How to Spend Wisely
Financial success is all about spending money intelligently. While it might sound simple, mastering the art of smart spending requires a blend of discipline, insight, and strategic planning. Here are some key strategies to help you spend wisely, focus on prioritizing your spending, distinguish between wants and needs, and embrace the concept of “conscious spending.”
Prioritize Your Spending
Prioritizing your spending is the first step toward financial stability and growth. It involves making deliberate choices about where your money goes, ensuring that your expenditures align with your values and long-term goals. Here's how to do it:
1. Identify your financial goals—Start by defining your short-term and long-term financial goals. These could include paying off debt, saving for a home, building an emergency fund, or investing for retirement. Clear goals provide a roadmap for your spending decisions.
2. Create a spending plan (aka “a budget”)—A spending plan is a powerful tool that helps you allocate your income toward savings, essential expenses (needs), and discretionary spending (wants). Track your income and expenditures with a system that works best for you. Whether it’s with paper and pencil, or an app on your phone, keeping tabs on how much you earn and spend will help ensure that you're living within your means.
3. Focus on high-priority expenses—Prioritize spending on necessities like housing, utilities, groceries, transportation, and healthcare. (Find more details below on how to lower your housing and transportation costs.) Once these essentials are covered, allocate funds to savings and investments before considering discretionary spending.
4. Review and adjust—Regularly review your spending habits to confirm that you're staying on track. Adjust as needed to accommodate changes in income, expenses, or financial goals.
Conscious Spending
The concept of conscious spending, as outlined in Ramit Sethi’s book I Will Teach You to Be Rich, emphasizes spending money on what truly matters to you while cutting costs mercilessly on things that don’t. Here’s how to apply conscious spending to your financial strategy:
1. Determine your "rich life"—Define what a rich life means to you. This is highly personal and could include travel, dining experiences, hobbies, or spending time with loved ones. Focus on what brings you genuine happiness and fulfillment.
2. Allocate funds to priorities—Redirect your money toward the areas that matter most to you. This means being intentional about your spending and ensuring it aligns with your personal values and goals.
3. Cut costs on non-essentials—Identify areas where you can reduce spending without compromising your quality of life. This could involve negotiating bills (your monthly mobile phone and cable bills), cancelling unused subscriptions (check your credit card statement for recurring charges), or choosing more cost-effective alternatives (housing and transportation are often our largest expenses; there’s always a cheaper way).
4. Automate savings and investments—Ramit advocates for automating your savings and investments to ensure you're consistently working toward your financial goals. Set up automatic transfers from your checking account to your savings and retirement accounts to make this process effortless.
5. Enjoy guilt-free spending—By consciously allocating money to your priorities and cutting unnecessary expenses, you can enjoy guilt-free spending on the things that truly matter to you. This balance allows you to live a fulfilling life without financial stress.
Here’s a 25-minute video with Ramit explaining Conscious Spending in detail.
Lower Housing and Transportation Costs
Housing
Housing and transportation are the two largest budget items for most people, taking up nearly half of the average person’s take-home pay. By focusing on these two items, you could save thousands of dollars each year.
Housing costs are often the largest expense in a household budget. Financial experts suggest that your housing costs should ideally not exceed 30% of your take-home pay. Here are some effective ways to lower your housing expenses and achieve greater financial stability:
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Move to a more affordable housing market or neighborhood. Relocating to a more affordable area can significantly reduce your housing costs. Major cities and popular regions tend to have higher housing prices due to demand. By moving to a smaller town or a less popular area, you can find cheaper rent or more affordable homes to purchase. Research potential locations, considering factors such as cost of living, job opportunities, and quality of life. Websites like Zillow, Trulia, and local real estate listings can help you find affordable housing markets.
Check out this Cost of Living Calculator at Nerd Wallet to see how expensive it is to live in various cities.
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Get a roommate/Rent out extra space. If you have extra space in your house or apartment, consider renting it out to generate additional income. This could be a spare bedroom, a basement apartment, or even a garage. Platforms like Airbnb, VRBO, and local rental listings can help you find tenants. Before renting out your space, make sure to check local regulations and understand any legal requirements. Creating a rental agreement and setting clear rules can help ensure a smooth arrangement.
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Downsize. Downsizing is another effective way to reduce housing costs. If you’re living in a large space, consider moving to a smaller one. Smaller homes typically come with lower rent or mortgage payments, reduced utility bills, and less maintenance. Evaluate your actual space needs and consider the benefits of living in a more compact home. Additionally, selling unused items and decluttering can make the transition easier and even generate extra income.
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Learn to do your own maintenance and repairs. Home maintenance and repair costs can add up quickly. By learning basic maintenance skills, you can save a significant amount of money. Tasks such as painting, fixing minor plumbing issues, landscaping, and simple electrical work are often manageable with some research and practice. There are countless online resources, including tutorials and DIY videos, that can guide you through common household repairs. Investing in a few tools and taking the time to learn these skills can lead to substantial savings.
Transportation
On average most people spend between 15% and 20% of their take-home pay on transportation. That includes a car payment, insurance, excise taxes, maintenance, and fuel. Here are several ways to reduce your transportation costs:
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Trade in an expensive vehicle. Each year, many publications list the best cars for under $5,000. These are reliable vehicles and low prices. Look for affordable models that meet your needs. You may be able to shave hundreds from your monthly payment.
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Reduce fuel costs. The average household spends $150 to $200 on gasoline per month. You can save on fuel by working from home, carpooling, taking public transportation, and walking or biking whenever possible.
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Lower your insurance premiums. You might be eligible for auto insurance discounts for being a safe driver, a student, having an anti-theft device, or maintaining low mileage. You also could bundle your policies—use the same company for auto, homeowners, and other policies—to get a better rate. Shop around. Auto insurance is a competitive business and you’re likely to get a lower rate by moving to a new provider. Increasing your deductible can also lower your premiums. Of course, you’ll need to make sure your Emergency Fund can cover the deductible in case you need to file a claim. Keep in mind that insurance companies use your Credit Score to determine your rates, so keep working to get your score above 690. (See our module on How to Build Your Credit Score.)
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Sell a second vehicle. If you can make do with one car, consider selling the unnecessary vehicle. This would require more planning and coordination with your partner, but the savings could be enormous—no loan payment, no insurance, etc. Before you sell the car, try using just one car for a week and see how it goes. It will take some adjustments (and patience) to create a plan for sharing one vehicle, but you may find it’s easier than you expected.
Lower Housing and Transportation Costs
Housing and transportation are the two largest budget items for most people, taking up nearly half of the average person’s take-home pay. By focusing on these two items, you could save thousands of dollars each year.
Housing
Housing costs are often the largest expense in a household budget. Financial experts suggest that your housing costs should ideally not exceed 30% of your take-home pay. Here are some effective ways to lower your housing expenses and achieve greater financial stability:
-
Move to a more affordable housing market or neighborhood. Relocating to a more affordable area can significantly reduce your housing costs. Major cities and popular regions tend to have higher housing prices due to demand. By moving to a smaller town or a less popular area, you can find cheaper rent or more affordable homes to purchase. Research potential locations, considering factors such as cost of living, job opportunities, and quality of life. Websites like Zillow, Trulia, and local real estate listings can help you find affordable housing markets.
TIP: Check out this Cost of Living Calculator at Nerd Wallet to see how expensive it is to live in various cities.