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Are you an irresponsible spender? Do you often find yourself wondering where your money actually goes? Does your credit card bill often come as a surprise?
Many people are guilty of overspending and living beyond their means. When you spend all—or more than—the money that you earn, you damage your long-term financial prospects. You could have put that money to better use by saving or investing it.
With this in mind, here are a few tips on how to spend less money and become financially responsible.
Why You Are Impelled to Spend Money
If you want to know how to spend less money, you must first understand the reason you overspend in the first place. While everyone’s overspending motivations are personal, they are not that unique.
Spending as Social Signaling
Some people overspend because they desire to create the illusion of wealth. They spend more than they earn on luxury items and experiences because they want to enjoy the pride, admiration, and respect that rich people enjoy, and they believe that they can achieve the same positive feelings simply by looking rich.
However, not only does trying to project wealth drive them further from acquiring wealth, it limits their ability to feel intrinsically happy because it leads to an endless competitive cycle: They feel happy when they buy something that projects wealth. However, when someone else buys something more expensive, it devalues the purchase and leaves them dissatisfied. The only way they can maintain happiness is to continue purchasing increasingly expensive things so no one outdoes them.
TITLE: The Millionaire Fastlane
AUTHOR: MJ DeMarco
Buying expensive (and often superfluous or excessive) things to signal our wealth, status, and power to others is a phenomenon known as conspicuous consumption. For example, strictly speaking, nobody needs a Tesla. But owning one suggests several things about you:
– You have a lot of money.
– You’re interested in new technologies (which implies that you’re well-informed and intelligent).
– You care about sustainable energy and vehicle emissions (which implies that you’re selflessly concerned with your impact on other people and the planet).
Note that none of these social signals is something we say outright. We don’t walk up to strangers and say: “I’m rich, smart, and selfless.” But a new Tesla promises to say all that for you. Simler and Hanson argue that this kind of signaling isn’t just about what you believe; it relies on your assumptions about what other people believe. They explain that lifestyle advertising (where companies focus on brand identity rather than extolling the strengths of the product itself) is meant to create common knowledge about the signals that certain brands send. For example, a Tesla wouldn’t signal the above qualities if nobody knew that Tesla makes expensive electric cars.
If you want to know how to spend less money so you can put it to better use, you need to give up the drive for social approval and learn and emulate the habits of wealthy people, not financial fakes.
Professor Tom Stanley studied the lifestyles of millionaires in the 1990s. He writes in The Millionaire Next Door that, contrary to what most people think, the typical millionaire lives modestly in a middle-class home, drives a used car paid for with cash, and buys clothing from discount stores.
Unlike those who spend to keep up with the Joneses, wealthy people don’t strive for approval, but for financial security, by living below their means so they can grow their wealth. In contrast, because of debt, average people often have a negative net worth. It’s hard to change when you like your nice things and you don’t want to admit to yourself or others that you’re broke.
If you’re doing anything with money in order to project wealth in order to win respect or admiration, you have to give up the drive for approval and undergo a change of heart about how you view spending. For example, it might require that you stand up to your family and reject the tradition of going into debt to buy a Christmas gift for each extended family member.
In addition, you need to recognize your weak spot, where you can’t seem to stop overspending. Everyone has one—for example, excessive clothes shopping, giving money to adult children, or buying expensive vehicles. Until you acknowledge your weakness, you’ll be susceptible to temptation in that area.
TITLE: The Total Money Makeover
AUTHOR: Dave Ramsey
Another common reason people overspend is that they spend money haphazardly: They don’t decide in advance how much they want to spend in any given area—they just buy what they want/need without regard to how their spending affects the state of their finances. If that sounds like you, you need to start tracking where your money goes.
In their book Your Money or Your Life, Joseph R. Dominguez and Vicki Robin recommend a system for understanding your spending:
Develop Spending Categories
The first step is to develop categories and subcategories that capture what you spend money on each month. For example, let’s say one of your spending categories is “Food.” If you realize that you’re frequently buying vending machine snacks in your office building, include “vending machine snacks” as a subcategory of “Food.” Find a balance between capturing more detail than the broad category, but not driving yourself crazy.
Here are some potential categories and subcategories:
- Food for home eating
- Food for sharing with guests
- Restaurant visits
- Rent or Mortgage
- Renter’s insurance
Pro-tip: consider subcategories that reflect emotional reasons for spending, like buying clothes to make yourself feel better.
- Public Transit
- Ride Shares
- Auto Insurance
Electronics and Tech
- Cell phone
- Wearables (ie. a smartwatch)
- Television/Movie streaming services
- Music streaming services
- News subscriptions
- Alcohol from bars
- Kids’ entertainment
- Gym Membership
- Prescription drugs
- Nonprescription drugs
- Health Insurance
- Doctor’s visits
There are often large, unexpected expenses that occur each month. Examples include:
- Car repair payments
- Once-a-year insurance expenses
- Paying down a chunk of your house
Not all unexpected expenses come up each month, but usually one will. Choose a strategy to account for these. You have two options:
- Put unexpected expenses in whichever subcategory they fall in. Over time, you’ll build a sense of how much you spend on unexpected expenses each month, regardless of category, and learn to have money on hand to deal with them.
