Our Second S Is For Spending
Because spending comes second. It comes after saving. It comes when you’ve saved all the money you need to save for your target. When you’ve saved your target amount for the month, you can choose what you spend the rest on.
Why You Shouldn’t Spend Everything
Most people don’t do that, do they? They spend what they earn. In fact, they spend almost exactly what they earn, and convince themselves that this is exactly the only amount they can spend.
Let’s imagine Jack earns a thousand gold coins a month. Guess how much he or she spends a month… it will be a thousand gold coins, give or take a few gold coins. Some months they may spend a bit less. Some months they may spend a bit more. But on average, they spend about a thousand gold coins.
Now let’s imagine Jill earns two thousand gold coins a month. Guess how much she spends in a month… Yep, two thousand gold coins. Some months she spends more and less, but again it averages out to all the gold coins she gets.
And someone who earns three thousand gold coins? That’s right… this just goes on and on for ever.
No matter how much money people earn, they nearly always think that’s how much money they NEED to spend in a month.
But Jack was living on a thousand gold coins, so we know that Jill could have lived on half of her two thousand. She doesn’t know that, though. She thinks, like the rest of the world, that her spending is determined by her income. She spends and spends until she has none left, or less than none.
Spending A Lot Less
After learning that saving comes before spending, the second most powerful thing you can do is to learn that spending is not determined by income. Your income is one thing. Your spending can be a lot less than that. A LOT LESS.
If you’ve never worked, never earned, remember this for when you do. You don’t need to spend all your money. You don’t even have to spend half. Spend as little as you can. Value the time and effort you put into making that money.
If you’ve already started working, and started spending the money you make from working, it’s going to be harder than that (that’s why I urge you to give Happy Ever After to any teenager you know about to start work now!), but not impossible… here’s an exercise:
- Work out the tiniest amount you can spend. Can you live on nothing? Write down the things you can’t avoid spending. Really, here I mean the things you will go to jail if you don’t spend. Rent, debt payments, utilities.
- Treat this as an exercise, a game with yourself to get the lowest number you can. If you know someone who pays less than you for these things, work out how you could do the same. Write down that number.
- Add some money for food to that. Basic food. Rice and beans. Lentils. Whatever is the cheapest thing where you live.
- How much does that add up to? Take that away from your income… and there you have your maximum saving amount. If you save below that is your own choice.
I didn’t say this was going to be a fairytale. If we aren’t saving the maximum we could save in the exercise above, then it’s because we have chosen to live in a more expensive apartment than people we know, to eat expensively, to do things we don’t have to do.
Let’s be clear with ourselves. Spending more than you have to doesn’t make you a bad person, and there is no element of judgement here. Equally, pretending that things we choose to do are necessities doesn’t help either. If we lie to ourselves about needing to eat fattening food, we will never get slim. If we tell ourselves we have to eat out, or live in a fancy area, we may never be able to save. Being honest with ourselves will help us faster.
And you don’t have to have a 0% fun spending budget. The typical saving budget allocates 30% of monthly income to fun spending, but (50% to necessities and 20% to saving). Personally, I would work out my necessities first, save more than half the rest, (25% to 30%) and then see how much of the rest I really NEED to spend for fun (and then see how much of that I can add back to savings at the end of the next month!)