By Joan Baker – Author, financial commentator, wealth coach.
What you do with your income matters. Whether you earn a little or a lot the choices you make with your spending are critical to getting what you want. Clearly, you first need to know what you want in life. If you don’t, spend some time considering what you want, clarifying what’s most important to you and pinpointing the goals you want to achieve. Working out what you want to do, have, and be, and what your priorities are, is the essential first step to getting what you want.
The next step is to align your spending with your priorities and goals. Every woman needs a spending plan – otherwise called a budget. The word ‘budget’ often makes women feel uncomfortable as they associate it with giving things up or not being allowed to buy something. I think the exact opposite is true – a budget is a plan for spending! Even the wealthiest of women need a budget as no one can buy everything. The budget is simply your plan for what you will spend in whichever areas you choose.
You can budget to be rich or poor. The key to budgeting for wealth is to ensure that you plan for a surplus, ie, that some of your income will be put aside for saving and investment. Becoming financially independent is as simple as choosing to ‘spend’ some of your income on savings and investments so that you will have that wealth available sometime in the future. After all, it’s not what you spend but what you keep that eventually sets you free. You can then spend the remainder however you choose.
But choose carefully. Make sure that you’re spending on what you really want. Many of us allow our income to be consumed entirely by food, transport, utilities and the other necessities of life. Are you getting enough fulfillment from what you buy? We tend to spend all our available money and then wonder why we have none left to fund other things that we value highly – the security of home ownership, the joy of family visits and celebrations, the fun of socialising, the achievement of education, the satisfaction of sport and hobbies.
No matter how small your income it’s important to identify what’s really important to you and allocate some of your spend in that direction. Nothing will change in your life if you do not fund those changes. Borrow a concept from business and ‘invest’ in aspects of your life that you believe really matter. This could be as simple as identifying the importance of improved fitness and allocating $500 a year ($10 per week) to allow you to buy some suitable shoes and a waterproof jacket to go walking. Or it could be as ambitious as gaining a tertiary qualification, requiring you to budget $100 a month for books or babysitters.
The less income you have the more likely that fixed expenses (like rent, food, power) take up most or all of it. They are called fixed expenses because they are unavoidable. The key to getting at least some of what you want is to ensure that you spend the small amount of discretionary income you have left (after paying your fixed expenses) on the things that matter the most to you. And it goes without saying that you should not spend a cent more on fixed expenses than you must – most of us can shave quite a bit from grocery, transport, and utility bills if we have a strong enough desire to allocate the spending to something else, such as a diploma that would give a career change or a family trip that would be remembered forever.
It’s very easy to fall into the trap of spending more than we make on stuff we don’t really want, just to impress people we don’t really like! After all, there is an entire marketing industry working full time to part you from your money. If you’re not really clear about what you want and what you’ll spend your money on, others – marketers – will decide for you. Marketing is meant to persuade and unless you have already decided what you want in your life the shopping mall is likely to design a different life for you.
The hardest part of being smart with money is deferring gratification. We all tend to want much more than we can afford – at any income level! And we want it now! Giving up something we desire in the moment so that we can spend on something we really, truly want is the key to smart money. It’s all about replacing mindless spending with mindful spending – spending that will deliver you financial independence and give you the life you really want.
Author of “Smart Women, Smart Money”, Allen and Unwin 2004 jbaker@wealthcoaches.net
The views or information given in this article are not necessarily the views of AMP or AMP Adviser Businesses. It provides general financial information and is not intended to provide financial advice. For personalised financial advice, we recommend you contact us.