YARDLEY, Penn. - Financial columnist Greg Karp, the author of "Living Rich by Spending Smart," says if you ever want to get out of the hole and start building wealth, you have to face this truth: you just can't out-earn dumb spending.
He's made it his mission to find thousands of ways you can stop that dumb spending.
Karp lives in the pretty town of Yardley, Penn., where he has researched what can prevent you from wasting thousands of dollars a year by accident or by habit.
Most average families spend more than $62,000 a year. If you can cut that just 10 percent, you'll be saving more than $6,000 a year.
Karp recommends first concentrating on three major areas: food, insurance, and telecommunication, or "F.I.T.:
"These are three areas of tremendous spending, about $14,000 a year an American family of four spends in just these three areas," he said. "And they're areas of repeat spending. So you'll be spending on these areas again and again your whole life."
CBN News followed Karp into a Yardley grocery store.
"The average American family of four spends about $8600 a year on food," he told us as we walked the aisles. "So it's a large expenditure for most families. And just little cuts can make a big difference."
Don't Buy What You Need -- Buy What's on Sale
Karp has one main principle:
"The big idea with grocery shopping is not to go buy what you need. Instead, go buy what's on sale and stock up," he explained. "That way, when you need something, you go to your own freezer, you go to your own pantry and you get the discounted item."
"Generally, sales go in 12-week cycles," Karp pointed out. "So you need about a three-month supply. So if you see a really good sale, stock up for three months. Because three months from now, it's going to be on sale again."
So remember: don't buy what you need; buy what's on sale.
As for coupons, Karp says the smartest way to use them is in combination with those store sales. You can cut prices in half and sometimes even gets items for free.
And you don't have to cut out every coupon in every flyer or packet. Karp recommends you write the date on the entire packet and set it aside.
"Then you can go online to this database at couponmom.com, and just look up there when you need a coupon," he explained. "It'll tell you which circular to go to and then you clip the coupon at that point."
As for the weekly store flyers, Karp says to concentrate on the front and back because that's where stores places loss leaders -- items they're willing to lose money on just to get you in the door.
Also, look for stores that will double your coupons -- that's double the savings.
And definitely go for those cheaper store brands over the big brand-names.
"We used to call them 'generics' derisively," Karp said. "But they're really good quality now-a-days. So you want to try the store brands. In fact, many of the store brands are made by the name brand manufacturers."
As for eating out, Karp recommends only doing it for special occasions, not because you're tired. And don't buy drinks or appetizers at restaurants. Those are huge extra costs you can forego. And you can probably do without dessert, too.
But if you really like having coffee and dessert at a restaurant, then make that another special occasion. Just go out for that another time.
Insure Against Disaster, Not the Little Things
Moving onto insurance, Karp has another big principle:
"You don't protect against the little things. You protect against financial disaster," he said.
So you want to raise your deductibles, on your home insurance to something like $2,500 and on your car insurance to maybe 1,500.
"That's because you don't want to be tempted to make small claims," Karp said.:If you make small claims on your auto insurance, what are they going to do? They're going to drop you. So don't be tempted."
"And if you're concerned about having an accident or having to pay that deductible, you want to start an emergency fund, which you should have anyway, and that's when you tap the emergency fund," he added.
That should seriously lower your premium payments.
Another area to save big: get term insurance to cover your possible death. It's simple and cheap.
"If you die, they pay your survivors some amount of money," Karp explained. "When you have whole life and variable life, these all have an investment component to them. And the problem is, these investments are very costly. You can do better on your own. So the big idea here is to keep your investments separate from your life insurance."
And if you got term life insurance years ago, Karp advised, "You want to get a new policy in place and cancel your old one. That's because prices today -- premiums for term insurance -- are so much lower than they were even a decade ago. They're about half."
How much term insurance should you have?
"About eight to 10 times your gross annual salary in life insurance," Karp recommended.
There's a whole other area of insurance: warranties. Karp's not a big fan.
"Say 'no' to extended warranties. The sales people push these things, yes. And it's hard to say no, and they make convincing arguments, but they're almost never worthwhile," he said. "So when they ask you to buy an extended warranty, just say 'no.'"
'Right-Size' Your Telecommunications
As for our third area, Karp says right-size your telecommunications: don't pay for service you don't actually use, like with your cell phone.
""I myself, I use the cell phone frequently, but I don't use a lot of minutes," Karp said. "So I went to a prepaid cell phone. And that means I'm going to save $700 just this year by going to this because I pay as I go."
Many people are abandoning landlines altogether, and just using cell phones. If you use a cell mostly for work, maybe your work will pay for it.
And in some cases, people are saving big money using their computer as their phone.
Karp showed us a $20 device called a "magic jack" that lets you use your high-speed Internet connection as a phoneline for $20 a year.
"And this is free voicemail, free long-distance, everything, caller ID, the works," he said. "If your phone bill's going to be 30 bucks a month.this is $20 a year."
So how to remember these three areas? Their first letter. F-food, I-insurance, T-telecomm. If you can cut the flab in these three areas, it can start you on the path to being financially "FIT."
How Much Home and Car You Can Afford
A couple of other areas of huge spending: your car and your home.
When it comes to your mortgage, Karp says, "Twenty-nine percent of your gross income is probably about the mortgage payment you can afford, and that includes your mortgage principle, interest and insurance."
And it's their transportation that Karp says sinks many a family's budget.
"We get used to spending $30,000 on a car, but about seven percent of your gross income. That's what you want to shoot for when you're talking about a car payment."
Karp said used cars are so much more reliable than they used to be, everyone should consider them.
"The biggest problem with buying a new car is the depreciation," he explained. "The owner loses 30 percent of the car's value in the first year. So that's a tremendous hit to take. If you can swoop in at year two or three, man, the savings that you can have!"
And don't be afraid to haggle.
Karp said, "A lot of people are uncomfortable negotiating prices, but it's something we should be doing a lot more of, because you can get a lower price just for the asking oftent imes."
There are literally hundreds of ways to save money throughout Greg Karp's book, "Living Rich by Spending Smart." If you would like to conact the author, you can e-mail him at email@example.com, or go to www.gregkarp.com
*Original broadcast January 2, 2009.