sucked over the edge.

What's the purpose of that 6.6 million tons of concrete piled up in the Black Canyon 30 miles from Las Vegas? Hoover Dam turns the Colorado River into enough power to serve 1.3 million people in Arizona, Nevada, and California. Which brings me to today's money metaphor (you'll have to pardon me; I was an English major, and my wife writes poetry): We all have our own flow to control -- our cash flow. Our bank accounts are wedged between the inflow on one end and the outflow on the other. How that flow is managed determines the power of our pocketbooks.

In my Rule Your Retirement newsletter each month, I profile "success stories" -- people who were able to declare their financial independence. Some do it the old-fashioned way: aggressive saving and smart investing over many years. Others are more unconventional, such as the couple that sold their business and reduced their income needs by living in inexpensive but exotic countries. In the upcoming issue, readers will hear from a guy who made a fortune from an invention that came to him in a dream.

But here's what they all have in common: They actively manage their cash flow. Whether it's by using financial software such as Intuit's (Nasdaq: INTU  ) Quicken or Microsoft's (Nasdaq: MSFT  ) Money, or by using a spreadsheet, or by using an old-school ledger book, they make sure their priorities are paid for and the waste is reduced.

On Dr. Phil's prime-time special last night on Viacom's (NYSE: VIA  ) CBS, viewers met a woman who can't stop spoiling her kid with too many toys. Her husband's solution: She gets a certain amount of money every week for various expenses (groceries, etc.), separated into envelopes. Once she has spent that allotment for the week, she can't spend anymore.

Of course, the strategy didn't work in this situation. She just pulled an Enron (or Uncle Sam, when it comes to Social Security) and just shifted money around so she could still spend less at Safeway (NYSE: SWY  ) and more at Toys "R" Us (NYSE: TOY  ) . Here's why the technique didn't work for that couple: The wife saw it as a restriction, even a punishment. That's the wrong way to look at smart money management.

Money is opportunity. You choose which opportunities will get your resources, and thus have the greatest chance for success. The woman who spent so much on toys values the happiness of her daughter -- a respectable intention. But she's overfunding that value, spending more money than is necessary or healthy, and possibly neglecting other opportunities. The kid had almost 300 stuffed animals! At some point, I bet that family will wish they stuffed their IRAs with that money instead.

The less you spend on toys, groceries, gadgets, restaurants, clothes, etc., the more you can save for retirement. The more you save for retirement, the sooner you can bid adieu to the workaday world, and the more you can afford to do with all that free time.

I know, this sounds an awful lot like budgeting, which many people associate with restrictions and lack of financial freedom. But I'm not saying you shouldn't eat, have fun, and buy clothes; I don't think people should be undernourished and bored, and very few do I want to see naked. But there is an amount of money you spend on each category that is necessary and worthwhile, and anything above that amount compromises your retirement.

This is also true if you're already retired. The retirees I've met who know where their money goes are much more confident that their money will last. And they will be less likely to have to go back to work due to financial "surprises," partially because they already have a plan for such events.

Here's my challenge to you: Review your bank statements from the last couple of months. Look for items that you purchased, meals you ate, or services you paid for that aren't as important to you as a secure retirement. Chances are, you'll find a few. But don't look at them as mistakes; this isn't an exercise in guilt. Instead, look at them as opportunities to save more for retirement or, if you're already retired, ways to extend the life of your portfolio and leave more to your kids and charitable interests.

By directing your cash flow, you will harness the power of your money, and reduce the spillover. In other words, when it comes to your money management, just think: dam it!

Robert Brokamp is the editor of the Motley Fool Rule Your Retirement newsletter service. Try it free for 30 days and receive the "8 Ways to Supercharge Your Retirement" special report by clicking here. The Motley Fool is Fools writing for Fools.


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