Unless you have unlimited financial resources, which is unlikely, you will no doubt find yourself reaching limits in the amount of money that you have available to spend. All of us have a salary or income that has a ceiling. This means that what you spend your money on, is probably the single most important choice you have to advance our financial independence. Every day, month, and year you have expenses that have to be paid. Some are fixed and others are variable. This will affect the amount of money you save or whether you even have any money to grow your wealth.
Make sure you have a budget in place, if you not sure where to start, check out our article: 8 Ways a Budget Helps Achieve Financial Success.
Assess your expenses and the value they add?
In order to control their finances, most people will resort to reducing their expenditure as a strategy to create savings. The problem with this methodology is that 9 times out of ten, by cutting expenditure you might well create a shortfall in another area of your life.
Let’s say you decide to cut spending on your mobile phone. So you cancel your contract and migrate to a pay-as-you-go service. Initially you save the dollars you were spending, but now you find that on your pay-as-you-go service, you have less capacity to communicate. On top of that, your costs are higher when phoning or using data.
This can happen for a variety of different expenses. This is why it is important to calculate the cost-saving vs the alternative cost for not spending on that service or product.
You decide to move to a cheaper residence. It’s further from your work and from your children’s school. On paper it looks great, you going to save a packet of money. Then you move to your new apartment. Suddenly you see your fuel costs skyrocket. You didn’t factor in all the additional trips and extra driving required to do what you would usually do for less in less time.
Do a cost analysis before making financial decisions
The key is comparative cost analysis is to determine if your cheaper option is truly cheaper! There are always hidden costs and these need to be assessed or you might just find yourself spending even more than you budgeted.
If you decide to reduce expenditure on anything, assess how will this affect you. If it is a non-essential product or service you can live without, drop it! If you going to incur more costs in the long run by saving a buck now, then its not worth doing.
Ask yourself the following questions:
Do I need this product or service?
What will it affect if I don’t spend money on this?
What is this expense saving me in other areas?
What expenses will I incur by not having this?
Identify whichever expense you can live without and remove them from your list. Then consider investing the savings into areas where you need to build better resilience.
What other strategies could you use to build financial stability?
One option is, instead of obsessing about saving money, spend your money on things you know you always need. You know there are monthly expenses you cannot live without. Expenses like food and groceries, pet food, school fees, or whatever is an essential expense.
Instead of operating from fear and trying to save, focus on spending your money on what could save you down the line. Purchase more items you can’t live without.
You purchase one jar of coffee each month. So this month buy 2 or 3. Then do the same on other items you can afford, start small. The key is getting ahead of your expenses, you can’t get away from spending money, so use it to leverage capacity.
Wealth is not purely about how much money you have in the bank, wealth goes deeper than that. It is about capacity and what you can do:
- How long can you live without needing income?
- How long can you live on the resources you already have?
By being ahead of your expenses will give you the room you need to deal with the bigger financial issues, like paying up any debt. It will also allow you to save up for larger financial goals you might be working toward.
Break down your expenses into two sections:
Fixed Expenses: Expenses like rent, home loan, policies, etc. that have a fixed monthly amount
Variable Expenses: Expenses like groceries, fuel, entertainment, etc. that can fluctuate.
Now assess your variable costs and find opportunities to invest in areas that are critical.
- Categorize your expenses from high to low.
- Start with the lowest expenses first.
- Assess which of these you could go without and commit to not spending money on them.
- Now for one month invest in one or more of these items.
By investing in things you always need and having several months’ worth in stock will allow you to invest in other items next month.
You can repeat and apply this to higher and higher value items until you have grown your capacity to a point wherein a few months you can go a full month without paying for many or all of those items.
This will free up money for expenses that you are not able to currently afford. It could give you the needed sum of money to settle an outstanding account that has been pending for months!
Control Your Spending or you will Waste Money
Spending money is not the problem, we all have to spend money to purchase goods and services we need every month. The problem lies in how we choose to spend that money. If you spend it wisely and grow your investment in the things you need, you will make more money available for the things you truly want.
The true secret to growing your wealth is not necessary just increasing your income. It is even more important to evaluate how you are spending your money! Are your expenses growing your financial capacity or are you being wasteful in your spending?
How important do you thinking your spending decisions are in your progress to achieving financial success?
Want to learn more.
Check out our tips to improve your financial independence:
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