Don’t you wish that you would have more money so that you can spend all you want? I definitely do. But it’s not always the case. Sometimes I get a windfall through sheer luck, sometimes I get a dent in the pocket because of emergency or stupid mistakes (like forgetting my Metronorth pass, which cost me 13 bucks per trip!).
We talked about unautomating your expenses last week. But what about the spending that’s not automated? Things like eating out, shopping, and the likes. You can adjust how much you spend on these expenses because they don’t run automatically every month.
So that’s what we’ll attack this time!
Notice how your friends complain they can’t save on anything, because money saved on clothes will often become money spent on eating out, and money saved from car will often become money splurged on happy hour. Well, I’ve done it myself, have you?
It most likely didn’t work for you. And frankly it didn’t work for me either.
Trying to save on everything is like trying to do ten things at once, you will most likely fail at all ten.
A better way to do it is to use what I call the “Laser Focused Savings Technique“.
How to Use Laser Focused Savings Technique
You will ONLY, and ONLY save on ONE thing every month.
Yeah, and nothing else.
How do you pick the one thing to save on? Let me explain how you can use this method to really save money:
1) Pick the expenses that you know you’re overspending on, and be honest with yourself on this! You don’t need to know how much you spend on them just yet, but you should know you want to spend less. For me, it’s eating out (because I love food), books, and personal development courses (marketing, entrepreneurship, personal finance).
[As a side note: I don't shop for clothes very often, although I spend quite a bit when I do. I'm putting them into my monthly worry-free spending.]
2) Find out how much you spend on each of them. How do you do that? Check your credit card and checking account statements. That’s the traditional way. I use Mint to track all my transactions. It’s a super safe online personal finance software. Plus, I have like 18 accounts so I NEED to use Mint.
If you don’t have an account there yet, just create one at their website and start importing your account transactions. It takes less than 5 minutes to update all your accounts.
3) Pick the one with the highest spending. If you’re overspending on $1 snacks, you won’t be much better off to save $10 a month. I picked eating out, because as much as I love food, I love books more because they give me the knowledge I want now.
4) Decide on how much you want to save per month. Maybe you want to save up $1,500 a year to invest for the future. So, you need to save $125 per month to reach that goal, or $31.25 per week (I just need to skip eating out once a week to get there). Remember, this is the most important step: you can’t reach a target you do not have.
5) Keep track of your expenses using a budgeting software. Mint can do it very well. Here’s how you can set up your own budget:
- Click on “Planning” tab
- Click on “Create a Budget”
- Choose the category of item you want to save on
- Enter the target spending amount per month
My Own Results
To show you that you can do it too, here are the results I got from implementing the Laser Focused Savings Technique on eating out:
I started from spending about $500 on eating out in November of 2009 (it’s expensive here in NYC), and my goal is to cut it down to $350 per month because I knew I was totally overspending.
Nov 09 – $500
Dec 09 – $420
Jan 10 – $470
Feb 10 – $430
Mar 10 – $390 (estimate)
I decided to put the extra money into my Roth IRA since I’m not maximizing the contribution yet. Looking at how I’m doing, I should be able to reach my target in 3 to 6 months. And based on my calculation, by putting extra $150/month into my target 2050 retirement fund for 40 years, I’d get about $527,000 if I cash out 40 years later. That’s more than half a million dollars!
You can also run your own number using this tool. I will touch on the detailed investing concepts and tools in the next lesson.
Some things to keep in mind when you use the Laser Focused Savings Technique:
1) Some may ask you to focus on 2, or 3 expenses at the same time. But I’d try to do one thing really well, instead of trying to save on eating out and books and courses. When you start to overwhelm yourself with so many things, you’d lose your focus and give up entirely.
2) Be prepared for unexpected expenses like birthday presents for your friends, I have a $50 budget for things like that every month and I roll over the budget from month to month (you can do that in Mint). You will get a sense of how much you need to set aside for stuffs like these after doing it for 3-6 months.
3) I recently began to feel a little guilty about the $1 I pay for my afternoon snacks at the vending machine. I found out that I could buy them for $79 at the cafe. But am I really saving money? Maybe not. I’d probably get like 2 of them every day if it’s that cheap.
But the real question is, does it matter? I could save maybe like 10 bucks every month, or if I push really hard, $12.50!
I’d rather focus on the big thing. There’s a fine line between being insane and being smart.
4) I still sway a little sometimes, especially when I find out about a great restaurant in town. But overall, I manage to keep my expenses at the desired level, without depriving myself.
5) If you manage to save like $50/month or more, great. But don’t make the mistake of spending it elsewhere, unless it’s for investing in yourself or the stock market. If not, put it towards your next savings goal. [We talked about how to set up multiple savings accounts for your goals in the last lesson.]
Once you manage to reach your monthly savings target consistently (6 months would be good number), repeat the same process for the next spending item. Remember, start small and think big.
