In my previous post, we listened to a sermon from the Lawyer On A Mission. He argued that we live in a society plagued by excess, over-consumption and greed. It all got a little dark and depressing. So, uh, can we get back to personal finance now?
Of course. In this post we’re drilling down into the numbers. I’m going to show you exactly how making small decisions on a consistent basis can add up to big savings in the future.
To demonstrate, we’ll use the analogy I explained in my previous post. Let’s say you go out for a meal with your friends (assuming they haven’t already deserted you for extolling the virtues of a life of frugality). You visit the same restaurant that I visited, and you forgo the £7 starter because you read my last post and realised the error of your greedy ways. Congratulations.
Now what? You’re looking at me with a puzzled expression and asking how seven little pounds are going to turn your fortunes around. And, well, you’re right. £7 won’t make you a millionaire. Yet. But it will do something else. It will get you moving in the right direction. Because what this post is really about is something called ‘trajectory’. Trajectory focuses on the direction of travel, not the speed. And as it turns out, finding out whether you’re heading towards financial freedom or financial ruin is as simple as using the following formula:
Income – expenses = profit.
Oh great. Now I get to have a lesson in accounting from a lawyer. I think I’ve got some paint to watch dry in the other room…
Hold your horses avid reader. Don’t despair. I’ll make this quick and painless.
Put simply, if your expenses are greater than your income, you’re on the road to financial ruin. That’s what we call the wrong trajectory. On the flipside, if your income is greater than your expenses, you’re accumulating money. We call this the right trajectory.
As long as you’re headed in the right direction, it’s up to you to decide how fast you want to travel. The greater your income and the lower your expenses, the speedier you’ll accelerate towards financial independence.
One way of accelerating towards financial freedom is by increasing your income. Work more hours, speak to your boss about that promotion, join that rival business with the higher salary and the flashy company car. But in my experience, these events tend to happen infrequently, maybe once or twice a year at most. On the other hand, your expenses are almost entirely in your control. Every single day, you make decisions about what to buy and where to buy it from. And these daily decisions build up into huge figures.
Acceleration, speed, trajectory? What is this mumbo jumbo? Can’t you show me with numbers?
Okay, let’s get into it. Remember our £7 starter? Let’s assume you take your friend or significant other out for a meal just once every week (which is actually a lot less than the average person). That’s £364 every year you’re leaving on the dinner table. And that’s just in one area of your life. Imagine what you could do if you cut out all the other unnecessary excess in your life?
Think of the weekly cappuccinos from your local coffee shop, or the designer jacket you bought that you hardly ever wear, or the new bread maker you purchased during lockdown that you’ve only ever used once (although that tiger bread was pretty amazing). Once we start counting the things we spend money on that don’t bring us any lasting happiness, the numbers can really start to swell.
How much can they swell? Let’s take the average family in the UK. According to the most recent figures, household expenditure for the average UK household was £30,571 per year. That breaks down to outgoings of around £83.76 per day. Now, let’s assume you cut your outgoings by a minimal amount. For our purposes, let’s say just 1%. That equates to saving just 84 pence per day. Less than a third of the average price of a cup of coffee. Surely that wouldn’t make a difference, right?
Wrong. A saving of just 84 pence per day equals a whopping £306.60 extra in your pocket at the end of the year. That’s enough to buy a cheap camping holiday for a week and spend some quality outdoor time with your family. And that’s just 1%. If we become a bit more ambitious and increase this to 10% (which is far easier than you think, as this blog will continue to explain), you’re looking at annual savings of £3057.10. Compounded yearly, that’s enough to cover your children’s university education with some spare change at the end.
An extra £3,000 per year?! Okay, now you have my attention. What’s the next step?
I treat cutting costs rather like a game. Think of it as financial whack-a-mole. At the end of each month, print off your bank statement (or read it on your phone if you’re technologically inclined) and examine your outgoings. Many will be essential, like childcare, rent and utilities. But I guarantee you’ll be able to find at least a few that are not necessary at all. Any by not necessary, I mean not bringing you any lasting form of happiness.
You can even use the list you compiled in my last post to try and swap some of these expensive purchases for low cost alternatives. After a bit of practice, this process can actually become quite addictive and give you a sense of satisfaction all on its own. Try it out and let me know how you get on in the comments.
As we’ll learn in my next post, the micro saving decisions you make today can actually turn into hundreds of thousands (or even millions) of pounds in the future with the use of one magic tool. But for now, I want us to focus on the underlying mentality of building wealth, which is this: cutting our excessive consumption is one of the easiest and fastest ways to save money and achieve financial independence. It all starts with evaluating the things that really make us happy.
Note: I’d like to thank James Clear for inspiring the ‘1% improvement every day’ philosophy. Human brains aren’t programmed to recognise the potential of incremental improvement every day, but as this article explains, it can make a huge difference. James’ book, Atomic Habits, isn’t specifically related to personal finance, but it is full of similar concepts which can apply to saving money. A link to his book can be found here.