Less Stuff, More Life – Part II
Less focus on stuff will lead you to more living!! Life is short – really short! Do stuff that matters!! That is how I ended Part I. Now let’s talk about the second part of wealth-building – managing the difference between “Earnings” – “Spending” = Savings & Investments. In order to increase your savings and investments, you either need to earn more money or spend less. While the former is an effective way, it is not usually in our control, but spending less could be.
Make a change where you have control: Expenses
Just to get it out of the way, I don’t believe in spending less money or being frugal for the sake of spending less. Unless frugality is your lifestyle choice and you find fulfillment there, austerity itself is not our purpose. I believe in living well both now as well as later. Yet, you will find that you can spend less money through your sustainable choices and invest more while living a fun and fulfilling life now.
A few examples: traveling is my passion and it costs money. So does gardening but I love it. So I set aside money to do both. Will I need to deprioritize something else in order to allow for my passion projects? Probably, sure! Both passions add greatly to my fulfillment and comfort my soul so I prioritize them over a lot of stuff. It is part of my well-lived life. The stuff I deprioritize instead is not.
Here are some small changes you can make to increase the difference that goes towards both short-term and long-term financial goals.
- Make the evaluation of your spending routine
- Evaluate your spending towards your values and reduce excess “fat”
- Don’t leave the left-over money in your chequing account and don’t just save it; instead, invest, invest!
Evaluate your spending each day or week & create a routine
The habit that we are trying to establish here is like watching our weight. For about a decade or so when I was busy with my corporate responsibilities, I didn’t pay attention to my weight. I generally had a great metabolism and was not the type to be hugely concerned about appearance, so I didn’t even own a scale and didn’t watch my weight at all.
One day I stepped on a scale in a hotel room and to my surprise, I had gained 10 kg over a 10 year period time. My first reaction: the scale must be broken. Gradually I accepted this new reality and I got a digital scale for home and started monitoring my weight. Over time, I was able to lose most of what I had gained. Your spending routine and monitoring (be it in an excel sheet or in your agenda) will be your de facto scale.
Regular monitoring of how we spend our money can teach us a lot about our consumption and help us be more mindful of how and where we spend it. Pick a time each day or each week and schedule it into your calendar*. (* In my case, I won’t remember what I am supposed to do each day unless it is on my agenda).
Whichever you choose to, make sure it’s something that you can realistically stick to. Daily accounting will help you establish your new routine quicker and it’s faster to evaluate (fewer items to grapple with), whereas a weekly accounting may provide you with more quality time to contemplate and complete your task.
Here’s an idea of how you might set up your spending survey: Create three columns: in the first column, indicate said expense, in the second column, establish the current cost. In the third column, indicate the proposed adjustment (evaluation).
|Date: January 1 2021 or|
Week of December 28 2020
Adjustment (+ /-)
Expenses and Evaluations
Evaluate each purchase against your values & remove excess spending
Two things always:
Have an honest conversation with yourself and ask:
ONE: Was my spending consistent with my values?
TWO: Can I remove any excess “fat”? If your spending doesn’t reflect your values, you will need to make adjustments. Remove the unneeded.
See below for how an ‘evaluation’ might take shape using two yardsticks: (1) Is this cost congruent with my values and (2) is this expense necessary or not?
Do I need a two-bedroom apartment for myself? Can I share it with a cool roommate to reduce the cost? Do we need to own such a big house for just the two of us? Can we rent part of the house out? Or should we downsize? Do we need to own a large SUV or can we manage by renting one when necessary?
Turns out it’s also way more sustainable to share our homes, both financially as well as environmentally, and where I live with a new 0% vacancy rate, it’s also helpful for the community to share living quarters. I would even go as far as to say that we have a duty to create more rentals if we can. Sharing part of your home will not only reduce your own expenses for housing but also other costs like utility bills, shared internet, streaming services, etc.
Of course, if you really value your privacy, you may make a different decision. This evaluation is not to be homogenous as we may value different aspects of life. I aspire to live sustainably and I highly value connecting with people. Throughout my evaluation, those values come to the forefront so sharing part of our home makes perfect sense to me.
In the example above, we’ll refer back to Susie in a previous blog called Two Different Lifestyles; Two Different Retirement Consequences. Let’s say Susie spends $2400 each month for her rent. She decided that she could find a roommate, either from her circle of friends or outside. Considering that she is in the driver’s seat, she can choose whomever she feels compatible with and whoever fits with her lifestyle. She will write -$1000 as her roommate will be paying this amount to her.
Should you continue to lease a car? Should you own a car instead and eliminate the interest amount? If you don’t have the money to buy a vehicle outright, is it better to lease or pursue a loan? Have you considered a second-hand car? Cars can be significantly less expensive after 5 years or so. Should you actually join the sharing economy and use a ‘car to go’ instead? Can you get around easily/comfortably by public transportation?
If owning your own car is significantly more convenient (time is also money if it takes 2 hours to get to work by public transportation and only half an hour each way to/from work with your own vehicle), consider an electric car. Or could you pursue a more fuel-efficient car? Have you researched the most competitive insurance packages? Or are you paying for more coverage than you actually need?
In our example, Susie paid $55 for gas. She decided that she would try to not drive her car for two weeks and see how that would work. So for now, there won’t be a long-term change in her expenses – $0.
Are you eating out often? Can you continue connecting with people without eating and drinking out? Consider cooking at home more often. Do you bring your own lunch to work? How about suggesting to your friends that you could take turns cooking for each other? Did you need that second latte? Did you buy too many groceries and now you have veggies and some fruit going to waste in your fridge? Should you start planning your food needs weekly?