Here are my questions for you: What’s the next spending you will save on? And with more cash flow coming in every month, what are you going to do with the money?
Feel free to share your answers in the comment section below!
The Personal Finance School Series:
1. Personal Finance School: An Introduction to Effective Personal Finance
2. Cash is King, Net Worth is Queen
3. Why and How You Should Kill the Debt Monsters
4. Personal Finance Automation: The Art of Doing Nothing with Your Money, or Not?
5. How You Can Spend, Save, and Earn Half A Million Dollars
6. Your Money Will Work for You 24/7, If You Are Willing to Work FIRST
7. Why Investing Deserves Another Round of Lesson
8. The Most Important Personal Finance Lesson of All…
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Hi Ken,
I can relate to this.
5) If you manage to save like $50/month or more, great. But don’t make the mistake of spending it elsewhere,
Something that was mentioned in Rich Dad, Poor Dad was that (in general) when people find money, they spend it immediately! It’s like they won a free prize. For example, when you find $50 in a jacket in the closet, you tend to see it as a freebie and spend it without thinking.
I’ve tried to curb these impulses (not always successful (: ) and see where/how to invest instead.
Final point. I then ‘reinvest’ the found money back into my career, family, life etc.
Nice to see that your Facebook page is up and running. Looks good!
Ivan
Hey Ivan, yes it’s really very common for us to spend any windfall we get – lottery, gifts from family, ‘found’ money. If you don’t make the decision what to do in advance, it’s very easy to get sucked into the spending mode automatically.
And it’s not like you can’t spend any of the money you saved, sometimes it might be necessary to use the money you saved in things that make your life better. For me it could be putting the 50 bucks I save into buying 3-4 books on subjects that I want to learn.
And thanks for hanging out Ivan, I’d been thinking about the fans page for a while but finally decided to launch it. Gonna come up with more ideas for building a great community!
Dude, what a system !
How did you come up with this stuff, it’s crazy !
You know my system ?
When I feel like spending, I spend.
When I feel like saving, I save.
It’s KISS, and I can tell you, with a little trust in the universe, you’ll never have any money problems !
What’s up Mars? I got some ideas here and there and came up with my own!
KISS is a great way to go, and it definitely works for you. But quite a lot of people just leave it to their guts and spend on unimportant stuffs when they should really be spending on more important stuffs in their lives.
This technique is really for those who know they should be doing something about their overspending problems but don’t know how. And they probably can’t trust their universe either! And the really hard part is the impulsive instinct to buy stuffs, not the system itself.
Thanks for sharing man!
Ken, fantastic post! Don’t get me wrong, watching your expenses is half the battle, but I think the other equally important is maximizing your savings.
Are we too focused on how to cut our expenses, that we completely miss out on how to maximize savings?
I mean, really, with interest rates ridiculously low, I’m making “pennies” in interest … is this worth the sacrifice for giving up an expense that makes me happy?
Should you also be looking at the other side of the coin, how to push our savings and investments to the next level?
Just two cents.
Thanks!
Kunal Kalsani
Hey Kunal, you got the completely right idea! In fact, I talked about savings in the previous lesson (more details on that in next lesson). I will also touch on maximizing investment in the next few posts, I just need to polish up the drafts.
As for the ridiculously low interest (trust me I hate it), I’d suggest you to invest the money instead of putting it into a savings account, unless you’re saving for something like a wedding or vacation. In fact that’s what I did.
Along the same line, DON’T cut down on the things you love. You should cut down the things that you’re overspending on, stuffs you don’t really have to spend extra on to be happy. For example, I love eating out, but I don’t have to spend 50 bucks every time. Even if I spend like 30 bucks for a dinner, I’m equally happy because of the experience with friends and the good food. You gotta figure out what’s really important to you (takes some soul searching sometimes!).
Thanks for sharing Kunal, have a good weekend there!
The surprising thing about limits is they really do free us up … and it works for financial freedom too.
I agree with you JD! Strange thing it is, but it frees us up to do more of what what really want to do.
Just checked out your site, I really like your insights from your career at Microsoft! And
thanks for hanging out here.
Hello Ken
Just came across your blog on personal money management, and it’s brilliant! Informative, informal yet solid. I like the way you used case studies and studied your own experimentation on yourself and your money habits, to share with your readers.
I think I came from another blog, either Micheal’s or Erica.biz but I think I’ll stay around longer with you. Personal finance management is one of my personal areas that I’ve been beefing up like you, setting systems in place to automate that is good, and using the 80/20 rule to get rid of the useless or not so important stuff. You’re spot on!
I’m focussed more on maximizing ourselves and entrepreneurship, but I do touch on personal finance as well.
Keep up the great work Ken.
Nigel
In fact I’m going to sign up for your newsletter and ebook report too. :)