Control Your Frivolous Spending in 6 Easy Steps
One of the downsides to saving large sums of cash is it starts to burn a hole in your pocket.
When I was a kid, my grandparents would occasionally give me a $10 bill after I’d go visit for a week. I had zero tolerance for saving back then, so I would spend it on candy and comic books almost immediately.
Since then, I’ve built up a pretty good tolerance against spending cash. I’ve seen too many financial struggles and missed opportunities to not have a decent stockpile of cash in my bank account.
As of late though, my tolerance against spending is being tested. With a looming bear market, hoarding cash doesn’t feel like a bad investment.
The problem is this extra money starts tempting you. And, the last thing you want to do is waste your hard saved cash on something frivolous.
So, what should you do?
Here are 6 “easy” tips to help you control spending. I say easy because none of these require any extra discipline or extravagant measures. All you’ll need is a calculator, a pen and pad of paper.
The fastest way to boost your savings is by not spending what you have. If you want to accumulate more money, you need to learn some tricks to keep your spending urge at a minimum. Here are some tips I like:
Tip 1: Calculate How Much in Gross Income Is Needed to Buy
How much does it cost to buy a $90,000 Porsche 911 Carrera? It takes about $136,000 in gross income at a 30% effective tax rate. At a 25% effective tax rate, it requires $2,700 in gross income to purchase the newest $1,799 Macbook Pro.
Whatever you’re thinking about buying, multiply it by 1.5x to find out how much it really costs before tax. Suddenly, what you want to buy doesn’t seem as affordable.
Tip 2: Calculate How Many Hours of Work It Takes to Buy
If you work a salaried job, then you likely don’t pay much attention to your hourly rate.
However, understanding how much labor is required to afford something is sometimes the best strategy to give yourself some pause.
For example, to buy a $9,000 second-hand Rolex Submariner will take about 450 hours driving for Uber at $20/hour after operating costs. If you drive for 40 hours per week, that’s almost 11.5 weeks worth of work to purchase one watch.
Tip 3: Save 50% of Your After Tax Income Every Year
This might sound challenging, but I promise it’s not. As long as you’re maxing out your 401k and saving a certain percentage of your after tax income before you spend, you can afford to do whatever you want with your money after that.
But one idea I like is to max out your 401k and then save 100% of every other paycheck. Since most employers pay out twice a month, you can easily save at least 50% of your after tax income every year by following this plan.
It’ll be painful for the first 6 months, but after that you’ll adjust your living standards and it becomes easy.
Tip 4: Compare Yourself to Other People
If you make more than $35K a year, you’re in the top 1% of global income earners. Appreciate what you have compared to the billions of other people who weren’t lucky enough to be born in a developed country.
According to the UN world food program, some 795 million people in the world do not have enough food to lead a healthy active life. Simply comparing your circumstances to those less fortunate is sometimes enough to curb those impulse buys.
Alternatively, you can try motivating yourself by comparing your wealth and career success to other people your age who are doing better than you. Depending on your personality type, this can be really motivating and force you to keep boosting your savings in order to catch up.
Tip 5: Establish a Spending Goal
There’s a rule I like which states that whatever you want to buy, you should try to make at least 10x that amount first. For instance, if you want to buy a $30,000 car, try making $300,000 first. This is a tough rule to stick to but it forces you to achieve certain financial goals tied to big rewards.
What you’ll find is after spending all this time earning and saving enough to reach your big goal, you might lose the desire to actually buy what you originally thought you wanted.
Make your spending goals challenging so when you reach them it’s worth the pain to make the purchase.
Tip 6: Visualize the Opportunity Cost of Your Purchase
If the S&P 500 averages 7% a year for the next 10 years, you’ll have doubled any money you invest today in the index. Therefore, the $9,000 watch or $30,000 car you buy today might be worth $18,000 and $60,000 respectively in the future. Visualizing opportunity cost is one way to prevent spending, but it’s hard because it’s difficult seeing that far into the future. One easy way to see the future is by running your finances through a retirement calculator. You’ll quickly see whether you’re on track to retirement or not.
Boosting savings is not rocket science. Yes, it requires some discipline but if you follow these simple tips on how to curb your spending, you’ll build a high tolerance and see your bank account grow.
To a richer life,