When we talk about building wealth, we imagine earning lots of money. It’s certainly important, and as we saw here earning money from multiple sources and boosting your income is one of the fundamentals of building long term wealth.
However, wealth has two sides to it, and while it can be easy to focus on what’s coming in, how much attention do you pay to what’s going out?
So, let’s take a look at the other side of the equation. Spending.
There are people who never earn more than £50k a year and retire millionaires, and there are others who earn £250k and beyond and retire broke.
The defining difference? Their spending habits.
The Right Kind of Habit
The problem with spending habits is that if you don’t get them right in the beginning, they will trip you up majorly once you start earning a higher income. It’s therefore essential to get into good habits from the start, and to carry those forward with you in your wealth-building journey (together with a bit of Stoicism, which we’ll come to later!)
One of the most important factors in managing your money is to pay yourself first.
You see, if you set up your bank account to automatically pay money into your investment account, your savings account, and to your household account to pay your bills, then what you have leftover, by your own decision, is your fun money. You’ve taken care of the important stuff with a system.
You play a psychological trick on yourself and remove the temptation to spend it on other things, because by putting it into a different account, it’s physically not there. (This is helped further if the other account is in a different bank!)
However, if you wait until the end of the month, AFTER you’ve spent your fun money, what are you likely to find?
That there’s none left for your investment account, your savings account or anything else.
And you’ll ask yourself what on earth you managed to fritter it away on!
Building wealth depends on paying yourself first, otherwise there’ll be nothing left to pay yourself with.
Seeing the Problem
You might have heard that the first step to solving a problem is recognising that there is one.
Now, maybe you don’t have any issues at all with spending, and you know your exact monthly expenses across all categories. Congratulations to you for existing in perhaps this 0.0001% of the population! 😉
For the rest of us mere mortals, we have to find a way to track our spending. If you don’t know what you’re spending on, how can you identify areas in which you can cut back?
There are many different ways to do this, from computer spreadsheets to finance apps. Find whatever works for you and stick religiously to it. Input every last expense, and don’t leave out expenses to make it look better. The only person you’re cheating is yourself (sounding like my old primary school teacher there!)
It’s only once you have all your expenses down and categorized that you can see where the money you spend each month is going. All of a sudden, you realise that you’re paying for memberships that you barely use, your Uber Eats habit is getting wildly out of hand and there’s really no need to be signed up to 4 different streaming services!
Tracking your spending allows you to identify where you can trim it back. Not only does this help to keep your spending in check, but it also leaves you with extra money at the end of the month. Result!
Lifestyle Inflation and Hedonistic Adaptation
Two phrases that are worth remembering.
Lifestyle Inflation refers to the common occurrence where as your income increases, your expenses increase accordingly. Now that you earn x amount more, you can afford to eat in THAT restaurant, and you should live in THIS type of apartment in THAT particular neighbourhood. As a result, although you earn more, you still end up with the same amount (or less!) at the end of the month simply because your expenses are correspondingly higher.
Hedonistic Adaption refers to the fact that you always return to a baseline. That fancy new car that you just bought? You won’t care much about it a few months down the line. The designer clothes you just purchased? They’ll be hidden away at the back of the wardrobe by next season. The initial thrill when buying something quickly fades as we adjust to this new normal. Then we look for the next thing.
Some thoughts on the matter:
You should enjoy your money. But you should make sure that you cut back ruthlessly on the areas that are not important to you, and spend extravagantly on the things that DO matter. Whether that’s a personal trainer, eating out at fancy restaurants, or buying designer pieces. Because you’ve already taken care of the essentials, you can spend the rest on what’s important to you.
I found that viewing prices in terms of my hourly wage was a great tool. When you calculate what you earn per hour, you see that pair of jeans not as £120, but 12 hours at work! Are you sure that you still want them?
The thrill associated with buying new things often comes beforehand. The same way that you anticipate a holiday, a lot of the enjoyment comes prior to the experience/purchase (“grass is always greener” mentality). If I’m considering buying something, I will think about it for at least 48 hours. Will it genuinely improve my life? Have I existed happily before I found this item while scrolling at 2am?
After giving myself a pause, I often realise that my desire for something was just momentary, a fleeting fancy.
For the happiest man is not he who has the most, but rather he who lacks the least.
Your spending habits define your success with money.
Will you spend it all, living paycheck to paycheck, hopelessly caught in a upward spiral of higher wages to offset an increasingly expensive lifestyle?
Or will you be the one in charge, like a general in command of his soldiers.
You decide.
But one thing’s for sure.
Being able to choose NOT spend is a superpower when it comes to building wealth.
Have a great weekend!
Felix