Spend less than you earn is the golden rule of personal finance. It's incredibly simple, but it's not easy to follow. Your brain likes to get in the way by tricking you to go against what you know to be true. Here's how your brain sabotages your finances, and how you can overcome those tendencies.
Work With Your Need for Motivation
Motivation is a tricky thing. Sometimes, it's hard to feel like you're in control of your money, but many of us need that feeling to get things in order.
For example, when it comes to debt, the Stack Method makes the most sense on paper. You pay debts with the highest interest rate first. But, in practice, the Debt Snowball actually works better for people. You slash your smaller balances first, and this gives you a sense of accomplishment and control. Yeah, you end up paying more in interest. But if Stack doesn't work for you, you'll just be in debt longer, and that's even more costly.
Control doesn't mean you're going to suddenly get out of debt and start making millions. It just means you're taking an active role in building your financial life, even if that only means coming up with a plan to tackle your debt.
You can work with this tendency beyond debt, too. When you budget or create financial goals, focus on control. Devise a plan that makes you feel like you're calling the shots with your money. Feeding your need for control will make you feel motivated. And that will go a long way toward the whole spend less than you earn thing.
Consider Your Impulsive Nature
To spend less, we're supposed to simply create a budget and stick to it. We crunch the numbers, they add up, and that's that. But impulsive, emotional behaviour gets in the way of the maths. We know a new phone isn't in our budget, but we buy it anyway. That silly price tag doesn't stop us.
This can also happen if your budget is toostrict. For example, I wanted to pay off my debt as quickly as possible. So I drafted a tight budget that left no room for spending -- only necessities. Every cent went towards my debt. On paper, the maths worked. In reality, I busted my budget and overdrew my account. My intentions were good, but my impulsive human nature -- my desire to pay unrealistic amounts -- got in the way of my better judgment.
To work with this, create a realistic budget that helps curb your impulse. Put less pressure on your limited willpower by giving yourself a little breathing room for spending.
Obviously, it also helps to control your impulses as much as possible. That's easier said than done, but here are a few techniques I've used:
- Make a list of stuff I already have. When I feel like shopping, I take a look at that list.
- Getting rid of junk I already have when I feel the desire to spend.
- Staying away from the stores that tempt me most.
- Not storing my credit card information with the sites that tempt me most.
If you want more, we've written an entire post on how to program your brain to stop buying crap you don't need.
Feed Your Need for Reward
In a similar way, it also helps to understand our need for reward. Again, spend less than you earn is easy to budget on paper. Just save all of the money you earn, right? But in reality, you work hard, and you want something to show for it. It's only natural.
There's nothing wrong with rewarding yourself. But most of us do it without much thought, and we do it at the expense of something else. There are easy ways to feed this need and still keep your finances in order. We've talked about it in detail, but here are some highlights:
- Prioritise your spending: Make room for fun rewards, but splurge wisely. Spend money on the things that will bring you the most joy.
- Celebrate your money milestones: Don't reward yourself for earning money -- reward yourself for saving it.
- Find non-costly ways to reward yourself: There are plenty of luxuries that don't cost much at all. A relaxing bath, for example.
It might seem counterintuitive to consider your impulsive habits and your need for reward when you budget. But again, much of personal finance is about learning to work with and manage your behaviour.
Accept Your Inability to See the Future
Personal finance talks a lot about the "future self". You're supposed to take care of your future self by saving more now, and making sure they have enough money. The problem is, that person is like a stranger to most of us.
It's easy to calculate how much you need for retirement and how much you should start saving. The maths is the easy part. Actually caring about it now is another story.
The key is to link your future with the present. In one study on this topic, Saving in Cycles, researchers found that people saved more when they didn't focus on some abstract future goal. They saved more when they focused on the process of saving for that goal. The subjects who saved more were instructed:
focus on saving the amount that you want to save now, not next month, not next year... The future will be exactly like the present: if you save money now, you will save in the next pay period. If you don't save money during the present pay cycle, it is likely you won't save money in the next cycle.
It's the same reasoning behind the whole systems vs goals thing. Yes, you need a goal to have a system in place. That's what you're working towards, after all. But focusing on the system helps link your present to your future achievement of that goal.
You can focus on the process by setting smaller milestones. It also helps to pay yourself first and automate your savings. You want to know what your retirement goals are. But in practice, focusing on the process might help you get there better.
Maths is obviously a big part of money. But for most of us, it's more about habit and behaviour. If you can learn to work with your own tendencies, it will be a little easier to follow the simple golden rule of building wealth: spend less than you earn.