Being intimately familiar with where your money is going is an integral building block to reaching Financial Freedom. But as important as it is, I know a lot of high income earners who have little to show for it and no ability to tell you where all their money is going. They just know that at the end of each month, their money is gone.
If you want to be in control of your finances, that approach doesn’t work. You need to know exactly where all those hard earned dollars are going. Each and every one.
It’s only once you know where your money is being spent that you can effectively assess where you can cut expenses. Skipping your latte each day is not going to help you very much if it turns out that you spend 20 percent of your monthly income eating out.
As a savvy freedom seeker you should know exactly how much your monthly fixed expenses are (fixed expenses being things like your mortgage or rent, utility bills, insurance, car payment etc.) Essentially, your non-fluctuating costs to live each month before anything extra at all.
Your monthly income minus your fixed expenses equals your available spending/saving. You should know what this number is. Not roughly, exactly. And from that exact number you should know how much you want to save and how much of that your are comfortable spending on “the extra’s”.
It’s from these two expense categories, the “fixed” and the “extra’s” that you can start to think about how to spend less and save more.
When you can capture savings from the fixed category, it’s a huge win. These are recurring monthly payments, and if you can reduce or eliminate any of them, you can immediately add that equaivalent amount to your monthly savings.
But if you can find ways to minimize the extra’s, you can learn a lot about what exactly you need in terms of lifestyle in order to be content, and sometimes that can be an even bigger win in the long term.
When people approach cutting expenses and spending less, they often look at it from the frame of mind of “where can I sacrifice”. But, if you can shift your approach even slightly, it can completely change your perspective of reducing expenses and motivate you in a whole new way.
My favourite way to approach spending is to calculate exactly how much after tax money I make per hour. If you are a salaried worker, or work on commission, just calculate an estimated average of the hours you work each year, and divide your after tax income by that number.
When I would sit back and assess my expenses, I would look at each one individually and determine how many hours I had to work each month to afford that item.
If it was my car, and I had to work 25 hours per month to afford it, another 10 for the gas, and another 5 for the insurance, then my next question was, is my car worth it? Is it worth it for me to work 40 hours per month so I can have a car? Do I get enough convenience/value from having a vehicle that it’s worth trading 40 hours each month?
If I was assessing the cost to live in my house, and it equated to 80 hours each month, I would ask the same question. Did I love my house and its location enough to be trading 80 hours of my month just to live there?
When I saw a new pair of shoes I wanted at the mall, were they worth 4 hours of my life? Did I want them that much? Would I get enough use from them to justify that trade?
The vast majority of us are literally trading our time for the things/conveniences/experiences we have in our life. So it’s worth asking yourself, are those things worth the trade?
As soon as I started to evaluate my expenses this way, it became a lot easier to say no. And it didn’t feel like I was sacrificing, it felt like I was saving my time from being wasted on another thing I didn’t really need.
Much like the digital world has removed us from the tangible feeling of hard cash going out of our wallets, the use of currency has removed us from what exactly we are giving up for the things we spend our money on.
At it’s source, it is our time we are trading for all the things in our lives. So before you buy that car, sign that rental lease, or swipe your credit card, it’s worth it to take a pause and make sure that your time is well spent.