When trying to spend less, the three most effective places to look are housing, transportation, food, and clothing. These are the places where people typically spend the most money so any savings will have a greater impact on your overall spending.
It is important to keep sight of the overall picture when looking to spend less. There is no point in amassing great wealth if it leads to a miserable life. This is why it is important to take the time to determine what you truly need in your life to be happy. Keep in mind there are people in 3rd-world countries that are happy that can’t even afford running water, and there are multi-millionaires that have every luxury you can imagine and are miserable—as if unhappiness was a status symbol.
Focusing spending on only the areas that provide you the greatest sense of fulfillment and happiness frees up tons of money for investing in your financial independence. I have always been a natural saver and have been able to prioritize spending in my head similar to what is taught in “Your Money or Your Life” by Vicky Robbins and Joe Dominguez—they just put to words what I subconsciously did. I find that other people are more comfortable prioritizing their spending with a written budget. Whichever method you choose the net result will be more conscious spending leading to less spending overall.
A common misconception I should address is that people think that spending less is taking away from your life. People view spending less as taking away their happiness. They can’t imagine living without a big house and a massive yard or driving a used car without a luxury brand emblem on it. The problem with this thinking is that they don’t take the hours needed to work to earn the additional money for this spending. Nor do they take into consideration the extra hours to protect and maintain these purchases. “The things you own end up owning you” couldn’t be truer.
The end goal is that you will think about each purchase in terms of what spending this money will take away from your life. If you don’t already have everything that you want, think of what you want most but don’t have yet. Any purchase you make will extend the time it takes you to get your most wanted thing. You may also want to evaluate why you are wanting these things and if these wants will truly bring more contentment to your life. Do you really need a massive house to be happy? Are designer clothes really that important? Do you really need to buy your car new?
If you already have everything you want, think about if this purchase is worth pushing back your financial freedom. A good quick estimate is to look at how much you save toward your financial independence per year. Divide the purchase price by the amount you save a year, and this is how many more years you will need to work as a result of the purchase.
Let’s say you make $100,000/year and save $10,000. You consider buying a Corvette for $50,000. This will require you to work about 5 extra years before your financial independence.
$50,000 / $10,000 = 5 years
Is having a corvette now worth 5 extra years of working? 5 years of not having time to spend with family and friends, not being able to do the things you enjoy the most, of financial stress and uncertainty? Only make the purchase if it is.
This also works with smaller purchases. Just convert your yearly savings into a smaller amount of time.
$10,000 / 12 = $833 per month
$10,000 / 52 = $192 per week
$10,000 / 260 = $38 per working day (assumes 5 day a week job)
$10,000 / 2080 = $4.80 per hour (assumes 40 hour weeks)
Spending an $40 at a restaurant will require just over a day of extra work to reach financial independence. A $10 movie ticket will cost just over 2 hours of work. Sometimes this is worth it, other times it is not. Only you can answer that question, but the important part is that you are asking this of yourself and carefully choosing what is right for you.