Spend wisely. You’ll hear that from any type of financial blog out there. Heck, probably even more than on just financial blogs. Spending your money wisely is important no matter what your priorities are in life.
But what does it actually mean to spend wisely? And how can spending wisely make you more money?
The answer is simple: Spend money on your priorities, don’t spend money mindlessly or on things that do not bring value, and put that new-found extra dough to work for you.
I know that isn’t just one thing, but the ideas flow together. You see, by identifying what is important in your life, you are able to create a budget for those items. Anything else you spend money on becomes extra. Extra that can either be spent or saved…. And saving is the clear winner there.
Let’s dig into this more.
Spend money on your priorities
This is the hardest part. You may not think so, but determining what your priorities are is the first step to spending wisely. The trick is determining what counts as a priority and what doesn’t.
That bagel sandwich you grab on the way to work each morning likely isn’t a priority. However, a weekly coffee with friends could very well be. Do you see what I mean? The daily bagel sandwich is a mindless activity – wake up 10 minutes earlier and make your own breakfast sandwich. The coffee with your friends is a way to connect and spend time with those you care about.
The weekly coffee could be considered a priority because it’s part of something bigger. It’s time spent with loved ones, which is worth it. The point being, priorities are larger than a single activity. Priorities encompass your values, your goals, and your purpose.
Popular examples of priorities are things like family, friends, health and fitness, travel, hobbies, legacy and work.
These aren’t all-encompassing. As individuals it’s up to us to decide what our priorities are. It also matters that you spend wisely on these priorities. Taking on debt or spending excessive amounts of our budgets to pursue a certain priority should raise a red flag. If that’s the case, it’s time to re-evaluate how much that priority is really worth, and where it falls on your list.
Don’t spend money mindlessly or on things that do not bring value
Recall the bagel sandwich mentioned above. I alluded to it already: mindless spending is the worst kind of spending.
Personally, my biggest challenge is the grocery store. I walk in planning to buy specific items, yet walk out with a cart double the size I planned. It’s gotten better as I’ve started to focus on it, but my mindless grocery shopping easily increases my grocery bill by 25-50%.
A classic personal finance example of mindless spending is the daily cup of coffee that you buy on your way to work. Other examples of mindless spending could be ordering takeout too often, magazine subscriptions, buying bottled water (or beverages), clothes shopping or using gift cards. In general, mindless spending occurs when you’re not paying attention.
Unnecessary expenditures can add up quick, so if you are not keeping track of your spending, it’s time to do so. I’d recommend Mint or Personal Capital to do this. I prefer Personal Capital, but check out both and see which one works for you. In general, Mint has a bigger focus on budgeting while Personal Capital leans towards investments and net worth.
Mindless spending occurs when you’re not paying attention.
You should also resist spending money on things that do not bring you value. I grouped mindless spending and value together because, a lot of the time, they go hand in hand. Instead, revert back to your priorities and make sure you budget for them. Eliminate anything falling outside of, or not relating to, those priorities.
Put that new-found extra dough to work for you
By focusing on your priorities and removing mindless and non-value adding spending from your budget, you should start to see some extra dollars in your bank at the end of the month. Resist the urge to spend them, and instead put them to work for you.
Perhaps it’s only $100 a month, perhaps more. It doesn’t matter. Put it to work.
How exactly do you put it to work? By investing it.
Contribute more to your 401k, open an IRA, put money into the market in some way and leave it there. Let it grow.
The coffee example I provided above explains the power of compound interest very well. It turns out that coffee ends up costing about $100 a month. By investing that $100 a month over 30 years with a 6% return, you end up missing out on $100,000.
Put money into the market and leave it there. Let it grow.
Chances are, if you make enough money to spend mindlessly you can come up with more than $100 a month. At $200 a month that opportunity doubles to $200,000. At $500 a month you could have over a half million dollars in 30 years. Done the quick math yet? Saving $1,000 a month for 30 years could make you a millionaire.
Now is that magazine pile on your coffee table worth it? Likely not, unless you’re a Doctor’s office and have people waiting in your living room often.
As I have said before: have a plan and execute to it. Pay attention to your spending, save what’s left over, and watch your nest egg grow.
Spend wisely, friends.