Have you ever heard the saying “cash is king”? Well when it comes to achieving financial independence CASH FLOW is king. More specifically the excess cash flow that you can divert to your investments in order to buy your freedom. Your excess cash flow is the difference between all your cash inflows (income, dividends, side hustle earnings etc) and your cash outflows (cost of living). I believe that for the highest chance of success, you need to look at both growing income as well as controlling spending. However learning to control your expenses should be done before you look at growing your income. Here’s why:
When it comes to “improving your standard of living” via lifestyle inflation it’s much easier to move up the cost curve than it is to move down. Once we become accustomed to a certain lifestyle it can be very difficult to give up that life for something viewed as lesser. For example, tell anyone to give up one of their vehicles to become a single car household and they will instantly come up with a whole host of reasons why they need two cars.
When I hear people say that they don’t have the slightest clue about what their outgoing expenses are I immediately think that their chance of reaching financial freedom is low (but who am I to judge? They may not actually have a goal of reaching financial independence so maybe it doesn’t matter). If a person or household can’t control their expenses and they are relying solely on increasing income to grow their excess cash flow, their chances are still low. This is because, while income can grow indefinitely so too can cost of living – there are always bigger yachts, planes, house and islands to spend money on.
Now that we know why controlling your expenses first is important, here’s the how:
Abundance mindset
Realise that you are already living a life of luxury. The fact that your toilet flushes and you have access to safe drinking tap water already puts you at a higher standard of living than billions of others in the world. Realise that, in this lucky country called Australia, most of our “needs” are actually wants in disguise.
Create instead of consume
Consumption costs money, because you’re paying for someone else to create a product or service for you. Take joy in learning things in your spare time rather than paying others to do it for you. There is much satisfaction to be had by putting your own blood, sweat and tears into achieving something that is difficult.
Make a budget
This will help you to understand where your cash outflows are going so that you can look at areas where you can eliminate wasteful spending like buying groceries but going out to eat. We make this process easier by putting most of our spending through our credit cards, at the end of each month we use the list of transactions fill out our budget.
Prioritize conscious spending
The first part of this is to have a good understanding of what brings you joy and prioritize your spending on those activities. The rest can be reduced or cut out completely. We spend a significant amount of travel because it’s something that we really enjoy, however we spend very little on alcohol because it’s something that isn’t much of a priority.
The second part of this equation is to look at your spending habits and see if they actually bring you joy. Do you have a habit of purchasing new clothes every time you are going to have a night out? Do you buy the latest smart phone but not actually use the new features? Do you automatically renew your home insurance policy without shopping around? Learn to be conscious about your spending so that you are putting your money towards something that is going to bring you joy.
Set goals
Start small and slow. Doing this makes the goals achievable so that you are more likely to stick to them and continue to move in the right direction. One goal could simply be to set up a budget and fill it out every month. For some, controlling expenses is easy but for others it can be very difficult – especially if they are coming from a very high cost base.
Invest your pay rises
You already know how to live at your current level of expenditure which is without your upcoming pay rise so why not just automatically invest the extra dollars?
Hopefully you’ve found the above tips useful. Are you just starting out with controlling your expenses or have you been fairly successful at it? Do you have some other initiatives that have helped you? Let me know in the comments below
Engineer your freedom