Spending reduction is a topic that is related to a amount of my customers (not all). Maybe they really need to save more. Maybe just her feeling as if they are spending too much without having anything specific or concrete to point out as a measure of “too much”. Perhaps they grew up poor or “middle class” and their current income and lifestyle are still confusing.
As I often mention, changing habits is one of the hardest things to do under the sun. (One of my favorite books on behavior change is Switch: How to change things when change is difficult. It’s damn good read, and not just for financial planners.)
Change accordingly expenditure Behavior is one of the hardest things in personal finance. This does not mean that you will save more on your 401 (k) which you can accomplish by signing up to Fidelity and changing a% once. If you change your spending behavior, change your behavior several times a day each day.
Over the years of working with clients and speaking with other financial planners, I have had many discussions about spending reduction techniques and ways to shape the discussion. These are not recommendations per se. They are … what would you call them? …Considerations.
It could be either an especially good time or an especially terrible time to encourage you to do something about your expenses. If your psychic energy is squeezed under the heel of the universe right now … can I recommend bookmarking this post?
Stop saving and thus outputting% s, even if they are arbitrary.
I have long refused to give my clients specific dollar or percentage recommendations on how much they should save or spend. In a perfect world, you identify what you want in your life now and in the future, calculate how much you need to save to pay for those things, and then spend the rest. Or you can very clearly identify what your values are, what your ideal life is like, and adjust your spending accordingly.
The problem is, you rarely know what the future holds, what you want, and how much it will cost. So there is no objective answer to how much you need to save and how much you can therefore spend.
Another problem is that it simply takes too much mental effort to figure out how to balance spending with values or ideal living and therefore nothing is done.
Enter the rules of thumb.
Arbitrarily, of course. But as long as they are reasonable, they can be great. My friends at Mana Financial Life Design have found great success with their customers Ramit Sethi’s rules of thumb:
From your after-tax income:
- Basic costs (rent / mortgage, groceries, healthcare, etc.) = 60%
- Proactive savings (short-term or normal “retirement”) = 15%
- Debt Free Spending (whatever you want) = 25%
Many of us need specific goals in order to pursue them. If you’re bringing home $ 10,000 after tax every month, it is much more effective to say, “Spend only $ 2,500 each month on debt-free expenses and save $ 1,500 each month” than to say: “Just spend.” Fewer. ”
A more accurate approach to stock compensation
Before you start getting too involved with these specific numbers, let me remind you that they are a bit arbitrary. And especially in the tech industry, where “lumpy” stock-based compensation can be a huge chunk of your income, those numbers can be silly.
So let’s put together another set of (mostly arbitrary, but still more reasonable) numbers! How so:
From your monthly salary,
- Base costs = 80%
- Proactive savings = 15%
- Debt-free expenses = 5%
From you RSUs this vest quarterly (and in this example that They sell 100% of),
- Proactive savings = 80%
- Debt-free expenses = 20%
Of ESPP shares that you get every 6 months (and in this example that They sell 100% of),
We’re just trying to get to the right stadium folks. Life is too changeable, too unpredictable to wrap around axis to get just the right percentages.
Go on a cash diet
Mmmmm … maybe best for another time, but man, do you want to cut your expenses? Pay for everything you can with cash. As in dollar bills, no debit card.
Sure, you can’t pay your mortgage or gas bill this way. However, this way you can pay for restaurants, bars, coffee, groceries, etc. Probably the biggest impact: You would be forced into local stores by Amazon because you can’t pay cash on Amazon.
The delivery of 100 USD in cash is a path A different experience than handing over a credit card and seeing the numbers $ 100.00 on the screen. Then press “OK”.
Sounds tough, doesn’t it? Probably because it really is. For a while. If you want to do an experiment in your life, just try for a week. Observe – maybe even write down – your daily spending behavior every day of the week.
Reduce from above vs. recreate from scratch
We issue reviews for every customer. In preparation for this meeting, our customers collect their spending data from the last month or (ideally) 3 or more. One of the unfortunate consequences of this approach is that customers have a list of their current spending dates right in front of them. So the natural instinct is to figure out what to cut.
Eeeyuck. Not only can I see from my personal spending experience, but literally too everything The clients we have worked with find it difficult to bring down the cost of their current spending behavior.
What about wiping the slate clean? everythingand then count back the expenses one by one? Of course, you can’t just stop paying your rent, but at least you can be deliberately of every dollar you spend on rent when you spend it … and all of those not essential Cost, you can simply Stop them?
Cancel your Spotify. Cancel your gym membership (ha ha). Cancel your Prime membership. Get your expenses as close to the bone as possible, and then purposely rebuild from there.
Many of our customers have a ton of subscription services of various types. None of them cost much, but they add up to $ 100 a month overall. Instead of trying to pick that one subscription service and that one subscription service to eliminate, eliminate them all, see what you are really, really missing, and then add that one one back on purpose, on purpose?
This is great for recurring expenses that you pay for every month regardless of your usage or value. For the cost of you active every month, maybe a month (week), that you actively evaluate each purchase before making it. For a month (or a week) only.
The goal here is to deliberately Spend every dollar and don’t just let dollars squirt out of your (e-) wallet without really paying much attention.
Money can be many things, but among other things the power to change your life, the power to protect you and your loved ones. Don’t want to reserve as much money as possible for these things instead of literally waste them about things you don’t even think about?
Modifying “proxy” behavior that is easier to modify.
We have just discussed this with a client who has drawn up a “disaster plan” so that she does not lose her job. (She is the only wage earner in a family of four.) For her, “disaster planning” means knowing exactly what expenses she would cut if her income were lost.
Unsurprisingly, they identified food as a major expense (especially during these quarantine periods). You usually shop at Whole Foods. In order to spend less money at Whole Foods, they would have to pay attention every single article They bought in Whole Foods. Exhausting.
Or they could change the store they shop from. If instead they shop at Kroger (choose your cheaper grocery store) they have to make that only change (where they shop) and not have to worry about all of the individual choices once they get to the store. That sounds a lot less strenuous – and therefore much more manageable.
So instead of changing the identified spending behavior – which groceries they bought – they can change a proxy behavior – where they shop. It’s a lot easier.
Eliminate one major expense versus reducing many minor expenses
This is something I bring up to all of our customers looking to cut their expenses. It all starts with this spending review for which they collect spending data for a few months. We then go through it category by category.
The customer wants to spend less money. The customer starts talking about “Maybe I can spend less on groceries and I can spend less on clothes and I can spend less on blah blah blah.”
My question is: do you think it will be easier to keep track of how much you are and are spending on groceries, clothes, cafes and blah blah blah? Fewer for all of these things … or just pick a category or two that you want to output Nothing at least for a short time? Can’t you just go out to dinner for a while? (Okay, bad example during quarantine.) Can you just eliminate your fitness expenses? I don’t know, maybe they sound crazy to you. But there are other things in Your spend a life that you could really just be gone with?
I think back to the psychic energy, willpower, discipline that comes with spending less money … and how limited it is. What options can you use? Fewer?