In this season of new year’s resolutions, why can’t people stick to their great intentions for the year? Well, one answer might be that these intentions require commitment and discipline. Those are hard. People feel entitled to a little bit of easy fun; instant gratification, if you will.
Same logic applies to personal finance, unfortunately. Clients ask me all the time, “I work so hard, why can’t I go out a few nights/week?” or “why can’t I buy a pair of shoes or sport gear?” Although you do work hard and earn a good living, you are still not entitled to spend more than you earn. Period. It’s not my rule, it’s a math rule and math does not play favorites. It’s the same for everyone. You could buy on credit that you cannot pay off at the end of the month, but we all know why that’s a bad idea.
You cannot spend more than you earn (you should spend even less so you have some left over for goals and savings, but that’s another post). Using that rule, you have a pot of money that comes into your household each month and a pot that goes out for necessary expenses like mortgage, car payment, electric bill, groceries, etc.
The amount left over after you pay for the “must-haves” each month is for Full Discretionary Spending” or fun like clothes, entertainment, etc. You should have some full discretionary money. You are human after all, but the key is not spending more than you have for full discretionary items. If you want more left over for full discretionary, you need to prioritize.
Here are the priority decisions I recommend you make:
- Instant gratification vs. your long term goals. You have to weigh how great it will feel to pay off all your debt or go on vacation, against how great it will feel for a few minutes to have that sports gear or new pair of shoes. Unfortunately, you may have to remind yourself of that every time you want to buy something that goes OVER your monthly amount of full discretionary money..
- Prioritize your must-haves and try to stream-line. You value going to the gym, but does it have to be a fancy gym or can it be simple and, dare I say, cheap? Is looking good a bigger priority than having more discretionary money for instant gratification? Both are equally valid.
- Keep your eye on the prize. Figure out your 3 key financial goals. Maybe it’s private school, a big house, paying off debt, or saving for college? All the other priorities and expenses revolve around your ‘key 3’. If you want a big house, you spend a lot on housing and have less for other things. Keep your key 3 in mind ALL the time including when you feel entitled to something new.
Nothing I’m saying here is new to you, but here’s what you should try to remember:
- You are not entitled to spend more than you earn no matter how much your friends or neighbors earn or have or spend or do. Math is math, it’s that simple.
- You have some full discretionary money. You can go out to eat. Figure out how much full discretionary money works for your household and enjoy it. But, do not spend more than you have.
- Prioritize your expenses and be honest with yourself about what is important to you. Know that all your other decisions allow you to go after your big priorities and get them.
You are doing well. No matter how well you do, your lifestyle and desires will always expand to meet your income… Thinking about your priorities will help you not feel so deprived when you have to say ‘no’ to yourself in order to save for your key 3.