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Many individuals lack knowledge of proper spending habits.
Traditionally, it has been thought that the world of finance is highly complex. If a person wants to create wealth, they must participate in complex investment strategies with sophisticated products.
After so many years of working in the world of wealth creation for my clients, I have concluded. There is always a mistake repeated over and over again, no matter if you have a significant capital or are just starting. By the way, it is a mistake that even many financial advisors make.
As Ramit Sethi, author of the book “I Will Teach You To Be Rich,” would say, people do not know how to spend their money. This is an extremely interesting theory since it points out that, although it is essential to generate income, we are not taught how to spend or use our money.
Few people keep track of where their money is going and if that amount is too high or is within the expected amount. If I did a statistic among the number of people we have served in these years, I could say that this statistic is easily fulfilled:
“For every 10 people, 2 do not keep track of what they are going to spend monthly, and many of them have no idea how much they spend each month.”
Why not keep track of what you are going to spend month by month?
So why don’t we keep track of our expenses? The answer has several fundamental causes:
- Although the technologies have improved, in some cases, it depends on us having manual control. This is very annoying because we must classify each expense type at the month’s end.
- Sometimes, it makes us feel guilty for spending so much on things we didn’t need. But our subconscious told us that we deserved it.
- It is scary because it may be that when we see the sum of the monthly amount, we see that the income was not enough to cover all those expenses.
Our rational thinking would tell us, but why don’t I keep track of my expenses; if it is like the one who is going to have a blood test done and they tell him that the results are ready. Then, we are afraid to see the result and just go on with our lives without seeing what might be happening.
If you were a large corporation and wanted to optimize your finances, what is the first thing you would do? Of course, work on what you can control: Expenses. Although it is true we would all like to generate more income, and it is a fundamental part of your finances, it can take more time and depends on a sales process that you can’t always increase as one would like.
Control of spending is in your hands.
So whether we like it or not, expenses are something that is in our control and we can modify. This work can represent something different for everyone, but we can tell you:
Think that you are saving and spending your money in a better way because you are saving on not having the coffee you want or changing in small expenses that make you feel like you are on the right track. Still, then you go out and spend on an expensive dinner that is not what you can pay for. It is not the best methodology because although it helps you feel less guilty, it does not take you where you want to go.
For each person, the level of expenses is different:
For example, in May 2023, the yacht of Amazon founder Jeff Bezos was seen for the first time, called Kuru, it is the largest yacht on the planet with about 417 feet and an estimated cost of $500 million dollars, being widely pointed out by all media saying how it is possible that that amount of money was spent on a yacht.
Many families spend much more than Bezos did on this yacht. Considering that his fortune is about $146 billion, he spent 0.3% of his money on his yacht.
Then we compare that with the average fortune of the common American, which is about $121,700 according to Nerdwallet; we could say that if you spend anything over $400, you spent more than Jeff Bezos on the world’s largest yacht.
So, after seeing all these points, we want to share with you what is one of the best methodologies that you can use to control your expenses.
We have already seen that keeping a very detailed control of your expenses is something that not all people like. Loading your data into an expense control App could be seen by many as a daunting task.
Divide your money into 3 bank accounts.
So you could use the following process every month: divide your money into 3 different bank accounts, which will have the following functions:
- 1st account: in it, deposit the money you need for your day-to-day expenses, for example, food, basic services, housing expenses, education, transportation, etc. This account should sometimes contain 60% or even 70% of your income.
- 2nd account: for entertainment expenses and tastes, outings to restaurants, purchases of what you like, and eventually short-term vacation expenses come from this account. It could be 10% or 20% of your income.
- 3rd account: to save, this is the one that will feed your investment portfolio for medium and long-term goals, such as retirement, long-term vacations, and saving for your children’s education. You must have at least 10% of your income and, ideally, 20% of your income.
For accounts 1 and 2, it will be normal that they have a low balance at the end of the month. In contrast, account 3 is the one that should continue to grow, and if you can have it in a bank that is not the same one where accounts 1 and 2 are, much better so that you do not see the balance of this account so much and feel that you can use that money for day-to-day expenses.
Apps to take control of your finances:
In the same way, so that they feel that if they would like to use an App to keep more detailed control of their finances, we suggest adding to the methodology described above the use of some of the following expense control apps:
- Mint: You can view your income, expenses, savings goals, investments, and assets. Points in favor: it’s free, and you can synchronize your bank accounts and create savings and spending goals. It has reminders of pending payments and allows you to monitor your credit services.
- You Need A Budget: Distribute your budget in so-called “Buckets” so that you can extract the best performance for each dollar. Points in favor: it is designed to help you get out of debt, it allows you to synchronize your bank accounts and credit cards, and you can establish your goals and categories of expenses.
- NerdWallet: due to its design, it is one of the most comfortable ways to visualize your cash flow, net worth, and credit score. Points in favor: it’s free. You can add and manage your bank accounts; it gives you access to calculators and guides for different purposes. It does not have intrusive advertising.
These are just a few ideas that can help you stop spending more than Jeff Bezos and keep learning how to spend better.