Spend Less Money Than You Make
A word to the wise:
There is one financial fact that will always remain true. To gain wealth and gain control of your finances you must spend less money than you make. If you spend less that you make, your wealth will grow. If you spend more than you make, you will go into debt. Don’t let yourself fall into the trap of lifestyle creep. Looks for ways to increase your income and ways to decrease your spending.
Spend less money than you make.
Sounds like an easy rule doesn’t it? Than why is it so hard for us to stop living paycheck to paycheck?
This is a topic I talk about regularly because I believe it is a huge factor for the current generation. There are so many things we can buy and activities that costs us money. When you are single, you spend money to go out and meet new people or buy fancy things to impress someone enough to go on a date with you. And when you are in a relationship it is the ‘social norm’ to take fancy vacations, have an expensive wedding, buy a home right away and drive fancy cars.
The reality is a majority of us believe that this is how things are supposed to be. We are supposed to buy nice things and continue to ‘level up’ at every opportunity. Perhaps this is a side effect of video games. The second you complete a level you move on to the next level, and the next, until the game is complete. Why do we feel the need to do this is real life as well? Why don’t we enjoy what we have, and aim for a less materialistic lifestyle? It’s because many of us fall into the trap of keeping up with the Joneses.
I spoke a little bit about this in College Word to the Wise’s article on Lifestyle Creep. The idea being that you are always trying to keep with the neighbour, or your friends or someone you saw on TV or Instagram.
There is an illusion that the bigger the better and the more you have the happier you will be. People often interpret the idea that ‘money equals happiness’ means they should buy nice things and live in an amazing house and have 500 guests at their wedding. I would argue that money equals happiness with you have enough money in your bank account to no longer fear living paycheck to paycheck. Having the ability to become financially independent is the real goal, and if you are spending more money than you make, you will never reach this goal. Spend less money than you make.
Funnily enough, most people don’t even realize they are spending more than they earn! Instead, it slowly drains away like a hole in a bucket. Bit by bit, month by month. Before they know it, they have consumer debt and no savings.
So, what are some simple indicators that you are spending to much:
- You are using your credit card to cover daily weekly expenses prior to your next paycheck.
- Each month you are getting overage charges for phone services.
- You bought a car which was out of your financial limits, you struggle to pay each month.
- It’s a struggle to pay for monthly expenses such as rent, insurance, groceries.
- Regardless how much you work, you have no significant savings.
- You aren’t maxing out your TFSA or RRSP. (Or both if you are making enough money!)
- When an emergency expense happens, you have to pay for it with your credit card.
If any of these things ring a bell for you, it would probably be a great idea to sit down and look at your finances. It’s crazy to think of all the people who are not in control of their finances and even scarier to think of all the people who won’t have enough money to retire.
Taking the opportunity while we are young to create good habits is essential. And if you aren’t that young, now is the best time to turn things around.
So, what can you do to change your financial trajectory and begin to spend less money than you make?
Figure out your net worth:
You can either do this with an application such as Mint, to connect all your accounts, or you can do it the old school way with pen and paper. For the first time, I suggest using pen and paper. The reason being that it will make it feel real to you. We’ve become so used to checking accounts online that it’s just a number. When you write your finances down on paper, it really gives you a feeling of the true implications of your financial situation, in my opinion.
To find out your net worth, check out College Word to the Wise’s 5 Steps to Financial Control. After finding out your net worth, make sure you fill out a Mint account. It is a great way to monitor your finances and get month reports of your spending.
Figuring out your net worth is a great first step because it gives you a foundation to build on. Even if you are heavily in debt, it is still the place to start. From now on, your net worth should always be going up.
If you do incur any more debt, make sure it is calculated debt such as a mortgage you can actually afford, not the maximum your bank will lend you.
