How to not worry about spending money

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Have you ever seen money advice like this?

Stop buying lattes every day and save 5 x 7 = $35/week, $150/month, invest this money at a 10% rate of return, after 40 years you would have a whopping $880,000!.

This is what I call the “Gym Guilt Syndrome” guide to money management.

How often have you seen this happen? Someone signs up for years of gym membership, go for a couple of classes, see they’re not losing any weight, and drops it faster than a sack of turkeys from an airplane.

Most people who follow this kind of advice act exactly like this.

They put on a huge burst of enthusiasm and save 95% of their take-home salary in week 1 by not drinking lattes, using 1-ply toilet paper and lighting the incense they got from the local Buddhist temple to see at night.

Then they see they aren’t making significant impact on their savings accounts and slip right back in after week 3, feeling even guiltier than before.

First, here’s my promise to you:

  • No “I am cheapness personified ” frugality tips. They don’t work.
  • No guilt. You can spend what you like.
  • No confusion. I’ll give you specific steps to set up your financial system.

Let me show you why frugality tips don’t work:

3 mistakes with ultra frugality money advice

1) 30 years is far away

Have you ever woken up one morning and said: hmm I can really see these 7 dollars I’m saving today setting me up 30 years later? Well, neither have I. To build our retirement accounts on lattes, we will have to deprive ourselves of that latte every single day, of every week from now until we retire. In. 30. Years. Time.  (or until the world devours itself in a zombie apocalypse).

The human brain can’t understand 30 years until it’s almost upon us. Nothing in our everyday lives prepares us to comprehend 30 years. Juice turns brown in a few minutes. Milk turns sour in a few days. TV shows end in a few months.  None of these everyday human experiences prepare us to imagine the meaning of 30 years. It’s a terribly long time away until it’s not.

2) Habits can’t be built easily

How easy is it to change your behavior? Frugality money advice supposes everyone can build new habits. It takes a long time to reprogram our brains. You can’t just tell yourself, stop drinking coffee today and it immediately becomes a reality. There are many reasons you’ve gotten used to that cup of coffee in the morning. And we’ve all got distraction. How easy is it to keep saying no when you pass 42 coffee shops on your way to work?

3) The money still isn’t there

Hey wow, you beat the odds! You decided to forgo that morning coffee. Now you’ll have 150/month right? Wrong. When you saved that $5 today, did you actually put it away or did you spend it somewhere else? Unless you’re physically putting that money under your mattress, you’ve probably spent that money without realizing it.  And when you did put that money aside, did you invest that money? There are so many hurdles to cross: not spending the money, putting it aside and then investing it.

So do you still think cutting back on things will build us wealth?

The good news is, there is a way to lead the lifestyle you want and still have money. No more getting to the end of the month and telling yourself: “I don’t know where my money went”. Let’s set up a system so we don’t have make these decisions every day.

Let’s draw up a plan:

Spending on ourselves first

I think of my money as going into 3 separate blocks:

Priority Spending Plan

1) Bucket list

For the bucket list, write down what you want for the future. Examples: vacations, wedding, new house, car etc. Now we use the “eat an elephant one bite at a time strategy”.

Let’s say you want to take a trip to Spain and through your research, you find that it’ll cost you 4,800 which seems like a lot of money. But if we know we are going in a year’s time, we just have to put aside 400 dollars a month which is more manageable.

So ask yourself these questions:

  • How much does your bucket list item cost?
  • When do you want to cross it off your list?

Then calculate what you need a month: cost of bucket list item / number of years / 12.

Once again you’ll want to write these amounts down and sum it up.

2) Fixed Payment

A fixed payment is a regular amount that you have to pay every month, rain or shine. Some examples include, rent, phone, electricity, gym memberships, insurance etc. Dig deep into your last month’s expenses and find all the fixed payments you have.

As this point, you might want to consider including 5-10% of your take home salary for investments and another 5% for the “I forgot” fund”. Trust me, you’ll be glad for this when you visit the dentist and forget your company insurance doesn’t cover that.

Write these amounts down and sum it up.

3) Guilt-free spending money

Spending = Take home salary- Bucket list – Fixed Payments.

Once you’re at this step: you’ve planned for all your bills, created an emergency fund and put aside money for things you really want to spend on. Congratulations! This single step puts you ahead of 90% of the people. This money is for you to spend on whatever you like. No guilt associated. $7 latte. Sure! Get the next round of drinks for your friends? Why not?

Next, we’re gonna automate so all the heavy lifting.We’re going to use technology to help us.

Let’s use technology to help us:

Automate your financial system

By setting up an automated financial system, we free ourselves. We don’t have to make those will-power draining decisions every day and we are sending our money where we want without lifting a finger.

Checking Account

Find your center

First decide on a high interest account, this is the center of your financial system. You can find online comparisons that fit what you want but I like the OCBC 360 account. They give 1.2% interest a year just for crediting your salary into it. Talk to your company’s HR department and arrange for them to credit your salary into that account every month.

Pay your bills automatically.

Look at the fixed payments you have each month. Give them a call. You want to change the billing cycles so your bills come after your salary is credited into your account. At the same time, find out how to get an automatic payment schedule set up. GIRO is the method for most cases. Link these payments to your high interest account.

Set up your bucket list

I like OCBC because they have a simple set up for your bucket list items. Once you have an online banking account set up with OCBC, simply go to “Add a new savings goal”, pick the category it’s in and you should see the screen below.

Step 3

You need to fill in the amount, when you need it, the amount to transfer and check the “Automatically save this amount every month” box. Repeat this for all your bucket list items and you’re done.

Transfer your spending money

Finally, set up an automatic transfer for your guilt free spending money from your high interest account to your withdrawal account. This simplifies your system. Download a mobile app for your withdrawal account and check it every week or so to see if you’re on track. Now you don’t have to get to the end of the month and wonder if you missed a bill. And you don’t have to worry about saving on trivial things. Spend money in this account on whatever you like!

So to recap: we’ve gone through why frugality money ideas don’t work, created a plan to spend on what’s important to us and used tools automate our financial system. This is a foundation piece for building wealth. You really should pat yourself on the back for doing this!

And next time you hear someone telling you to cut back and keep a budget; ask yourself, is that something you want to do for the rest of your life?

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