With high average debt many households in North America are facing into uncertain times. It doesn’t help that both short- and long-term economic uncertainty is increasing almost daily in an economy that requires you to waste money to survive. This was even before the suckerpunch of Covid-19
Due to this reality, the majority of marketing and financial advice is designed to make people both spent too much money and to value excess. Even a large number of financial advice commentators enough people to take impractical steps and unnecessary risks (i.e. to sell you snake oil).
It can be incredibly difficult to combat these cooperating forces, especially with information overload and FOMO encouraged by social media. Fortunately, there are ways to shift your thinking and chart a sounder financial course for yourself and your family; The 15% Rule, Compartmentalization, Yearly Thinking, Store Brand Math, and Sales Watching.
Mindset Shift 1: The 15% Rule
With all the best planning in the world, your financial situation will always operate in some degree of chaos. That’s not always a bad thing however, chaos can help you learn. Overcoming challenges gives us great lessons to move forward.
For example, I once had to get very expensive surgery and that taught me a ($2,000) lesson about valuing dental hygiene. Interestingly enough however, my out of pocket was still cheaper than insurance, another lesson.
Hopefully your chaos is a little funnier, like your belt breaking on your way to work, or your cat knocking your iPhone onto the floor, (totally random examples I swear). Whatever the case, it’s important to understand that no plan survives first contact with reality.
Some commentators say the definition of poverty is needing an immediate fix to a car or broken-down boiler that you simply cannot afford. This is helpful but I prefer the benchmark of 6 Months Living at Current Spending, 6MCS.
Unless you’re already highly paid and frugal (in which case thanks for reading anyway), this is going to be a significant challenge for most people, probably in the region of $2,000 per adult per month or if you like $5,000 per month for a family of 3*.
That’s a $30,000 cushion, which is something that ~50% of Canadians at immediate risk of bankruptcy can only dream of (or ~40% of Americans that couldn’t cover an unexpected $400 expense). One of the key tools to navigating the chaos and making it to your 6MCS is to follow the 15% rule.
*Note: I know many, many people life at much lower levels of spending than this so please don’t feel like I’m setting this as a baseline for everybody.
Living life at 115%
“Build in at least 15% for failure in everything you do”
To some that sounds ridiculous and to others it might seem common sense, but in your finance journey you are going to fail. You’re going to spend $55 instead of $50 or you’re going to need tyres that take up 40% of your 6MCS balance. The things happen* and will continue to happen for life.
There is no way to tell what will come down the line during your finance journey but one of the smartest things to do is to build in a buffer. This is a simple but powerful tool that will allow you to ride the waves of financial uncertainty a little smoother. Take your overall saving and spending figures and change them by at least 15%.
This means calculating what you want to save in a year and adding 15% through overestimating your line items. Going to spend $1,000 a year on clothes? Budget it to $1,150 instead. The point of this is to train your spending habits to operate at less than full capacity. This has three main benefits:
- You are encouraged to mentally stick to the lower spending target and more likely to come in under $1,000 if your goal is $1,500 than if it was identical.
- You get extra cash in your savings from multiple different areas that can absorb the ebb and flow of your spending needs (our friendly failures).
- Over time you will become a budget ninja as you consistently meet or beat your own expectations
*Non-catastrophic things of course, serious life changing problems can arise and this article is not the place to help with them.
Does it sound a bit like you are tricking yourself? It should, because you are. We’re trying to build resilience against a large number of forces in society that will encourage you to waste money and stop thinking critically about your life. It is difficult to block this all out without practice and hard work.
So, what’s the end point of the 15% rule? It’s simple, over a long period, e.g. 12 months, you are aiming to accumulate at least 100% of your goal by living budgeting to save 115% of your goal. It sounds tricky, it sounds odd, but it is highly effective in the long term.
Shift 2: Compartmentalize, Compartmentalize, Compartmentalize
I know a lot of us will pick up a few beers or some wine as part of our grocery shopping, or maybe something different like a magazine (those still exist right?) or some vape juice or whatever. For a successful financial journey, we need to accept an amended understanding of groceries.
Groceries are the food you need to live a healthy life, everything else is a treat.
However, before you turn into a monk living of oatmeal and sadness we also have to accept;
All things in moderation, including moderation.
Life is pointless without treats, genuinely. Obviously, I’m an austere person but I still buy random stupid things from time to time just to break from the structure and have a bit of fun. Everybody should. But here’s the key point: In today’s world there are things you need to achieve you goals and things that are treats, and the majority of people get it wrong.