Figure out your spending habits and decrease spending:
There’s two ways you can tackle this, and it will really depend on your spending habits. I know that for the most part I am fairly good with my money and try to spend as little as I can on most things. That being said, whether it’s on groceries or grabbing a bite to eat with friends, I know for a fact that I spend WAY too much money on food.
Already understanding where I spend the most money made it simple for me to start tracking my spending. If you aren’t sure where your money keeps disappearing too, take some time to look through your credit card statement and debit card statements to see where your money is going. Ignore the necessities such as rent and car payments for now. That’s a whole other conversation. For now, focus on simple day to day spending that adds up quickly.
Once you know what area you spend the most money, it becomes easier to track your spending.
For the last 2 months I have saved all my receipts from grocery stores, restaurants and pubs. At the end of each week I would take a highlighter or pen and identify my ‘essential purchases’. These items mostly consisted of things like:
- Contact solution
After highlighting the essentials, I realized that about 50% of my purchases were not essential foods at all. They were just snacks, sale items I walked by, and things I purchased on a whim.
I was pretty shocked by the amount of unnecessary purchases.
What I didn’t realize was that by shopping without a plan, I was buying more things I had no intention of buying and less things of what I actually needed.
Groceries aside I also discovered that my dinners out, often with my girlfriend Jillian, added up quickly over the month. Let me be clear, it wasn’t having enjoyable dinner dates with Jillian that were breaking the bank. What was doing the most damage was going out for dinner when we were “out of groceries”. Instead of having an inexpensive meal at home, we would look in the fridge and say to ourselves “there’s no food, better go out for dinner tonight and get groceries tomorrow!”.
Wow, those dinners added up quickly.
Find ways to decrease your spending and increase your income:
Here’s the good news. Now that we’ve figured out where and how our spending habits are hurting us, it’s quite simple to fix the problem! The only problem remaining is our willpower to do what needs to be done.
Decrease your spending:
Cut the junk!
Now that all the essentials have been identified, and all the non-essentials have been flagged, we can now be more conscious of our spending habits. For Jillian and myself, the quickest fix was writing out exactly what food we need from our essentials list before going shopping. Our weekly grocery cost went from close to $100 a week to about $50-60 a week for the both of us. That’s huge!
$50 x 52 weeks = $2,600 annually saved
But we didn’t stop there. By changing our shopping habits to focus on always maintaining the essential items, we rarely go out for random meals. Instead we plan to go out once a week or once every 2 weeks for a nice dinner. Before that we would often go out 2-3 times a week. Assuming that the dinner out cost us $40-60 for the both of us and we were going 2 times a week because we were ‘out of food’, we saved about $80-120 a week!
$100 x 52 weeks = $5,200 annually saved
Looking at that cost written down annoys the heck out of me. It’s easy to look at your bank account and think “Oh, I definitely have enough money to go out for dinner!”. But the reality is that even though you may have the money (or worse you put it on your credit card), it adds up quickly and can be detrimental to your savings. It’s safe to say I’m happy we’ve reduced those costs.
Increase your income:
There are multiple ways to increase your income and it would take a whole other article to outline all the possibilities and techniques. But the purpose of this article is to spend less money than you make.
By decreasing your spending habits, you are already on the right track. After decreasing your spending as much as you can, crunch the numbers again to see if you are spending more than you are making. If you are, the next way to fix the issue is to increase your income. This can be done in many ways, and all will require work on your part:
- Get a raise at work
- Find a job that pays more
- Start a side business
- Get a second job
- Make sure your money is compounding through investments
- And etc.
For me the simplest way to increase my income was to get a raise at work. I make sure to schedule performance reviews with my employers every 6-8 months to review my progress as an employee and reevaluate my salary.
By decreasing how much you spend and increasing how much you earn, you will have the ability to pay down debts and start to increase your wealth. This is a proven way to get out of the living paycheck to paycheck lifestyle. Gain control of your finances and spend less money than you make!
Are you spending more money than you make? What is your problem area of spending and how do you plan on fixing it?