KEY PRINCIPLE 3: SPEND LESS THAN YOU EARN
We all know that the way to wealth, is to spend less than we earn, so why don’t we all do it?
Quite simply, most people would rather have something now, and receive the instant gratification, than have “delayed gratification”. It is difficult to weigh up the benefits of something that is ten, or twenty years down the track, as opposed to something that we can see, feel and have right now.
If you want to be financially secure, the first lesson, is to live within your means. If you can’t afford it, you can’t afford it. We all get the concept, that saving rather than spending, creates wealth, but how easy is it to spend money on coffees, dinner, clothes and other items, rather than save money for something that we can’t see. Several authors have called this, the “Latte factor”.
In short, this is the concept where if we were to cut back on buying one latte a day, or buying lunch one day per week, it can make a massive difference in the long run.
For example; let’s say that you spend $5 each day on a coffee on the way to work and $10 on lunch; instead of making it at home. That’s $105 per week that you could be saving and investing.
I know this sounds very boring, but I have now realised that these very small sacrifices, are in my opinion, well worth it. What is more important? Spending crazy amounts of money now and being broke in the best years of your life, OR making a few small sacrifices now, in order to have a life where by you can spend more money than you had ever dreamed of.
A couple of things I have learnt along the way, when trying to spend less than I earnt, have been the cornerstone for my financial growth. I included these, in the wealth chapter of my book, “Create The Life You Want.” Let me be clear, I am not saying you have to be an absolute miser with money, but if you just spend money like a sailor, then you will end up with more “month” at the end of your money; rather than more money at the end of your month.
If you’re struggling financially, yet always living the high life, it is pretty clear where the issue is. Regardless of your level of income, if you spend more than you earn, then you will end up broke.
TIP ONE: Make a budget
I am not suggesting that you have a boring life, or miss out on the nicer things in life, however, to reach your financial goals, you may have to make some sacrifices along the way. One of the easiest ways to ensure that you are not spending too much, is to have a budget.
We rarely use cash to pay for things these days, so it is easy to spend without keeping track of where your money is going. I have a very simple budget, which includes a small amount of spending money. If I try to stick to a strict budget, with no room to move and no “play money”, then it’s more likely that I’ll cave in and spend even more, than I am supposed to.
It’s the same as having a “cheat day” on a diet. If you restrict yourself too much, it will only lead to failure in the long run.
TIP TWO: Have a grocery budget and a shopping list (And stick to both)
Each week, I have a set amount of money that I am allowed to spend on groceries. This amount cannot change. Yes, occasionally I splurge, but only when I know I am not breaking my savings plan. Set yourself a reasonable shopping budget. One that is not over the top, but not too tight either. You need to eat and eat well; but within your means, of course.
When you go shopping, write out a list. Don’t just walk down the aisles and grab whatever gets your attention. As I shop, I keep a rough tally of what amount I am up to, as I grab things. You don’t need to count exactly, but try to keep track, so you don’t blow your budget and look like an idiot if you have to put things back, when at the checkout.
I hardly ever go over my budget, but if I do, it is by $1-$2. This is because I usually stock up on toiletries and costly items, when they are on sale, so I have a backup at home. I try to spread my expensive items out, so I am not buying them all in one week. This means I am only every buying one or two expensive items each week and therefore not going over budget.
TIP THREE: Reduce / manage your bills.
Monthly expenses such as power and phone, car insurance and other bills, kill a family budget faster than anything else. It’s important that you take a few steps to bring down these costs as much as possible.
The first thing I did to reduce my electricity costs, was to go and buy energy saver globes, for my entire house. This cost me $25 total, for my house and I noticed a huge difference in my electricity costs in the next bill. It also saved me money, because energy saver globes last much longer than normal globes. Four years on, from replacing all of my globes, and I have not had to change one single globe yet.
Once I had the house running more efficiently, I started comparing providers, to get better deals. I used comparison websites, to find a cheaper electricity deal, better phone plan, cheaper car insurance, home contents insurance and boat insurance. It took me less than two hours all up and it ended up saving me over $150 per month. I didn’t go to inferior providers. I just asked for a better deal, or found a cheaper – comparative product. I do this exercise once a year, or every two years, to check that I am still getting the best deal in the market.
Once I have all of my bills reduced, I work out how much each bill costs me, every week of the year. The way I do this is, I firstly work out each bill on a yearly basis. I go through and find every single bill that I pay throughout the year and workout the yearly cost. If it is a phone bill which is monthly, I multiple the monthly bill by twelve to give me the yearly cost. If it is an electricity bill which is quarterly, I multiple it by four.
Once I have each bill as a yearly cost, I then divide each bill by fifty-two. This gives me the amount that I need to put away each week, so I always have enough money to pay the bill, when it arrives. For example, if you have a phone bill that is $60 each month, you will multiply it by twelve, which gives you $720 total for year. Then divide $720 by 52, for the number of weeks in the year. This gives you an amount of $13.84 per week. If you get paid every fortnight, then divide the yearly total by twenty-six. You do the same calculation for all your bills. Once you have all your weekly amounts, add them together and that is the total amount that you must put away each week to meet your commitments.
The reason to do this is so that you don’t get hit with four or five bills at the same time, and have to pay them all and subsequently blow you weekly budget. For me, my weekly total bill cost is $170, so every week, when I get paid, I transfer $170 into a separate account, which is only to be used for paying bills. This account accumulates, until I receive a bill, at which time, I use the money in that account, to pay the bill. By doing this, I never have to stress about finding a big amount of money for a bill, I never blow my weekly budget, and I always have enough money ready to pay all my bills.
If you try to balance it, using different amounts every week, it becomes too hard and all fall apart and you will never save. Don’t try to juggle a budget where you’re paying different amounts each week. It won’t work.
Here’s how a family budget might look using this formula.
EXPENSE:
Mortgage – $400 / week
Groceries – $200 / week
Bills (Total) – $250 / week
Petrol – $60 / week
Spending – $100 / week
Savings – $200 / week
This is the hard part:
Once you have established your budget, if you find out that you’re over the amount that you earn, you’re going to have to look at where you can cut costs. Using the simple comparison exercise with bill providers, will save you quite a bit. Otherwise, it might be a case of not being too spend thrift. We all want nice things, but the simple fact of the matter, is that if you can’t afford it and still save, then you can’t afford it. Live inside your means; not outside of it.
Once you have your budget and spending under control, and you have a little extra to save, then it’s time to work out what to do with that extra money.
For a more detailed look into this principle and much more, grab a copy of my book “Create The Life You Want.”
Key Principle 4, looks at how you can start to grow your wealth, through “The Power of compounding”
