Solving puzzles – Financial Shenanigans #7
How to think about saving and a couple of strategies you could try.
There are two paths to financial independence, two sides of the coin. One is to maximise savings through a frugal lifestyle and careful budgeting. Most people will probably consider this to be a boring option. Second is to maximise income by picking up extra work or building a side hustle. More exciting perhaps, but requiring more energy and effort.
I had a few attempts at building a second income stream on my financial independence journey. I delivered food on my bicycle, picked up freelance writing gigs and also tried to sell some products on Amazon Australia when it first launched. I soon realised that after a day spent at the office, my energy levels were low and brain capacity insufficient. I certainly wasn't in a position to consider which manufacturer in China to source my Amazon product from. At the same time, the physical activity of delivering food on a bicycle was a pleasant distraction from sitting at the desk all day. Arguably, this might have something to do with the fact that I enjoy cycling.
So for me, the majority of savings came from limiting spending and living substantially below my means. That, and the investing aspect, are the two areas of financial literacy that I have the most experience with. I realise that saving your way to financial freedom might not work for everyone. It's necessary to consider your personal circumstances and the behavioural factors at play. A sustainable strategy has to align with the way you see yourself and become a natural extension of your personality.
In my experience, excessive restrictions on spending might work in the short-term but will not lead to beneficial outcomes over the long term. Just like with diets, we eventually rebel against extreme constraints. Instead, we should aim for a natural equilibrium, a perfect balance of saving and spending that aligns with our lifestyle. Finding that equilibrium is a trial and error process. Sometimes, we might have to try a few different approaches and conduct many practical experiments to achieve the desired outcome.
As an example, it took me more than a year to find a way to save on coffee. It's a small thing, I know, but it illustrates the point. Like most people, I enjoy a few cups of Joe a day. Buying every single one of them does add up. I tried using French press and coffee filters at home. I also tried different apps, loyalty programs and prepayment plans. I experimented with replacing coffee with strong black tea. All these methods proved either inconvenient, unacceptable to me in terms of taste or not that much cheaper. Eventually, on a trip to Europe, I discovered a stovetop coffee maker. For no apparent reason, it resonated with me. All of a sudden, I had a way to limit my coffee spending without sacrificing the experience.
I wanted to talk about two approaches to savings that I find helpful. One is the method by Ramit Sethi, who talks about the concept of spending dials. Everyone's spending is naturally broken into many categories, from groceries to entertainment and from travel to necessities like utilities, for example. You can think about your spending habits or use an app that breaks your purchases into categories. Now imagine that each category has a dial, representing your spending, that you can turn up or down. The truth is that most of us spend a lot of money on dials that have little value. At the same time, we often don't know which dials are the meaningful ones. This leads to incredibly misaligned spending.
One solution is to experiment with those dials. Try to figure out which are meaningful to your quality of life and which ones are not. Reduce spending on non-essentials. Maybe bump it up for your priority dials. Needless to say that this approach should go hand-in-hand with some old school budgeting.
Now, there's a variation of the above approach that I, personally, prefer. It's a bit more blunt, which frankly, aligns with my personality. In this scenario, you turn off all non-essential dials simultaneously and just wait. As you start to feel discomfort with the absence of certain things, you will begin to understand what spending is consequential to your lifestyle. You might miss some things you didn't think mattered and the other way around. You can then start to slowly turn up the relevant dials, eventually reaching an equilibrium. The advantage of this approach is the ability to build an entirely new budget from scratch, based on practical experimentation.
Another concept that has worked for me is forced scarcity. In simple terms, it involves leaving less money in your bank account than you require for monthly expenses. Maybe 10%-15% less. As you might imagine, this forces you to swiftly adjust your spending behaviour, leading to some uncomfortable decisions. At the end of the day though, it's forced scarcity, not the real one. So if you are running short during the last week of the month, there's nothing wrong with topping up your budget account.
These are just some ideas based on my personal experience. The main lesson, however, is to keep experimenting and trying different approaches. Financial independence is like a puzzle. Your job is to figure out how the pieces fit together in a way that is manageable and aligns with your personality. Happy experimenting!
AG, I really appreciate your approach of trying different things and find out what works for you. Defining how much you need and saving your way to financial independence offer a peace of mind. I learned something here. Thanks for sharing your mindset and personal stories. I'm going to transfer some money out of my bank account and to my invest account to stay "broke" to limit spending.