You only need a suit good enough for your career goals, everything else is a treat.
You only need a car that meets your needs and career goals, everything else is a treat.
Case by case analysis of ‘needs’
Now, I know some of you might be worried this is going back to the monastery but notice what I did there. You only need a car that meets your needs and career goals. Society is not a meritocracy no matter how hard anybody would like to have you believe. A banker needs to buy at least some fancy nonsense to ‘fit in’ with the social network key to his/her career growth. So maybe he/she does, in general terms, need a BMW.
The key is it should be the cheapest BMW that gets him/her where he/she needs to go and gives the right signals to those that can positively (or negatively) affect his/her financial state. This is always a delicate balance and takes a lot of practice but over time it will become obvious what is needed and what is not. Some wasting of money can genuinely be a positive investment in our future.
So, what you are going to do is separate every area of your spending (for suggested areas see here) into required and discretionary. Then, you are going to merge all discretionary spending into one area. Yes that PS4 game, that $100 bar tab, and those Nike sweatpants are going into the same basket.
If everything is in one basket you’ll see just how much extra spending you almost subconsciously do. Similarly, when broken down into categories you will be able to see your financial categories more clearly. Looking at both in turn is a useful tool in budgeting.
Shift 3: Think in years not months
One of the core manipulation techniques (or should that be marketing, I can never tell) used by businesses is their pricing structure. We all know the assumption that if you price it $9.99 it’s more attractive than $10, not to mention the completely lazy practice of leaving tax off due to it being too complicated/expensive (odd how so many countries manage just fine).
Another way to do this is the advertise prices per month. Sure $40 sounds great for all the TV you want to watch but does $480 a year sound just as good? Spending $700 a year on a gym membership? A lot of these things seem wasteful if you couch them in these terms. That’s not to say that the reverse doesn’t hold true. $200 a year for a streaming site like Netflix actually doesn’t seem so bad, especially if it replaces your $480 cable. A $500 home gym and some running shoes can beat your corporate membership.
Thinking in years (or long term in general) is a great boost financially and psychologically. You gain a fresher perspective on your savings and see clearer opportunities for savings.
Now, some people will say you won’t get rich nickel and diming things. This is true, you won’t become a millionaire cutting out your $5 coffee on the way to work. However, with all due respect to our millionaire friends, if a saving isn’t much of a sacrifice (making your own coffee isn’t really…) there’s no downside. Let’s take an average amount of working days a year and take off some vacation time, we’ll call it 230 working days a year. $1,150 on coffee a year.
Many Personal Finance Gurus will joke about this tip as it has become a meme, but it came from somewhere, it does have a value.
The Economics of Coffee
Let’s take the cost of making it ourselves off and just to illustrate the point let’s be generous and say it’s only 50% cheaper to make your own coffee. That leaves $575 that can be used somewhere else. Not even our super-rich ‘abundant mindset’ friends would scoff at that.
Find a couple of more areas like this in your life and you’re getting into territory where you can afford to invest in yourself, maybe start a small business, or train/educate yourself to achieve career goals.
The one caveat to this is that you don’t go full monk. The calculation is not coffee shop vs tap water, it’s about making savings that aren’t sacrifices through understanding what is needed and what is not. Hey, maybe you work in a networking heavy environment and coffee is a necessity, that’s a bit odd but totally fine, it’s more about making the shift where you can and to keep moving forward in understanding your spending.
If somebody tells you to completely cut out your coffee, beers, pizza, they’re no more helpful than somebody telling you to ‘think abundantly’ and you’ll magically become a zillionaire. It’s not really about the $5 Coffee, it’s about what the Coffee represents.
Shift 4: Do the store brand math
Everybody knows this trick. Buy store brand and save big. But few people really go into the details of what it means to do it successfully. Going back to my earlier anecdote about my surgery, it’s worth noting that in the long run your physical and psychological health are the most important thing.
So even if it’s cheaper a year to follow the ‘Standard American diet’, don’t. You’re going to end up sick and less well off in your head, heart, and bank balance in the long run. So make sure you’re comparing like for like and not substituting unhealthy foods for slightly more expensive ones in the long run. That being said let’s look at some examples.
Ice Cream and Running Shoes
Say you like to buy a tub of ice cream every week with your groceries, not a bad thing, not something you need to cut out, especially if it’s replacing a more expensive desert when you’re out of the house. The key is to recognize that, as a food, ice cream is generally trash.