- Prorate expenses that you pay once per year across 12 months. If you pay $600 for homeowners insurance once a year, divide that by twelve and include the monthly figure in your expenses each month.
Miscellaneous Categories and Considerations
In addition to the above, make a small table that includes each of your income streams. Also make sure that you separate business and personal expenses. For example, what percentage of your time using your phone goes toward work versus personal use? Split the cost accordingly.
Create Your Tabulation System
List the categories you’ve created in a spreadsheet or similar tool. You’ll use this to sort your monthly expenses into your categories and subcategories.
The table below shows one way to set it up:
|Expenses||Total Dollars||Life Energy||1.||2.||3.|
|Tips and/or Bonuses|
- Total spent ________
- Total income ________
(2)-(1) Savings ________
Once your system is in place, follow these steps to understand your spending for the month:
- Place each transaction in its appropriate subcategory.
- Total the transactions in each subcategory, category, and overall.
- Count any cash you have leftover, and note the balance of your bank accounts.
- Calculate your savings for the month:
- (Income- Total Expenses) +/- error
- Error is any unaccounted for money you have, lost or gained.
- For each subcategory, calculate the hours of life energy you spent by dividing the total by your real hourly wage.
- Example: $80 on magazines divided by $8.42 = 9.5 hours of life energy
- Assess: are the hours of life energy that you expended to make that purchase worth it?
TITLE: Your Money or Your Life
AUTHOR: Vicki Robin and Joe Dominguez
In addition to giving up conspicuous consumption and tracking your spending, here are some more general tips on how to spend less money:
Tip #1: Pay in Cash
To encourage yourself to spend less money, pay in cash for most things. Counting the amount of cash you spend on a given purchase and seeing what you have leftover makes you more aware of the money leaving your possession than when you use a card. You may find that purchases you deemed essential feel less so. It’s also harder to make large purchases because you can’t use credit and may have to save up for them.
Tip #2: Pay Less Than Full Price
Another way to spend less money is to pay less than full price. Here are five ways to do it:
- Buy used. You can often find barely used, second-hand items for a fraction of their normal price. For example, you can buy designer clothes from a consignment store.
- Buy on sale. Many companies do seasonal sales, offering significant discounts on their wares. For example, vintage Cadillac convertibles are usually steeply discounted in the winter—most people aren’t thinking about buying a convertible in cold weather.
- Ask for a discount. Though it may feel uncomfortable to ask for a lower price, the worst the seller could do is say no. Since it could save you money, it’s worth a try.
- Do your research. Use the Internet or call different stores that offer the same item to find the best price.
- Trade. Instead of paying for something in cash, ask the seller if they’d accept another good or service as payment. For example, in exchange for your neighbor repairing your car, you could give them a home-cooked meal instead of cash.
Tip #3: Pay Off Your Debts
When you have debt, you have to pay a portion of your earnings toward it each month instead of putting this money toward things you care about in the present. To free up your money for things you want to buy in the present, pay off your debts. Here are some tips on how to spend less money on repaying your debt:
1. Don’t borrow money. It’s hard enough to get out of debt, let alone if you continue to take on additional debts. The solution is to spend only the money you have—no credit cards, no payment plans.
2. Start with the smallest debt and work up. Even paying off a small debt can give you the motivation to pay off more: You can now direct the money you had to put toward that small loan toward your larger debt instead. For example, once you pay off $5,000 in credit card debt, you can put the money you were paying toward that toward your $17,000 in student loans.
3. Pay off your debts early. If you don’t work to spend more than the minimum payment on your mortgage or credit card, you can end up paying thousands of dollars more over the life of the loan. To avoid this, pay more than you owe each month. When buying a home, look for a lender who offers bimonthly payments, meaning you pay half of your monthly mortgage twice per month. These loans re-amortize with each payment, shaving seven years off of a 30-year mortgage. If you can’t find a lender who offers this, pay a bit more toward your mortgage each month, or make one extra mortgage payment per year. This works for credit cards, too.
TITLE: The Success Principles
AUTHOR: Jack Canfield
Managing your spending is one of the most important life skills you could develop, especially in this day and age of almost endless choices. Many people spend more than they can afford, without much regard for how their spending takes them further and further away from their long-term financial security.
If you enjoyed our article on how to spend less money, check out the following suggestions for further reading:
In The Barefoot Investor, Scott Pape offers guidance and a 10-step plan for how to manage your money so that you eliminate debt and build wealth. Though the plan is written for an Australian audience, the basic principles are universally applicable. Starting with establishing regular date nights with your significant other to discuss finances, then covering reducing debt and buying a home, the steps in this book will help you learn how to spend less money so you can put it to better use.
In I Will Teach You to Be Rich, Sethi helps you cut through the noise of conflicting and overly technical financial advice, get past your own hang-ups around money, and take small steps toward a “rich life”—whatever that looks like for you. You’ll learn how to spend less money on unnecessary purchases, how to use credit cards wisely, how to choose the right bank accounts and investment accounts, and ultimately how to create a financial system that grows your money automatically.
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