5 secrets of people who spend way less than they earn
If you want to get rich, or at least enjoy some financial security, you have a few options. One: Win the lottery (a bad bet). Two: Inherit a lot of money (if you had, you probably wouldn't be reading this story). Three: Spend less than you earn.
For most of us, option three is the only option. But while this advice may sound obvious, living below your means can be deceptively difficult. After all, there are a lot of demands on your money, and before you know it, your paycheck can run out before the month's over.
To help make sure you're actually spending less than you earn, give these five steps a try. A few crucial tweaks to how you handle money will keep the green flowing — and keep you in the black — for years to come.
1. Consider both sides of the coin
Many people focus only on cutting expenses when trying to spend less than they earn — but there's another option: increase your earnings. If your salary is simply too low, it'll be very difficult to reduce expenses enough to save money, even on a bare-bones budget.
The best way to increase your salary, without having to do any extra work, is to be effective at negotiating your pay and to know when to ask for raises. Don't accept the first offer an employer makes in a salary negotiation; prepare an elevator pitch, show how you add value and ask for a higher income. Once you've been hired, go above and beyond to contribute and show your boss you're enough of an achiever that a salary bump is justified.
If you can't squeeze more cash out of your current job, consider taking on extra work part-time, freelancing in your field, becoming an eBay reseller or starting your own side business. "If you just view your full-time job as the way you’re going to get ahead, it’s just going to take a lot longer,” Grant Sabatier, who accomplished his goal of saving more than $1 million by age 30 in part by taking on side jobs like launching a consulting business and selling concert tickets, told the Washington Post.
2. Know your "number"
Believe it or not, around 60% of adults don't have a budget or keep close track of spending, according to a 2016 survey from the National Foundation for Credit Counseling. Among those who think they know what they're spending, close to half underestimate expenditures in a big way. "Financial advisers who press clients to tally their spending say the numbers are often at least 20% higher than the individuals had thought," the Wall Street Journal explained.
You have to know what you're spending each month to ensure your income is below your earnings. You can track all of your spending using apps like ProsperDaily or DollarBird, or you could add your expenditures the old-fashioned way from your credit cards and bank statements.
You want to get an idea of your average spending, not just how much you spent in a single month, so keep tabs on your expenses over the course of 90 days. At the end of three months, you should have a good idea of what your total monthly outlays are, then you can compare your spending to your income to make sure you're spending less.
3. Slash unnecessary expenses
Now comes the hard part: reducing spending so your expenses fall well below your income. "The bigger the difference between what you earn and what you spend, the sooner you’ll find yourself with enough money to do what you want with your life," Money explained.
Cancel subscriptions you're no longer using, which can quickly add up to hundreds of dollars a month; avoid bank fees, which cost Americans $290 a year on average; and comparison shop for a cheaper phone plan to cut unnecessary expenditures that could be hurting your monthly budget. Switching to generic groceries could save you another $14 on a typical cart of groceries each trip, while making your own cleaning supplies could save a lot off the average $42 most households spend per month on cleaning products.
When you make cuts, try to find a level of frugality you can sustain month after month. The goal is to find a long-term budget that works so that you can save over time. If you can keep all of your spending — on both necessities and wants — to 80% of your total take-home pay, you'll be in good shape.
4. Make autopilot work for you
Every month, you must make the choice to transfer cash to savings. This gives you a lot of chances to decide you have other spending priorities you'd prefer to allocate the money to.
Don't force yourself to make the right decision with each paycheck or each monthly transfer. Set up an automatic debit of money directly from your paycheck to your 401(k) and savings account.
Ideally, you should ask your employer to withhold 15% of your pay and deposit that money into a 401(k). If you don't have access to a 401(k) at work, set up your automated transfer into an IRA.
Transfer another 5% into some kind of savings account, like an emergency fund or a long-term or short-term savings account, and you'll start to see the dollars pile up quickly.
"When you make the decision to set up a savings plan, you're less likely to stop and start in the future," Judith Ward, a certified financial planner with T. Rowe Price wrote in a blog post.
5. Stay off the hedonic treadmill
While a raise may boost your happiness levels for a while, the "hedonic treadmill" suggests that you'll eventually return to your happiness baseline. The "extra" income won't feel like extra income for long, as you'll soon adjust your expectations and your spending to account for it. Soon enough, the cash will be swallowed up by expenses and you won't even notice having the additional money coming in.
Avoid this by banking at least a part of every raise you get. If you get a 5% pay boost, save 2.5% of it (or more) immediately by transferring the excess cash into your retirement or savings accounts. You'll never get used to having the extra money, so you won't miss it — but it will be there waiting to help you build a better future.
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