This post is part one of a series that is meant to serve as a quickstart guide to finances I am calling Spending Less. My goal is to post it as quickly as possible to hopefully begin helping people, so I may revise it after initial publication.
If I could impart one piece of financial advice to anyone I meet, it would be to spend less than you make. This may seem obvious, but a surprisingly small number of people practice this, and many even spend well beyond their means and what they make!
Most people here in America likely interpret this statement as “Make more than you spend”, but there is a very important difference. “Make more than you spend” is a philosophy for our parents’ generation. If you spend all that you make, or God forbid more than you make, making more money will not help you. You will simply spend it, resulting in the need for “more, more, always more” income to support your ever-growing spending. This more-ish tendency is something we all need to contend with on both an individual and collective level, far beyond the world of money, but that is beyond the scope of this piece.
A dollar saved is quite literally worth more than a dollar earned due to taxes. For example, if you are in the 22% tax bracket it takes over $1.28 in earnings to produce $1.00 in after-tax earnings, assuming no other deductions. That’s almost 30% more! By not spending that money, or by finding some other way to generate after-tax savings, you are helping your bottom line more than by adding the same amount to your income.
Even if one manages to keep spending steady while increasing income, the effect is not as great as that of reducing spending. By changing your spending (and reducing it!), the effect is two-fold: on the one hand, you can immediately allocate a greater portion of your income to saving (more on this later), while on the other you are decreasing the amount of money you ultimately need to save in order to retire or reach financial independence (we’ll also discuss this later as it is an important concept that means something different to each of us).
For example, let’s say Bob and Jill both make $50,000/year, which is slightly below the median annual income in the US, and currently spend every dime. Bob increases his income by $10,000/year, and Jill reduces her spending by the same amount. Both choose to save and invest all that money (because that’s what we would all do, of course). In both cases, assuming 7% returns/year, the balance of these savings will reach $1,000,000 somewhere between year 30 and 31. At this point, Jill can retire, safely withdrawing her required $40,000 in spending at a 4% withdrawal rate. Bob, on the other hand, despite his higher income, requires about four more years of working (half a decade) in order to safely reach his target of $1,250,000 to support $50,000 in spending at a 4% withdrawal rate (see pretty chart below).
This example is over-simplified in several regards and employs a few concepts we will have to return to in more detail later, but I believe it serves us well in illustrating the point.
Step One – KISS: Keep it simple, stupid!
Spend less than you make.
Step Two – Accomplishing step one.
So you have an idea of what you want to do. Why are you doing it?
Saving money is not a goal in and of itself, and money should always serve a goal, lest it have no purpose or direction, whence it shall be squandered.
The true purpose of saving money is to reserve your hard-earned value for some future spending, which you would prefer.
With an eye towards purpose, that twenty dollars you saved by not eating out, despite its convenience, may be a part of the one hundred dollars that you spend on something of value. Or better yet, it may serve as a small part of a safety net to support you in times of need, or go on to reproduce and create more money!
For while we know not the amount or day of unexpected expense, we know with great certainty that it will come, and possibly even to some degree of accuracy when it might occur, but we are not in the business of prediction or forecasting, but of the Present.
Depending on where you are in your financial journey, different strategies may be more or less appropriate for freeing up some cash flow for saving or investing. If you are at a particularly low income, or it is easy for you to do so without sacrificing something of greater value to you, it may make sense at this juncture to work on increasing your income, despite my focus on reducing spending earlier.
You can accomplish increasing your income through a number of means, including but not limited to: finding a higher paying job, asking for a raise or promotion, starting a side hustle, selling things you own but don’t actually need, etc.
That being said, in my experience, nearly everyone (at least here in the US) has a number of expenditures which can be easily cut or curtailed, which can be more impactful as we discussed earlier. View any recurring monthly billings with the highest suspicion. Your cable bill is not a necessity, nor is spending all your money out drinking with friends. If you can move back in with Mom and Dad for a short period of time (the horror!) in order to get your affairs in order, consider doing so. Reducing your housing (perhaps moving into a smaller space) and transportation (selling your new car for a used one or taking advantage of a bike and public transportation) expenses are often the easiest big wins you can give yourself. Try to limit how much you eat out, and perhaps learn to cook if you don’t have that skill already!
Be honest with yourself, but also be patient. In all likelihood, you will not suddenly transform into a new person with different spending habits overnight. Shoot for small, consistent, sustainable change over time and you will be surprised with the vast difference these small changes amount to in a relatively short period of time and the happiness this brings you.
Later on, I will post more content concerning specific strategies for increasing income and reducing spending, but for now, we are relying on you. Don’t allow yourself to be caught in a mindset of limitation, and realize that you have all the tools you need to succeed right in front of you, just waiting for you to pick them up and put them to good use!
Step Three – Examine your priorities.
There is no cookie-cutter answer to how to manage one’s finances (this guide included), and therein lies the Beauty: Your plan for managing your money (or as you will lovingly come to know it, a Budget) is your own and as such should be uniquely designed for and by you for the realization of your own life’s goals.
You’ve got some homework! (Don’t worry, it’s a completion grade as everyone’s answers will be different) Think and have an honest conversation with yourself (and possibly your partner(s)) about your priorities (for example, getting out of student loan debt or saving for FU money – more on that later). Write down what you come up with. Feel free to cross stuff out, rearrange, etc. Generally try to get them in order of importance, although this isn’t particularly important as this is just an initial conversation to get you started and your goals and priorities (and hence your plan – from here forth known as your budget) will evolve over time to serve the needs of the Present Moment in your life.
Be aware that your goals and priorities don’t all have to be far off (in terms of time and money), such as saving for retirement; they should encompass different time horizons. For example, paying for a roof over my head and food in my belly are extremely high priority, despite having a short time horizon. That being said, it still has to be balanced against your other priorities, such as buying yourself a new toy (medium time horizon) or saving for financial independence (long time horizon), even if you don’t have any money to put towards some of these goals (yet!).
That’s it for now! You’ve got your homework and when you’ve completed it look for the next post in this series!
Love,
(Your) Wallet
PS – Want more? Head over to part two, here!
