The idea of living on a budget is totally unappealing to most people. I don’t want to be put on a budget and my guess is you don’t either.
But at the same time, the number one fear of baby boomers is outliving their savings. Nobody wants to become the best-dressed greeter at Wal-Mart. The fact is, you’re never going to earn enough to live the life you want in retirement. You need to put your money to work for you — save where you can, invest, and make the shift from being a consumer in the economy to being an owner.
While I am not a fan of being put on a budget, what I do believe in is a spending plan. I like the idea of planning how to spend my money so that it gives me the most joy and happiness, but also ensures my financial freedom long term. You can create a spending plan that helps you decide in advance how and where to spend your money to give you the greatest returns today and in the future.
The reason most people don’t save is because they don’t realize what the value of that money is long-term; they don’t understand how to tap into the power of compounding. Little things can make a big difference and in the long run, they add up to surprisingly giant numbers.
For example, instead of going out for dinner with friends—at a cost, say, of $50—why not order in a couple pizzas and beers and split the cost among your group? Trade one good time for another, save yourself about $40 each time out. Forty dollars may not seem like much, but do this once a week, and put those savings to work, and you could take years off your retirement time horizon.
Do the math: you’re not just saving $40 a week, this one small shift in your spending can save you approximately $2,000 each year—and that $2,000 can help to harness the power of compounding and help you to realize big, big gains over time. How big? How about $500,000 big? That’s right: a half million dollars! How? If you put your money in the market, and generated an 8% compounded return over 40 years, that $40 weekly savings ($2,080 per year) will net you $581,944! More than enough to order an extra pizza—with everything on it.
So if you understand that, you start to realize that a half a million or a million dollars could mean the difference between being the best dressed greeter at Walmart, or being financially secure later in life. It might be worthwhile to look at some places you can cut.
David Bach, who has written multiple books in this area, including The Automatic Millionaire and Start Late, Finish Rich, is a former student of mine who got his start by attending one of my financial seminars over 25 years ago and made this his career. He talks a lot about the concept of creating wealth through finding what he calls your “Latte Factor.” And it’s not just about coffee—the Latte Factor is simply a metaphor for all of those small purchases that we don’t even consider—things we wind up wasting our money on without even realizing it. But if you are a coffee fiend, how much is that addiction costing you? Let’s say you’re a casual “user,” at $4 a day: you’re effectively giving up almost $56,500 of savings at 6% interest over 20 years. From a single drink! But let’s be real—the Starbucks loyalist doesn’t just go once a day. What about the real evangelists who are there two or three times a day? Take your $4 habit and boost it to $10 a day, and now you’re drinking away over $141,250 in savings over 20 years. That’s the cost of a four-year college education!
I don’t want you to sink your long-term financial freedom in a sea of steamed milk. So, here’s a quick-and-easy six-step process to show you how to cut things that aren’t giving you joy today, so that you have more joy and more financial freedom long-term. And remember, don’t think about this like budgeting, think of it like a spending plan:
1. Brainstorm about all the recurring expenditures that you could eliminate or reduce to cut your expenses. Car insurance, cell-phone bills, lunch money, movie tickets. Think about where you can make changes.
2. How much do these items / activities cost? Highlight the most significant of these expenditures and make a note of the associated costs. Next, calculate how many times per week you indulge in this expense and take a reality-check snapshot.
3. Now, on a scale from 0 to 10 (with 0 representing none and 10 representing extremely pleasurable), how much joy do you get from each of the items above? Attach a number to each activity / item to help you associate these costs to your life.
4. Next, think of what it would feel like to have absolute financial freedom. At the same time remember that this is not a feeling you will experience in the abstract or in theory. Here it’s close enough to taste. What would you be able to enjoy, have, do, be or give if you were absolutely financially free?
5. Decide which is more important to you—the joy you receive from the recurring expenditures on your list or the feeling of absolute financial freedom? Remember that life is a balance. You don’t have to cut out everything from your list to move the needle on that feeling of freedom.
6. Write down at least three expenditures you are resolved to eliminate. Calculate how much money this will save you over the course of the next year.
At the end of the day, the question to ask yourself is this: do your expenses, big and small, bring you the thrill they once did? It’s not about depriving yourself; it’s about timing and adjusting your spending habits to mirror your core values and indulge only the experiences that truly matter to you. You can still enjoy life’s finer pleasures—but you’re in control now. You get to choose how to allocate your funds and where to get the biggest bang for your buck. That deliberate spending allows you to invest in a quality of life that is sustainable and brings you joy.
So why not make simple changes today to ensure you have more than enough down the road to continue to fund your lifestyle and your dreams? Whether you’ve got 20, 30, or 40 years to invest, no matter where you are, how much you can save, or how many years you’ve got to do it, you can take advantage of the unparalleled power of compounding. Financial security, financial independence—whatever your goals, you will get there a whole lot faster when you put your money to work for you.