Susie went out to dinner with her friend and spent $100. After some reflection that evening, she decided that she and her best friend could just as easily spend the evening at home and actually working on their cooking skills which they’ve talked about for some time. So, next time Susie wants to try to cook a new dish for her friend, she’ll also buy a bottle of wine and groceries to make the evening special for just $35, hence the adjustment will be -$65.
Do you pay $100 and more for a cable TV subscription? If so, you’re presumably watching a lot of TV (in which case you may also be wasting a lot of productive time) and if you’re not, then you’re paying a lot for an unnecessary expense. Do you also have a Netflix account? Instead of paying a yearly amount, could you switch to monthly instead and only activate the service when you actually want to watch some shows for a set period? If you enjoy reading books (or listening to them), you do know many are available through public libraries for free, right?
Internet/Mobile phone: Are you paying for more data on your internet/mobile service than you need? Have you checked recently how much data you actually use per month? There might be a better/cheaper option for the same usage. Usually, the existing provider will try to match their competitor’s plans to keep you on. Did you spring for the latest device? If so, how much did that improve your life?
Susie decided that she is enjoying watching shows on Netflix recently and that it’s rare that she watches ‘regular’ TV. As such, she decided to cancel her cable TV subscription resulting in a $150 adjustment.
You will likely have quite a few more items here that don’t fit it in the listed categories. The process is the same.
Susie ordered a new pair of sneakers because they were on sale on her favourite shopping channel. The slight variance of black made the sneakers look very sharp. After a bit of reflection, she decided to cancel the order because she already has a pair of black sneakers although they are of a slightly different shade. She also noted that the shoes would have to travel a long distance being shipped from Asia. Her sustainability value would be highly compromised with this purchase when the payoff is so little (the slight shade difference). With this decision, she is able to adjust -$175.
Now appreciate the power of your new routine
The evaluation process informs us of the inconsistency and trains us towards value-spending alignment. When we live according to our values, we are likely most fulfilled and happiest. You will spend less and less on frivolous stuff out of habit or impulse decisions. You are building your value-based spending muscles.
If Susie spends $2000 less every month due to small changes that she made, and now saves and invests the difference towards her long-term financial goal, it would look like this.
Monthly investment of $2000 at a 4% interest (conservative average net return on investment rate), Susie will have built her assets as follows:
At the end of one year: $24,000
At the end of five years: $132,000
At the end of ten years: $295,000
At the end of twenty years: $733,000
Just by changing her spending based on her values and reducing excess in her consumption, yet without altering her quality of life, Susie will be able to build sizeable wealth for herself.
Invest the Savings
Don’t save, instead invest
So now that you have money to invest, go for it! You will need to “hire” money to work for you. Leaving it sitting idle in your chequing account is likely to get you very little return if any at all. I also personally wouldn’t put my extra money in a savings account for a mere 1-2% interest rate unless you are building up a small emergency fund.
Put your savings into investment accounts instead, which will give you a better return – historically speaking. If you haven’t started an investment account yet, begin the process now. Your government may encourage and support retirement savings (they mean investment) for example. You will want to take advantage of that opportunity as fully as you can.
In Canada, the government supports the Registered Retirement Savings Plan (or RRSP). It is a tax-saving mechanism, reducing your tax burden now when you likely are making more money than when you have retired. Once you withdraw from these plans, you’ll need to pay tax but at that point, you’re likely to have less income which means the tax burden/bracket will be lower.
Depending on your current income, you can contribute up to up to $26,000 per year. At a tax rate of about 40%, your taxable income would be reduced amount would be reduced by $10,400. That is the saving that you can now invest to grow your wealth instead. My former company also matched up to 1% of the salary to be added to my RRSPs. That too was free and it went towards my investments. Let’s say your salary is $100,000 and $1,000 was free to go into your wealth building. If we invest those tax savings ($10,400) plus your ‘free’ employer contribution ($1,000) you will be able to put away $11,400 every year and untouched, at 4% net return for 20 years, you will have built a $340,000 portfolio.
Educate yourself about investments
One last thing that I strongly recommend that you do is to start learning more about investment options. You will need to create multiple income streams so that one day you don’t have to work for money (money works for you instead). I would suggest ‘multiple’ or diverse investment portfolios because we cannot predict the future. Some people are passionate about real estate investment and some others are about the equity markets. The two camps seem to think that these investment opportunities are mutually exclusive.
I believe in both and in having a diverse portfolio. You will likely want to hire professionals in both fields but having some knowledge in these areas, even if basic, will immensely help to hire competent professionals and also, once hired, ‘manage’ your hires. You should be able to discern who knows what they are doing versus someone who pretends to know it. Some investment professionals are just not as knowledgeable as they might want you to believe. Just like anything, some carpenters, athletes, graphic designers, business owners, hairstylists, are just better than others! But if you decide to ‘invest’ yourself, you will just need to study the topic in much more depth.
Focus on experience, not stuff. Instead of buying stuff for your kids and your loved ones, travel together, spend the weekend together. Time is precious, so give your devoted quality time to what is truly precious to you. How about working less and spending more time with your family and/or friends? How about taking an unpaid leave of absence from work to volunteer? How about investing in new learning – gardening, cooking, carpentry, arts…?
Before your new routine, you might have said that you didn’t have money to travel with your kids. You might have challenged me and said you are not lucky enough to have loads of money saved up to afford you a 6-month overseas trip. But as you have now seen, you create your own “luck”. Susie saved $24,000 in just one year and she can now take 6 months off if she decides. If well planned, $24,000 could support the whole family’s month-long vacation. Don’t let luck run your life. Take control. Spend less. Live more!
I guarantee you that spending less will lead you to more living!! Life is short – really short! Do stuff that matters!!