Earning · Saving · Spending

Is it Better to Spend Less or Save More?

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:

  1. Getting an increase in pay – either in your existing job, or taking a higher paid role somewhere else.
  2. 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!
Investing · Spending

Afterpay and the Culture of Instant Gratification

If you have recently been shopping online or in a real shop (remember those?) you have probably seen Afterpay.

Afterpay allows you to ‘buy’ what you want and pay for it over four equal fortnightly installments. You can pay using your debit or credit card.

Just like like lay-by, you buy now, and pay later, with one key difference – you get to have your product or service straight away. You don’t have to wait.

And, best of all, Afterpay doesn’t charge you the buyer anything, except late fees if you don’t make your four payments on time. The cost is put back onto the retailer who pay Afterpay a commission for each sale.

Sounds great right?

Sure. It’s a clever business idea, but let’s think about the sort of behaviour Afterpay encourages.

You don’t need to save.

You don’t need to wait.

You can have what you want, when you want it and that means RIGHT NOW.

Have a think about why so many e-tailers and retailers would sign up for Afterpay, when THEY are the ones bearing the cost. Because it encourages you to spend. Spend more and spend more often.

Over 70 per cent of Afterpay’s users are millennnials (those born between 1980 and 2000) and the biggest group of retailers that offer Afterpay are female fashion brands. It would seem Afterpay’s target audience are young women which is no surprise.

The concept that you need a ‘new outfit’ for any and all upcoming occasions doesn’t seem to register with men, but for women it is standard fare. We also spend more on beauty and hair products.

When I see Afterpay offered on a $30 dress on The Iconic it makes me worry about the effect this has on young women. This facility encourages you to purchase items that you want, but probably don’t need.

Afterpay also encourages instant gratification. Why does that matter? Because studies have shown that when you have easy availability of something, it becomes less valuable to you. Easy come, easy go. Your hard earned dollars are precious and they shouldn’t be frittered away on things you don’t really need.

Do you actually need a new dress? Can you make do with what you have? Or borrow from a friend?

If you really do need (not want, need) a new dress, I recommend you save up for it and make sure you are buying quality over quantity.

Or, even better, don’t buy that dress and use your savings to buy some shares in Afterpay Touch Group Ltd (ASX: APT). The share price has risen nearly 30 per cent since July 2017 and is currently sitting at $4.13.

After all, it is a clever business concept, but you should be making (not spending) money with Afterpay.