Reducing spending is a topic that comes up with a lot of clients. Some truly need to save more, others just feel as if they spend too much, without having any specific or concrete thing to point to as a measure of “too much.” A good long term plan can help achieve financial independence.
As I often mention, changing habitual behavior is one of the most difficult things for a person to do. This isn’t like saving more to your 401(k), which you can accomplish by logging into Fidelity and changing a % once. Changing your spending behavior means you are consciously changing behavior multiple times per day, every day.
It might be either a particularly good or particularly horrible time to encourage you to do anything about your spending. I have long been loath to give specific dollar or percentage recommendations to my clients for how much they should save or spend. In a perfect world, you identify what you want in your life, both now and in the future, calculate how much you need to save to pay for those things, and then spend the rest. Or you identify very clearly what your values are, what your ideal life looks like, and you adjust your spending accordingly.
Problem is, you rarely know most of what the future holds, what you want, and how much it’ll cost. So, there’s no objective answer to how much you need to save.
Another problem is that it simply requires too much mental effort to figure out how to align spending with values or ideal life, and so nothing gets done.
Here are some rules of thumb.
Of your after-tax income:
- Essential expenses (rent/mortgage, groceries, healthcare, etc.) = 60%
- Proactive savings (shorter term or the usual “retirement”) = 15%
- Guilt-free spending (whatever you want) = 25%
Reduce From the Top vs. Rebuild From Zero
We do spending reviews with each client. In preparation for that meeting, our clients collect their spending data from the last month or (ideally) 3 or more. One of the unfortunate consequences of this approach is that clients have a list of their current spending data right there in front of them, so the natural instinct is to start figuring out what to cut.
What about wiping the slate utterly clean, stop spending on everything, and then add back expenses one by one? Obviously, you can’t just stop paying your rent, but you can at least be aware of each dollar you’re spending on rent when you spend it…and for all those non-essential expenses, can you simply stop them?
Cancel your Spotify. Cancel your gym membership (ha ha). Cancel your Prime membership. Get your expenses down as close to the bone as possible, and then intentionally rebuild from there.
The goal here is to consciously spend every dollar, not just let dollars randomly fritter out of your wallet.