Step 1: SPEND LESS

There are 2 main areas that we can look at here. Spending less than you earn, and also just spending less in general.

Spend less than you earn. Way less.

This probably sounds obvious. How are you ever going to build up wealth if you’re spending more than you earn? But do you really know what you are spending? I bet you know how much you get paid every month.

When was the last time you actually sat down and looked at a record of what you are paying out every month, or year? You need to do this and come up with a proper concrete figure of how much you are spending every month. Yes, budgeting’s not exactly fun, but if you don’t know where you’re starting from, it’s hard to plan your route.

How to work out your monthly spending

One way to do this is to get your last 3 months bank and credit card statements, and just copy all the entries into a spreadsheet, breaking them down into spending categories. List everything and try to be as accurate as possible. By the end, you’ll not only know how much you are spending but where it is all going.

Another way you could do this is by using a spending tracking app. There’s many out there and they’re all easy and good. I’ve got ‘spending’ and ‘YNAB’ on my phone and they’re both good. Do either of these for a month or two and see what it looks like.

I personally find it difficult sometimes, particularly as an expat, to accurately break down my monthly spend though. I find my spending can be ‘lumpy’. By that, I mean that sometimes I’ve paid my rent in 6-monthly installments (2 huge cheques). We bought lots of furniture or moved house. My kids’ school fees come out in a couple of big chunks. My pay can be variable and I have to buy expensive flights a couple of times a year. Then you have big one-off payments like getting the car insured and serviced etc. All of this makes my spending ‘lumpy’ rather than a smooth predictable monthly spend.

This all makes it harder to accurately model. So what I’ve found to be the best way is just to list my recurring monthly costs – food, bills, giving, subscriptions, childcare, etc, then alongside that, I list the less frequent costs and just divide their total annual spend by 12 to get an equivalent monthly cost. If flights cost me $1200, then I’ll budget $100 per month) and add that in. After a few months of data, you should have a pretty good idea of how much you’re spending month-to-month.

Now stop and compare that to your salary. How does it look? Similar? More? Less? I would imagine it’s probably pretty similar. We tend to adjust our lifestyles to fit our budget, and often just spend what we have. If we are to try and build wealth we need to put our spending significantly below what we are earning.

Spending less

We’ve had a look at how to work out what you’re spending and compare your outgoings to your income. But would it be possible to lower that outgoings figure? Could you get it down significantly lower than your income? The more you can do in this area, the more you will have to save and invest.

How much lower? Well, that depends how aggressive you want to be. The proportion of your pay that you are saving is known as your savings rate. A sensible starting point if you’re really new to this might be 10%.

You want to try and increase that number significantly over time and you can do so monthly, quarterly or annually adding a few % to this figure when you’re able to. Make a plan for when you’re going to increase it and stick to it. Any pay rises you get, you should add a portion of that to your savings as well.

A rule of thumb for how much to save

Some people would say that using your age as a guide for your savings rate might be a good rule of thumb. Now that might seem too high for some people. You might think you could never do that, but if you can aim for it, it will certainly help you.

Living a rich, frugal life

You might be turned off by the sound of spending less. The idea of frugality sounds like being miserable and stingy. But it’s really not.

I want you to have a look back at your monthly spending and see if any areas jump out at you. Any things that surprised you by how much you’re spending on them. Maybe it’s eating out, or monthly subscription services. Food delivery or payments on your car loan. Are you a spontaneous spender that just likes to shop and can’t pass up the sale sign?

Is there a wiser way to spend money in these areas? Anyone can learn to cook nowadays with youtube, so maybe you don’t need to order delivery quite as often. Your wife might even appreciate it if you cook her dinner! Or maybe its subscriptions and you don’t need Netflix, Prime, and Spotify all at the same time.

Wouldn’t it be better to buy something that you’ve thought really carefully about, that’s super high quality and will last you for ages? Something you take pleasure in using or wearing. Why not still buy the things you want, but do it wisely?

There are many ways to spend less, and we will look at lots of them, but for now, I want to give you 1 really helpful tool that can be used to help moderate your spending easily, and make wiser decisions.

1 simple way to spend less

Give yourself a cooling-off period before any purchases. Just a pause can make a big difference.

How long? Well, that depends on the size of the thing you want to buy. If it’s just a coffee, just pause a couple of minutes. You might decide that you didn’t need it all that badly and the bottle of water that you already have with you might be enough.

If you want to buy that pair of jeans or dress, wait 24 hours. Same if you want to get tickets to a show or a concert. Expensive hobby – pause for a week. Go and look up some reviews and decide if it really is the right thing for you.

If you desperately want that car, probably wait a month. Think if you really need it and if so, what it will cost you. If you really want it, are you going to have to give up something else to fit it into your budget?

Be wise with your money. You’ve worked hard enough to earn it. Try not to fritter it away on stuff that you really don’t need anyway.

Be wise with your money. You’ve worked hard enough to earn it.

I have to use this technique with my son all the time. He walks into a shop, looks at the toys and declares “I want that one!”. If he just waited a few minutes, he would see that there might be something better to spend his pocket money on, but instead, he just wants the first thing he sees. He has to learn to wait. (Teaching your kids the value of money is a whole other subject, but you get the idea!) I can be the same though, and I’ve had to learn the same lessons he does.

So you’ve tried to cut back your spending. You’ve given yourself a bit of breathing space. But there’s only so much you can cut before affecting your quality of life. What next? Well, that’s where our next step comes in.

Step 2: Earn More

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