Here is an exercise I use with clients to help them save money and accomplish big goals. This exercise is designed to be sustainable, healthy, and encourage real change in spending habits.
Some of the best things in life cannot be purchased through regular cash flow. Vacations to Thailand, your children’s college expenses, and your mountain condo all cost a pretty penny. So how do you do it? If what you are doing today is not working how do you change your behavior, save, and reap the personal rewards without having to say no to what is necessary and important to you?
The remainder of this article outlines an exercise I use with clients who are looking to save and achieve big goals:
- Make a list of every single purchase you have made over the last thirty days. If you use a credit or debit card for most of your purchases this should be pretty easy, simply log in and print it out. It is important that you actually print this off, this is an applied exercise! Do not forget any expenses that come directly out of your checking account like rent, utilities, subscriptions, etc.
- Get three different colored highlighters
- Now it is time to put on the thinking cap. Before you pick up your highlighters have some careful thought about the following categories and then allocate a highlighter to each category.
Category A: What do I spend money on that is essential to my survival and career? Reasonable mortgage/rent, reasonable car payments, groceries, medical expenses, childcare, student loans, and work related expenses fall here. Other items falling into this category are maintenance and repairs of the essentials. If the car breaks down, it needs to get fixed, and is an essential cost to keep the wheels turning (yes, that is a pun).
Category B: What do I spend money on that aligns with my personal values? Perhaps this is a plane ticket to see family or an old friend, a set of golf clubs, or the expenses associated with a weekend adventure in the mountains. If you value the product or experience, brings genuine happiness to your life, then it probably falls here. Frankly speaking, this article is about maximizing this category.
Category C: What do I spend money on that lacks personal value and is not essential? The main point is we spend money on things we do not care about or do not really need. This is where you can eliminate expenses and apply those savings to more important goals. What could be valuable to one may not be valuable to another. Personally, I find little value eating out for lunch by myself, especially during the work week, for me it is an 8 to 10 dollar Category C expense. Brunch, still food, is a different story. Although it costs three to four times as much, I can put a social price tag on the meal as I am spending quality time with my friends. I value the experience so for me brunch is a Category B.
Now we can pick up the highlighters. Highlight every single purchase in accordance with the categories above, be honest, take you time, and do not worry about the dollar value right now, just identify what was essential, valuable, and not valuable.
Once the highlighting is complete you should already start to feel a change before you review.
Review the essential, ‘Category A’ items first. While doing so, make sure the essential cost is entirely reasonable. Is the cost of the car you drive entirely essential? In some cases, yes, in some cases, not so much. You can drive a reasonably nice car and lease it for about $300 per month. But if you are driving a car that leases for $500 per month what does the remainder $200 per month mean to you? Is the increased luxury, performance, etc. something you value or not? Does the increased luxury, performance, etc. rank higher than your desire to send your children to college? Vacation in Thailand? In these scenarios the monthly cost can be split into two categories: $300 into Category A as essential, and $200 into Category B or C depending on how much you value the additional benefits of a nicer car, home, etc. Financial decisions often boil down to a series of tradeoffs.
Review the valuable, ‘Category B’, items next. Remember them, cherish them, that is what life is all about! We do not earn to simply work, save, retire, and die. We are on this earth to enjoy good company, have rewarding experiences, and have fun! Make these purchases an important part of your life, this exercise is all about this category anyways. If the perfect vacation is important to you then make it happen and be proud of the self-discipline that got you there.
Here is where it gets deep, review the ‘Category C’ items. These are the purchases that had little value to you. For each purchase take a moment to think about where you were, who you were with, and what drove you to make the purchase. Then reflect on why the purchase was not important to you. By reflecting on the moment you are training your brain to think differently so next time you are in that position you have the wherewithal and power to say no. This is where real and sustainable savings are created.
To complete the exercise add the dollar value of all the purchases under Category C, divide by three, and start saving that amount per month into a separate savings account. I highly recommend these savings be on auto pilot as it is easier and less stressful than manually transferring money month after month. Most banks and credit unions will now let you label your accounts. Label it “Thailand” or “Mountain Condo” whatever big goal you have.
Next month, do the same exercise: print, highlight, reflect, divide by three, and increase the savings again. Do this as many times as you need to until you sense big change in your spending habits and are making measurable progress towards your goals. A year from now if you feel things are getting out of control, do the exercise again. The fun thing about this exercise is you can measure the results right away and can have a near immediate impact on your finances, life, and happiness. Thailand was a blast…
Drew Hefflefinger is a CERTIFIED FINANCIAL PLANNER™ at Engage in Wealth in Denver, Colorado. Drew specializes in working with legal professionals by helping them preserve and grow wealth while achieving life goals. Drew can be contacted at email@example.com.