How to Control Your Spending | How to Build Wealth
Welcome to the Elias Talks Money V-log where I talk all things money. Today I'm going to be talking about how to control your spending!
In my previous V-log which talked about the top 3 reasons people go broke lack of discipline was one of those top reasons, and this is an issue that has been magnified in western countries with the availability of credit, which enables people to spend beyond their means.
The key to controlling spending is to be able to set a budget on what you spend, and then follow-up monthly, quarterly, and annual basis to ensure you're staying on track. It is important you try and make it as comprehensive as possible and include everything even those couple dollars that you use to buy a coffee for example and just try and make it as realistic as possible while using conservatism. So for example when making your budget if your last year income had a lot of overtime, you necessarily don't want to include all that overtime for your following year budget because you might not be guaranteed to get it. Take this same sort of approach with expenses with care not to underestimate.
The way I go about breaking out my budget is into the following categories:
Firstly Income where I include all sources of income. Initially for me this used to be salary & wages like most people, and slowly over time income from passive investments built up to eventually become 100% of total income.
As far as expenses the first category would be housing, which would be 20% of my income. It Includes mortgage, condo fees, property tax, utilities, and home maintenance. Transport is 10% and includes car lease, insurance, maintenance, and gas. Telecom is 5% and includes cell phone, cable, and Netflix. Food & Wellness is 10% and includes Food, Gym, Naturopathic, Chiropractor, Personal Training, and Vitamins and Supplements. Entertainment is 10% in cash and this is for going out to restaurants, bars, enjoying myself. By paying myself in cash I have an easier time to control my expenses. You can also setup a separate bank account if it works better for you. Clothing & Other Expenses are 5%. Donations are 10% for various charitable causes. Retirement is 10 percent.
Lastly, the "Get Rich Fund" is 20% and this is what I re-invest to create a passive income.
I'm not saying how I break out my budget is the only way to do it, but trying to provide a framework that you hopefully find useful. Depending on the economics of where you live the numbers will work a bit different. The key in my opinion is to have that 20% left over, so you have a get rich fund. So you can invest this in various things whether it be dividend paying stocks, real estate, or even buy a business. This will require sacrifices. For me this was moving from the Toronto, Canada to Hamilton about 1.5 hrs away effectively cutting my housing expenses in half. I had friends who made fun of me for moving from Toronto to Hamilton because Hamilton is considered a lower class city especially then, but I didn't care because I knew what my goal was. It was also a sacrifice because we were further away from family and friends, but at the end of the day it was well worth it because I managed to become financially independent.
For many people who struggle they get a paycheck and that entire amount of that paycheck is spent on stuff. Stuff that is not revenue or income producing or even worse an asset or liability that actually takes money out of their pocket such as a high end car. Also they generally extend their physical labour for all their income and wealth generation. They key to getting out of the cycle is to allocate your money into things that are revenue producing and or appreciating assets that you are not paying out of pocket for. Therefore I would say that buying a bigger personal residence is not a real asset unless it is producing income. The point is to increase your net worth to the greatest degree possible.
So how do you go about reducing your monthly spending, so you can have a get rich fund. It comes down to asking some critical questions before making any purchases and also while making your budget.
The Kakeibo method can be helpful in questioning your expenses. It is a method for personal budgeting developed in Japan over 100 years ago, and a core part of it includes asking the following questions:
1. Can I live without this item? We all have things that we truly can get along without. For me it's electronics sometimes I buy upgrades that aren't necessary. If you have an iPhone 10 do you really need the iPhone 11?
2. Based on my financial situation, can I afford it? Yes you can get a BMW, but should you be buying it and what percentage of your income are you spending on that BMW? What about the maintenance?
3. Will I actually use it? If you're buying a piece of clothing when will you wear it? Will it just collect dust at the back of the closet? If you're buying a house, car, or electronics do you need something with all the features that are being offered?
4. Do I have the space for it? Or will it end of up staying in storage? etc.
5. How did I come across it in the first place? Did I see it in a magazine? Did I come across it after wandering into a gift shop out of boredom? Was it recommended by friend? This creates mindfulness into the underlying reason for your purchase.
6. What is my emotional state in general today? Am I calm? Stressed? Celebratory? Feeling bad about myself? Some people make purchases when in one of these emotional states and this also creates mindfulness into the reason for your purchase.
7. How do I feel about buying it? Am I Happy? Excited? Indifferent? And how long will this feeling last? By asking this question it helps to draw emotions out of it. Have you ever been in a position that you purchase something and you are super excited about it, and then a few days later that feeling fades. This question Helps to bring some perspective into your purchasing decision.
Once you rationalize your expenses until the point that you can put 20% of income in a get rich fund you'll then need to follow-up monthly to ensure your staying on track. If necessary get an accountability partner to hold you accountable! Ideally this should be your spouse since you'll need their cooperation to make this work, but can also be family member or friend.
Thank you for listening to my V-Log. The main points are create a budget where you can take at least 20% of your income and invest it in wealth creation, stick to your budget and rationalize your expenses by using the Kakeibo method, and you will do well with time and perseverance. Over and out.