If you feel like you could be doing better with your finances, well — sure. You probably can find room for improvement and places to optimize.
But if your means to that end is trying to scrimp and minimize expenses, cut back on experiences to the point you’re missing out on living your life right now, or saddle yourself with an unrealistically tight budget that you have no hope of maintaining…
You won’t find financial success that way.
Stop making your focus “spending less.” You will always hit a natural limit to how far you can go with this strategy, because there are only so many expenses you can cut.
So instead, consider some of the following strategies:
1. Prioritize Saving And Investing (Over The Effort To Avoid Spending)
You prioritize your savings by simply doing it first. Period.
Either quarterly or monthly, depending on how and when you get paid.
This could be quarterly if you’re a business owner taking distributions, or an employee earning periodic bonuses and equity comp. It’s likely monthly if you’re an employee earning just W2 income.
Once you get paid, move the amount of cash required to meet your goals into your savings and investment accounts.
Our standard recommendation to our financial planning clients is to contribute 25 percent of gross income into investment vehicles. Use accounts optimized for long-term growth, like retirement plans and taxable investment accounts you can commit to keeping invested over time.
Beyond that, your specific goals (which might include buying a house, paying for a kid’s education, enjoying annual international trips, etc) will determine how much you need to save.
When money flows in, account for your savings first. This will get you much farther than trying to puzzle out what to avoid spending on, when you haven’t even made a contribution to savings or investment accounts.
After you put money in savings/investment accounts, consider any obgliations. Take care of those next.
That includes taxes if you own a business or have equity comp/receive bonuses that may generate a bigger tax bill than your W2 income alone would. It also includes any fixed, must-pay costs: your mortgage, your bills, your groceries, and so on.
Whatever remains is yours to spend how you please. You don’t need a budget broken down by categories where you can only spend $X amount on shopping or $Y on entertainment. You can do whatever you want with the money you have because you already took care of your savings.
So enjoy. Spend without guilt on what matters to you, knowing you gave yourself this freedom because you put your savings first.
2. Align Your Financial Habits With Your Goals, Priorities And Values
Before you start hacking away at your budget to free up money to save — a noble aim! — you need to think about your goals and priorities first.
This will help you decide what you want, which is a good place to spend (as opposed to things that you don’t really personally value).
Our philosophy is that money is a tool that’s meant to be used. Saving and investing is one way to use your money. But spending is another way to use money.
Spending isn’t inherently bad. It can help you acheive goals and live a great life. The key to growing wealth isn’t to avoid spending, or to fear it.
It’s to learn to spend well.
That starts by understanding what’s most important to you. Say yes to those things. Then cut out and stop spending on what does not align with your priorities, your core values, or your goals.
Spending is problematic if it takes you away from what you want to achieve. But it can be a facilitator of happiness and fulfillment if you use your money to gain things like experiences with loved ones, for example, or opportunities to invest in yourself and your personal growth. That’s why focusing on “spending less” can be counterproductive, especially when you didn’t have a spending problem to begin with.
Your goals are your guideposts — which is why an important step in this process is to review them every so often. Determining priorities is a dynamic activity, not a “set it and forget it” sort of thing.
Make sure to periodically review your goals (once every year or so is a good place to start), especially those you set a long time ago. It’s okay if a goal has shifted or you find a core value evolves, especially after a major life change like marriage or having children.
The good thing about getting what you want is that you likely have more control over your progress that you might first think. That’s because there are countless levers to pull when it comes to making changes that benefit your overall financial plan:
You could:
- Save more
- Spend less
- Invest differently
- Adjust your goals
- Reconsider your timelines
Of course, that’s a whole lot of choice to pick from, and it’s sometimes hard to know the right move to make. Again, your values can act as a sort of compass to point the way, to help us decide.
The best path forward is likely the one that moves you closer to your priorities — or, does not push you away from what’s most important to you.
3. Solve For X If You Run Into A Math Problem
The majority of our financial planning clients are earning high six figure incomes with complex compensation structures. They have enough money to cover their needs and most of their wants.
Finding greater financial success usually comes down to making sure how they use their money is actually aligned with what they say is important to them, avoiding unforced errors, and setting up systems to ensure they translate high incomes into high net worths.
But we know this is not the norm or the average. (We also know high-income earners don’t make a lot of money through sheer skill or power of will alone; luck plays a role.)
Many people who want financial success are limited by a math problem: the money you want to spend is greater than the money you actually make.
If that describes your situation, again, the best answer is not “well, just spend less.” Too many financial experts default to that, but it’s a terrible response.
A big component to financial success is your income and earnings potential.
There’s some validity to the refrain that “it’s not how much you earn, it’s what you do with it.” Cash flow management matters; you can go broke with an objectively high income if your spending outpaces what you earn.
On the flip side, there are only so many expenses you can cut. There are only so many things you can go without or decline to spend money to get.
This is why trying to spend less as a way to get rich is inefficient. (Not impossible, but certainly not optimized.)
You can amass more money by living a very modest, limited lifestyle — but you miss out on experiences and opportunities along the way if you’re frugal to a fault.
Worse, it simply takes a long time to accumulate assets this way.
If you want to build wealth efficiently, focus instead on options for increasing your income.
The good news is that there are many paths to explore to increase how much money you make. The bad news is there are so many paths!
It’s impossible to offer prescriptive advice to a wide audience, because the right path for you will not make sense for the next person.
These are the most common ways we see our wealth management clients increase their incomes over time:
- Proactively seek out new positions as your skill level and experience increases, both within your current company and with new employers. You should negotiate for higher pay or more valuable benefits each time you make a new transition.
- Evaluate job offers with equity compensation in mind. When considering career changes or advancement, think about the total value of the compensation package a company might offer you. The majority of our clients don’t just earn W2 income from a bimonthly paystub. They also get grants of equity compensation in the form of ISOs, RSUs, or access to ESPP plans. The value of this equity is often the same or even greater than their regular pay.
- Consider entrepreneurship, if that suits your skillset and goals. This is probably the hardest path to growing your income and is a good option for a smaller percentage of people — but it’s a good option for some people who have the knowledge, abilities, and desire to forge their own path, as well as the ability to take on some degree of risk.
As you increase your income, circle back to number 1 on this list: prioritize your savings first.
One of the most frustrating things we see as planners are clients who start off strong as diligent savers and investors… but as they earn more, they expand their lifestyle without also increasing their savings rates.
Their net worth growth stalls; their liabilities increase; and their future flexibility and freedom slowly ebbs away.
Growing wealth isn’t about constantly limiting yourself and saving less — but you have to make sure that your savings grows alongside any lifestyle changes or improvements you want to make.
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