In my 30s I’ve made a habit of taking financial advice from individuals who have reached a level of financial success that I wish to emulate. In the words of Dave Ramsey, "No more taking advice from broke cousin Billy," or worse yet, from clueless financial advisors whose primary interests are the well-being of themselves and their company–with those of their clients’ being tertiary at best. (This is a gross over-generalization, but I do believe the vast majority of financial advisors end up costing you money, a boatload of money, in the long run.)
After several hundred hours of self-education in my mobile university via podcasts and a number of highly regarded books on finance, a common formula for financial success has emerged.
Spending Less + Earning More + Investing the Difference = Dolla Dolla Bills Y'all
Learn to Spend Less
Today we’ll be focusing our attention on perhaps the most important category, “Spending Less.” This category serves as the foundation for what Dave Ramsey would call your metaphorical financial “brick house.” It is also the category where all of us can take action and start making changes today.
Track Your Spending
Before we can figure out how to spend less, we must first know what we are spending our money on. Herein lies the habit: TRACK YOUR SPENDING. The single most important habit a person can develop in regard to their financial well-being is to figure out where every $1 they spend is going.
The good news is, it’s simple. Well, relatively simple. Web platforms like Mint.com are not only free but do the tracking for you as long as your purchases are made with a credit card. Cash purchases can also be tracked but have to be entered in manually. Personally, I like to use a credit card for all my purchases to accrue reward miles, but I would only advocate doing so if you are able to pay your card in full each month.
Getting started with Mint.com can take some time, but it is an investment that will pay dividends in the future. “Dividends? I like the sound of that, but how will tracking what I spend earn me money?” For one, I was able to identify a few double-charges that were accidentally applied to my account. I was also able to cancel a few ongoing subscriptions that I didn’t realize I had (Damn you Jibjab and your recurring $15 annual charges!) and discovered just how much cable really costs me.
Recognize Your Spending Habits and Take Action
Most importantly, learning about your spending habits allows you to take action. It makes it possible for you to identify those areas where your spending does not align with your financial goals and personal values. When I first began tracking my spending, I had recently moved to NYC. Although I was making what I thought was a reasonable salary, I was living hand-to-mouth.
“Where was all my money going?” Tracking my spending allowed me to identify areas for improvement. “I spent $150 on cabs this month! Are you joking?!?!” It caused me to take a serious look at my spending habits and cut out the frivolous spending that really had no bearing on my overall happiness.
Since that time, I’ve noticed a drastic shift in my investment portfolio. I’ve also realized that the willingness to embrace a small amount of discomfort in life can lead to a lifetime of financial security and the ability to spend your money on the things that matter most–the things that make you happy!
How about you? What methods do you use to track your spending? How has this changed your financial well-being?