It doesn’t matter how fancy and ‘organic’ your moo moo chocolate fudge is, it’s still nutritionally bad. That’s why it’s so delicious. So then don’t bother buying the most expensive tub at the store. Look at the store brand options and see if, again, there’s a substitute that isn’t a sacrifice.
I remember recently finding a chocolate/peanut butter flavor ice cream in the store for $5 for 750ml. My normal ice cream was $8 for 500ml. I have no problem sprinting through a 500ml tub of ice cream a week. Between these two that’s vs $15 vs $32 with some chocolate/PB left to spare. I made literally zero sacrifice to make that change.
Say you need running shoes, because you cut your gym and now you’ve to be sweaty and out of breath in public instead of in a warm building with a TV. The old adage rings true here, never sacrifice on anything that separates you from the ground, whether that’s shoes, a bed, or an airplane engine…
This is very true for running shoes, but it’s not true for the pricing of running shoes on the market. Yes, at the high end there are amazing shoes that are worth the hundreds of dollars you pay, but this isn’t the case at the bottom end of the functional scale.
That big sports brand you love is not creating $200 running shoes that have twice the function of the $100 ‘lesser brand’. Don’t believe me? Just check the reviews of $200 vs $100 and see if it’s twice a positive, if they last twice as long. Practically nothing these days is built to last and in terms of fitness function should always come first with no apologies. If you are running enough, you’re only getting 6 months out of your shoes, whether they’re $100 or $300.
This is the most difficult one for a lot of people to implement. Brand loyalty runs deep and so does the feeling of wanting people to think we’re great for having expensive things. I personally love Puma sports wear, but my running shoes aren’t Puma because I found as functionally good a shoe for 1/3 the price with little extra effort searching. But really, when it all comes down to, do you think there’s any value to being a person that spends $200 for $100 worth of function?
Note: Again, this all has to be taken together. If you just cut $900 of gym from your spending there’s no reason you shouldn’t have the best running shoe or yoga mat at home. It’s all about balance and if you’re moderating your moderation by buying something useful, that’s not bad at all. Aim for a lot of easy sacrifices and watch them snowball.
Shift 5: If you weren’t going to buy it, it’s not a bargain
Finally, this is a short and simple one. Stop buying crap you don’t need because you think it’s a good deal. How many times have you walked into a store and seen something you occasionally buy on sale. Suddenly you’ve bought 5kg of potato chips or a new sweater because it was a ‘great deal’. If you didn’t need that for your function or treat budgets, it was not a great deal.
Now, I love bargains as much as the next guy, and hats off to people chasing them (so long as you’re doing the math but there’s bargains, and there’s bargains. If you need a new winter jacket and you find one on sale, that’s a bargain because it’s something you need to have and you’re saving money. But if you go into a fast fashion store and by five shirts on sale that will barely be used and will be worn out within the first five uses anyway, that’s not a bargain.
Again, this is going back to months vs years. If you’re going to spend $200 a year on socks (very fancy socks) then buy as many socks as you need to last the year or two years etc. Don’t be taken in by a big bag of sports socks that will wear after two uses.
The same goes for ‘Black Friday’ and ‘Cyber Monday’. Avoid these things like the plague unless you know exactly what you need and exactly the quality. Many stores even get cheaper and worse electronics in for these sales and you end up having to replace them earlier. If you’re going to buy a plasma TV you can afford to be patient, know the specs, know the models, and strike when a real bargain comes along. You can also probably make do without at 90” wrap-around UHD TV that will also iron your clothes.
Budget Mindset For Life
If you’ve read this far you’ve probably started to notice a trend, the shifts in thinking that are required are all heavily influenced by the external environment. This isn’t a Philosophy blog so we don’t go too deep into the forces are work here except to say that society has conditioned you to spend irresponsibly and often. A lot of economic growth depends on this, and a lot of jobs too. We all know it’s going to crash and burn at some point but for now it’s the only show in town so you’re going to need to make peace with it.
Really then, the shift is about taking steps to encourage good behaviours to wean yourself off this thinking. It is about developing enough discipline to be confident and happy in yourself and your approach to money. You can read all the books and articles in the world but rejecting the concept of ‘retail therapy’ has to come from within.
Hopefully, if you can apply these steps diligently you can get to 6MCS. Get that far and you’ve already practiced enough to break the cycle of poor financial management. Then it’s just a matter of remaining sensible without taking your vows and heading off to the monastery.
If you want some practical tips on easy practical ways to start saving, check our our friends over at broke girls get fixed who have put together 10 easy ways to save money.
Once your mindset is set, your success is halfway achieved.