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.
Budgeting Increases Happiness
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.
Start weighing the costs along with the benefits for each purchase. How many hours of your free time do you need to give up in order to have this consumption? Is having this thing worth giving up those hours of my free time?
Calculating Spendable (Real) Wages
To determine how much free time your consumption is costing you, look at a days worth of wages. Take how much you earn in a day and then subtract your taxes (federal, state, local, medicare, social security, etc…) and costs to get to work (~$0.50/ mile with a small car, $1.00/mile for a SUV or pickup).
If I make $20/hour and work an 8 hour shift, I would multiply 8 and 20 to get $160 per shift.
8 * $20 = $160
Then I would look at how much I pay in taxes lets take the average taxes paid of 13.5% for federal taxes, 7.65% for social security and medicare, and 9.9% for state and local taxes (these are average tax rates in the USA). This would bring the grand total tax percentage to 31.05%. So I would multiply $160 by .3105 (31.05 converted to decimal) to get $49.68 in taxes.
$160 * .3105 = $49.68
Then I would subtract the taxes from my gross income to get actual spending money per shift worked.
$160 – $49.68 = $110.32
Next I will add any time I spend to get ready for work and commuting time to the hours I worked. If it takes me 30 minutes to get ready for work and 15 minutes each way to get to work, I would add these to the 8 hours I get paid at work per shift.
0.5 + 0.25 + 0.25 + 8 = 9 hours
Now I divide my spendable pay per shift by the hours of free time I give up for that shift.
$110.32 / 9 = $12.26 / hour of free-time spent
So even though this hypothetical person makes $20 / hour at work, they can only spend about $12.26 / hour of free-time spent. This is typical that most people that I have gone through this exercise with make only a little over half of their gross wages.
Now if this person wants to buy a $100 pair of jeans, they would take the price and divide by their real wage to find out how many hours of free-time they must sacrifice to own these jeans.
$100 / $12.26 = 8 hours of work.
Now if the person feels that the jeans are worth 8 hours of work, then they should buy them. If they don’t think it is worth it, then they shouldn’t buy them. Simple as that.
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? Is it worth the time away from friends and family?
Simpler Calculation for Savers
If you already have everything you want, you can think about this purchase in terms of time until you reach financial independence. 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.
I have given you two strategies to think about making purchases in a more informed way. Notice at no point do I tell you not to spend on things you care about. That is because I believe that the best way to spend your money is specific to you. I also believe that if you are more conscious about your consumption, you will be more satisfied with your purchases while spending less than you were previously.