Let’s cut to the chase. We live in a consumer society that is, at every turn we take, geared up to encourage us to spend. The traditional distinction between needs and wants has been abandoned by an acquisitive drive to satisfy peripheral whims rather than fundamental requirements.
In theory, it’s simple. Basic food, shelter, and clothing represent our needs. The rest is a want. Not all of us, but certainly some of us, have convinced ourselves that things such as two cars, cable TV, and eating out three times a week are essential to our way of living. They have become standard for many in Canada and many other parts of the world.
As usual, Rob Carrick of The Globe and Mail nails it: “You cannot get ahead financially until you make a habit of spending less than you earn. Never in the history of this planet has it been harder to follow this most basic rule of personal finance. Between social media and the internet, we are immersed in messages to spend. And then there’s the pandemic, which has resulted in pent up demand to buy things, inflation and job losses for some.”
Like all habits that lead to financial freedom and independence, spending less than you earn is simple to understand, but hard to follow. Why?
Getting Used to Doing Without
When I was a pre-teen, our family didn’t have much money and, at one point our TV broke down and my parents couldn’t afford to get it fixed or replace it. We all went through withdrawal symptoms for a week or so until, gradually, I found I didn’t miss it at all. I spent more time reading or outside and went to bed earlier.
We went a year without a TV and why we eventually replaced it, I’ll never know. Living below your means is not just about distinguishing between wants and needs. It’s also about distinguishing between wants that really bring us fulfilment, and those that don’t. Learn the difference and you’ll spend less money.
Try the Trial Period
What if you didn’t have a TV? What if you didn’t have a second (or third) car? What if you ate out just once a week? What if you took your lunch to work every day? I’m a big fan of the trial period. Go without TV for a week or a month, to see if you really miss it. If it turns out that TV is not as important to you as you once believed, cancel the cable subscription and sell the TV.
Or don’t use your second car for a week. This will undoubtedly be inconvenient for many, if not most, of us. Is the second car worth the payment, gas, insurance and repair bills, though? Trial periods are a great way to figure out what works for you.
Identify Your Weaknesses
We all have spending weaknesses. For many, it’s eating out or impulse buying. Whatever your weakness is, you need to identify it and address it. Monthly expenses fall into many categories that can seem overwhelming at times. But most of those categories don’t need to be monitored. They’re either fixed expenses (mortgage or rent payments), or they’re essentials that are not causing you to spend more than you make (like utility bills). Make changes to areas of spending that are out of control.
Some Concrete Suggestions
Mr. Carrick offers some helpful suggestions for handling the issue of overspending such as:
- Scaling back rather than eliminating things, such as the frequency of restaurant visits from once or twice a week to once a month.
- Reduce the number of family vacations.
- Use debit cards over credit cards: it’s easier to control spending when the money comes right out of your account.
- Employ the 24-hour rule: wait 24 hours before buying splurge items to see if your enthusiasm fades.
- Review your subscriptions on the grounds that (especially those accumulated during the pandemic) you may be paying for more than you’re using.
- Track where your money’s going. Access the budgeting strategies credit unions offer customers to monitor spending.
Adopt the 1% Rule
If all this sounds too obvious and piecemeal, consider adopting the 1% rule. It was devised by a gentleman called Glen James, who hosts one of Australia’s top finance podcasts, My Millennial Money, and reported on CNBC’s Make It online platform.
“James’ 1% spending rule is straightforward: If you want to spend on something – a non-necessity – that costs or exceeds 1% of your annual gross income, you must wait one day before buying. During that time, ask yourself: Do I really need this? Can I afford it? Will I use it? Will I regret it? If, after a good night’s rest, it still seems like a good idea, then go ahead and make the purchase.”
James uses the following example to drive home his point:
Let’s say your annual gross salary is $60,000, and you want to buy a rug that costs $600 (1% of $60,000). You would need to wait a day before deciding. Even if the rug you have now is worn down, you might decide, for example, that $600 is too much, and that you could easily do with something cheaper.
“Now, the 1% rule is just a guide – it’s simple and really works for me,” said Mr. James.
Keep in mind spending less than you make is the single most important financial habit to develop. Sadly, it’s also the hardest. Consistently living below your means is the hardest thing to do in the world of personal finance.
As they say: if it were easy, everybody would do it. However, like any habit, once you start spending less than you make consistently, it does get easier. And with some determination, you can do it. As Mr. Carrick observes:
“There’s an emotional side to budgeting that isn’t discussed enough. It can be a bit shaming to be cutting back while your Instagram feed keeps showing you scenes of your friends and family living the lush life.
You need a stock phrase to tell people when they ask why you’re not joining them or choosing a cheaper option. How about this: ‘I’m trying to get my finances into shape in 2022 and I’m cutting back here and there to make that happen. Thanks for understanding.’”
Maybe 2023 will be the year we all try to follow this advice.