Learn to Spend Before You Save
Learn to Spend Before You Save
Third Prelude Post of ETFinance.
Hello everyone,
Welcome back to my third and final Prelude post.
I hope you liked the previous one. I discussed the types of Financial Conditions in it. You can check it below as well.
In this post, I will discuss the often-neglected piece of personal finance – The Spending. I believe in a financial journey; you should learn to spend first. It should be the first step that will work as a foundation for you.
In my experience, I have observed that every online financial guru focuses more on investing and how to grow your money, but this spending part always gets ignored. In my opinion, it is essential. Hence, with this post, I want to discuss the importance of learning to spend.
So, without any further ado, let’s start.
Introduction:
The foundation of this post started when I was discussing Personal Finance with my fiancée. We were discussing the frameworks of personal finance, and the foundational rule of 50-30-20 came into the discussion.
As most of us know, the 50-30-20 rule dictates that you should allocate your monthly earnings (post-tax) in percentage. The allocation should be like this.
50% allocation for Needs.
30% allocation for Desires.
20% allocation for Savings (Investing).
As far as personal finance goes, most of the focus is on the fact that we don’t touch the needs part in this rule and try to increase the savings part. But what usually gets ignored is the desires’ part.
That is where I want to focus on this blog.
The Importance of Managing Spends:
I want to focus on the Desires part because it contributes 30% of our salary. That makes it a big chunk of money that we spend towards our desire but don’t know how.
I have seen examples where people say that since this is the spending slot, I spend it every month and enjoy life. While it's not wrong, what if there’s a better way to do it?
What if there’s a way to “Maximize the Desires Slot”? Let me discuss it with an example.
My Love for Bikes:
I love bikes! I love the feeling I get when I ride a heavy-duty machine. But in college, this feeling was dependent as I only liked the expensive heavy bikes beyond my budget.
Although, I was able to get one before I expected, as I was good at managing my spends.
I got introduced to the 50-30-20 rule during college. Although, like every college kid, I was not earning much as my income was dependent on the allowances I got from my father and some ad-hoc work that I used to do part-time.
My 30% allocation for Desires was not bad, but definitely not much to buy or finance a bike worth 150K.
Since I controlled my expenses, I often had some extra money left at the end of the month. I will be honest that sometimes, I would blow it all on fun, but with time, I realized I could be smarter.
One day, I saw a bike that I started to love. Parallelly, I studied about long-term and short-term goals. Hence, I decided to use some of the extra money that I used to have at the end of the month to invest towards a short-term goal of buying that bike. And with time, I bought the bike without any loan.
So, I spent the Desires’ allocation on my desire, but in a better way.
Habit Creation:
Let me be straight; Habit is of utmost importance in mastering personal finance.
With this example, I am not only sharing how I managed the desired slot better, but I also want to convey that it also helps in habit creation.
As I have already stated, I implemented 50-30-20 in my college days. But as we all know, we don’t have much money to invest during college. Investing a small amount of money is possible, but it is not as crucial as we make out of it. I will explain it in the next section of this blog, so keep on reading.
Anyway, due to this limitation, where I didn’t have much money to invest, it was impractical to expect that it would generate the habit of investing.
But we can still succeed in incorporating habits into our lives by learning how to spend.
When I started investing, I never faced any problems as I was already used to following a system. And due to that, I was able to translate it into investing as well.
A habit is nothing but a process where you train your brain to follow a pattern. And once you have mastered it, your brain gets wired to identify them and that helps you adjust to new patterns better and faster.
With the process of managing your spending, you can go ahead and train yourself to maintain a habit that can be translated into making investing a habit as well.
You can say, with this process, you are making a Long-term investment in Habits.
Rewiring Your Brain:
You must have heard this a lot of times: To gain financial freedom early, you should start early.
It’s not bad advice, but it is not that important. Neither a mandatory nor the only way to achieve this.
