Can’t save money? Saving money is a lot like losing weight: It’s simple, but it isn’t easy. You have to maintain your self-discipline for years at a time, and even seemingly minor slip-ups can set you back for a discouragingly long time.
Fortunately, with these sorts of challenges, getting started is the hardest part. Once you understand the keys to success, you can create healthy habits and coast off your momentum. These are the 3 principles you need to turn your financial life around and finally start saving money.
1. Focus on the Big Wins First
Discretionary spending is often crucified in the name of personal finance. Lattes, video games, and clothes are all common victims, and there is some merit to these strategies. But for reasonably disciplined people not addicted to shopping, there’s only so much fat on the bone there.
When you’re trying to set yourself up for long-term financial success, focus on these three areas to get the biggest wins:
Don’t worry about your lattes too much when you’re first getting started. Your rent, car insurance, and monthly grocery bill drain your bank account far faster than any coffee habit ever could.
As you can see above, these three expenses make up over 50% of the average household’s monthly spending. So if you can find ways to minimize (or even eliminate) one or more of them, you’ll see a far greater return for your efforts.
Let’s take a look at an example:
Imagine a coffee fanatic who needs two craft lattes to get through each workday. That habit will cost them somewhere around $8 a day, depending on where they live. Every year, that adds up to $1,920. Not cheap. But this person also pays $1,400 a month for a nice one-bedroom apartment downtown, which costs them a total of $16,800 a year.
Between the two expenses, where do you think they should try to cut back?
- Scenario A: Some financial guru inspires them to cut their coffee purchases down by a whole 50%. They’d save an extra $80 a month, or $960 a year.
- Scenario B: They read this article on FreeMoneyStreams.com and decide to move to an apartment that will decrease their rent payment by just 15%. That would save them an extra $210 a month, or $2,520 a year.
They’d save almost three times more in Scenario B than in Scenario A. Focus on the big wins first.
2. Treat Your Finances Like a Business
Businesses go through four basic stages of growth. At each stage, they optimize their strategy for a set of distinct financial goals.
Their finance teams spend hours reviewing the company’s financial patterns, creating detailed plans for the future, and refining their systems. While you probably don’t have to hire a CFO to run your personal finances, you should be mimicking that same business mindset.
If you map these same stages onto your personal finances, it looks something like this:
- Startup: Education and initial job search
- Growth: Paying off any student loans and establishing a career path
- Maturity: Solidifying your career and acquiring assets
- Retirement: Living off of your accumulated assets
As you progress through these stages, your goals will parallel those of a business owner: Increase your income, minimize your expenses, and grow the gap between them.
So go ahead and steal their tactics! Set goals for your net worth, review your progress, and look into the differences between your budgeted and actual results. Use free software like Mint to organize your personal finances and review them at a glance.
It doesn’t have to be stressful. In fact, it really shouldn’t be. If you tend to overanalyze your purchases or worry too much about saving money, pay special attention to this last principle.
3. Prioritize Genuine Happiness
This one is a little counterintuitive. After all, we’re talking about spending less, which you probably associate with a sense of deprivation.
But your personal finance goals should be about making your life better, now and in the future. People fail to stick to their budgets when they cut out the things that bring them joy. Because you can only delay gratification for so long.
Remember that the hardest part of saving money is maintaining consistency, not navigating complexity. And to stay consistent with anything, you have to find ways to enjoy the process.
If you take away just one thing from this article, let it be this:
Spend lavishly on the things that make you happy and cut back ruthlessly on everything else. You can afford anything… but not everything.
Once you’ve been tracking your spending for a few months, do a self-check:
- What spending makes your life worth living?
- What are you buying purely out of habit?
- Where are your spending and enjoyment misaligned?
Maybe you’re someone who lives for their annual vacations, which cost about $1,400 apiece. Not cheap, but you get a ton of happiness from each one.
But when you look at your other spending, you find that you’re paying $85 a month for a cable package… even though you only really use it once a week. Over a year, that’s $1,020 – about 75% of what you spend on your annual vacation.
You know that your cable service doesn’t make you anywhere near as happy as those vacations do. So cancel it. Spend $500 more on each vacation, save an extra $520 each year, and end up enjoying your life more.
Get Started Today
Are you ready to turn your personal finances around and start saving money?
What’s the first thing you’re going to cut back on, and what will you do with the extra cash? Are you going to invest it? Maybe you’re going to stay at an extra fancy hotel on your vacation this year?
Tell us your ideas in the comments below!