If you are trying to get ahead financially, you will need to consider spending less or earning more. But which one works best?
Let’s start with spending less.
The quickest way to increase your savings in the short term is to cut back on your expenses. You can make this change very quickly and see immediate results.
I know that if you print out your credit card or EFTPOS card statements for the last three months you would find items you could have done without. Taking a long, hard, honest look at your spending habits and identifying what you can cut back can be tough, but you will feel all the better for it.
But you can only cut back so far.
There are certain expenses that you either can’t remove or cut down on. Rent payments or home loan, car loan and other repayments must be made regularly.
Unless you are living off the grid, you need working water, electricity and broadband (I think we can all agree this is now an essential utility!).
You need to eat. You need transport to school or work, whether that is in the form of a bus, train or car – which has all of the associated costs of petrol, registration, insurance and ongoing servicing.
You need to make sure you are looking after yourself. Investing in your health through exercise, healthy food, regular visits to the dentist or the doctor when you are unwell are all important.
And finally, you need to make sure you have a Safety Net stashed away.
I call all of these expenses your Necessity Spend. You need to make sure you are getting the best deals and asking for discounts with all of your Necessity Spend. I also want you to make sure that what you are calling Necessity Spend actually falls into the category of necessity.
You should never cut down on your Necessity Spend, because it will cost you more in the long run. Trust me, it will come back to bite you every time. When I was younger, I would never have the money to service my car when it came time to be serviced. Inevitably I ended up with a much more expensive mechanical problem months or years later that could have been avoided if I had just spent the money on the service.
Your Discretionary Spend is everything that doesn’t fall into the Necessity Spend. This is where you can cut back if you are trying to spend less. You can choose not to go out to dinner, skip the cinema, decline birthday drinks or give up your holidays. But there is a limit on how much you can cut down. If you are earning $4,000 a month, and your Necessity Spend adds up to $3,200, you are left with $800 Discretionary Spend per month. Even if you save every single dollar (read: literally abandon your social life) the amount you can save tops out at $800.
To increase your savings beyond the point of your Discretionary Spend, you also need to earn more.
The best way to change your financial situation in the longer term is to earn more. Increasing your income will make a huge impact – because unlike cutting down on your expenses, there is unlimited potential.
There are lots of options on how to increase your income so I won’t go over them again here, but they fall into two categories:
- Getting an increase in pay – either in your existing job, or taking a higher paid role somewhere else.
- Supplementing your income through your side hustle.
But here is the thing. You can’t just increase your income and not worry about your spending.
The classic example I think of is Johnny Depp. He has made more than $650 million in his career but is in financial distress. How is this even possible? Because of his spending habits. Johnny got paid $20 million for his last Pirates of the Caribbean movie, but his living expenses are estimated to be around $2 million a month – meaning he would need to star in a new Pirates movie every 10 months just to sustain his lifestyle!
It is scary to think that someone earning millions of dollars can be in financial distress but it happens all the time. When people increase their income they also tend to increase their spending habits. You need to make sure you save and invest your additional earnings as well as any savings you make from spending less.
Her Money Matters tips:
- If you want to increase your savings in the short term, cut back on your Discretionary Spend. How to Tell the Difference Between Your Necessity Spend and Your Discretionary Spend.
- Over the longer term, you should identify ways to increase your income – 50 ways to increase your income.
- Ideally you will do both. Make sure you are saving and investing this additional money – not living like Johnny Depp!