Let me do the math for you by taking an example:
Let’s assume your monthly income during your college days is 10K.
20% of that is 2K that we will allocate for investing per month.
You started with the first year of college and invested it per month till you had completed every course you wanted to complete, and let’s assume it took you 5 years for it.
If we assume you have received a handsome 15% return, by making the calculations:
You have Deposited 120K.
Your Earned Interest on it is 59.36K.
Your Total is 179K.
That means, you have spent 5 years regularly investing and earned only 59.36K.
I understand you will continue from here and increase the investment by adding more, but that is the catch. You have to invest more to get more, be it time or money. Let’s say you didn’t invest anything for these 5 years, completed your education, got a job and started to invest then with an increased amount, trust me, you will catch up.
For example: Invest 10K per month for two years with the same interest, and you will make 41.35K. So, the difference is not much.
So why does everyone ask to start investing early?
It's not because everyone is lying, but because it helps to create a habit. Now that’s what is important. And as I have already stated, you can make a habit by learning to spend as well.
So, does it mean we should stop investing that 20%?
No!
But we must understand how and where to invest it.
Your teenage and 20s are for learning and gaining experiences. You have to focus on those instead of making money. You should learn new things, gain new experiences, succeed, fail, etc., as much as you can as early as possible. Because, in your teenage and 20s, you have time, and even if there is a disaster, you will get time to rectify it.
That is why they say, “Time is Money”. And that’s how you should spend it.
Investing in Experiences:
There is one thing that I usually don’t hear: When you are young, you should stop focusing on generating money and focus on gaining experiences.
Let me be clear, I am not saying earning money is bad. I mean that instead of focusing on making money, young people should learn to understand what money is and how to make it work for them. For that, you have to focus on learning new skills and gaining new experiences.
In short, I want to say that investment isn’t only when you buy stocks or assets, it’s also when you invest in yourself by learning or experiencing something new.
Furthermore, Experience isn’t only what you gain by doing a job. That isn’t the only type of experience. When you meet new people, make new relations, and spend on something that will help you move forward, that’s also an experience and in extension: An Investment.
I once spent 60k on an Airbnb stay with my fiancée. It was not a financial investment but an emotional one. It was a valuable investment in my relationship as the time spent together helped us understand each other better, which is crucial before marriage.
If you see it in financial terms, it will seem like an overspending because we were not at any tourist place. It was local, and we did it solely to spend some time together. However, the personal growth and relationship benefits that came from the experience are priceless.
Hence, although it was a costly affair, it was a good investment for our relationship that helped us move forward with positivity.
That is the reason I say that when you spend on experiences that you love, it should be considered an investment. The only catch is that we should be aware that we are spending it from our investment slot.
Key Takeaways:
I know I have posted a lot of information in this blog. Hence, I want to conclude it with key takeaways. Please read them below:
Learning to spend effectively is the foundation of financial freedom. It allows you to allocate funds towards your needs, wants, and future goals.
The 50/30/20 rule is a helpful framework, but don't neglect the "Desires" portion. By managing your spending within this category, you can still fulfill your wants while saving for the future.
Habit creation is crucial for financial success.
Learning to manage your spending lays the groundwork for establishing positive financial habits, including investing.
Early investing is valuable, but so are experiences. While starting early can create a habit, your 20s are also a time for exploration and learning.
Invest in experiences that add value to your life and personal growth.
Expand your definition of "Investment." Investments aren't just about stocks and assets. Experiences that enhance your life skills and relationships are valuable investments as well.
You can consider these points and reflect on your spending habits. Let me know if by reading this blog you can identify and optimize your spending to better align with your goals and values.
Remember, financial freedom is about making conscious choices and taking control of your money, and I hope this blog helps generate the same feeling.
If not, read it like any other story, and we will meet on my next post.
Till then,
Shreesh, Signing off!
Let Me know if you want a dedicated post on how I manage my money that I have allocated in the Desired slot.