Are you up for the spending challenge?

“If your outgo exceeds your income, your upkeep will be your downfall.”

This quote, from someone named Anonymous, is as clever as it is apt.

After two decades as a financial advisor I find that money problems are often due to over-spending. Our income is usually adequate; we just blow it. Many people spend a small fortune on crap they can’t afford, sacrificing important stuff.

A story of spenders

My client David is a professional with net income of $350,000. In their early 50s, David and Nora should be set financially, yet have $650,000 of debt that may not even be paid off by retirement age. They spend a fortune on travel, toys for David and $3,000 a month on little stuff. They continue to support their adult children financially, creating dependencies from which they may never be free. They’ve owed $60,000 on credit cards for two years, at 18-per-cent interest!

I’ve discussed with them the big risk that David could be injured on one of his back-country snowmobile trips and couldn’t work, but they claim they “can’t afford” insurance. They can; they’ve just chosen different priorities.

Their finances are a disaster. What’s really sad is there is a simple fix. Buy less crap. It’s easy, if you want to accept the fix.

The seven day spending challenge

When author David Bach was interviewed about his book Smart Couples Finish Rich, the interviewer told him that his seven-day spending challenge was a stupid idea. “You’re telling me and my listeners that if we track our expenses for seven days, we’re going to be able to change our lives financially,” the disbelieving interviewer said. “Give me a break. I can’t tell you how dumb that is.”

The challenge is not stupid. If you have too much month left at the end of their money, try it. Both you and your partner should carry a small notebook and record every expenditure for a week. Every dime. Don’t change your spending habits for the week. Then compare lists to look for expenditures you can eliminate.

Bach challenged the interviewer to try it. If, after one week, he still felt it was stupid, Bach would give him $100. A week later the interviewer called back to admit being “stunned” by what he had learned. He had spent hundreds of dollars just eating out, yet couldn’t afford to participate in his employer’s group savings plan (forgoing free money), despite his six-figure salary.

“The moral of the story should be obvious,” Bach writes in Smart Couples Finish Rich. “Spend a week tracking your expenses. Then be brutally honest with yourself. How much money are you wasting each day? Each week? Each month? What about you and your partner combined?”

Spending on the small stuff

Most of us blow a lot of money on unnecessary things – frequent meals out, cigarettes, booze, entertainment, clothes, lattes – that contribute nothing to our financial well being. Then there are the big purchases – such as more house and car than we can afford, and expensive vacations.

“Money is easy to waste,” Bach writes. “It’s especially easy to waste on the small stuff.”

Bach coined the term “the latte factor” in a previous book, Finish Rich. “It’s simply a metaphor for all the small amounts we spend on little things,” he writes. “The small stuff adds up – and before you know it, you’ve cost yourself millions.”

The really unfortunate part is that while blowing money, people often ignore important things that have lasting financial impact.

The objection I get is that the stuff we buy makes life enjoyable. I would argue that your life is less enjoyable because of the stress due to constant worries about money. Imagine how enjoyable life would be if you were out of debt and afree of money worries.

Try David Bach’s seven-day spending challenge. It’s easy and you may be able to free up hundreds of dollars a month for things that are actually important. Like your retirement savings. Your children’s education. Life and disability insurance. Emergency savings. Yeah, stuff like that.

Stop buying crap!

Written by Wayne Rothe

Wayne Rothe, Certified Financial Planner/Branch Manager, Wayne Rothe & Associates Wealth Management, Manulife Securities Investment Services Inc., [email protected], 780-962-1146, Spruce Grove, Alberta. These comments are the author’s and not necessarily those of Manulife Securities. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

3 Responses to Are you up for the spending challenge?

  1. It took me a long time to figure this out, but once I did, I cut up the credit cards, paid off all my debt and never looked back. I am now on track to retire early in 2-3 years. Small amounts DO matter!

  2. I just found Xpenser.com. You can txt your purchases and expenses to the site, and track them however you like. For tax purposes, you can also attach copies of receipts! Tracking has long been known to work for weight watching, why not spending? Not only does it change spending habits, it also spills over into other areas of your life. I believe wealth is a habit.

  3. Great article and ohhh so important to realize the self-sabotaging habits we have around our money! Thank you for sharing this simple yet critical step in securing our financial future!
    It really is the small leaks that eventually sink the boat. Fill the leaks and your boat (your financial well-being) can sail anywhere!

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