Stop saving the money you don’t spend. Spend the money you don’t save.
A simple trick to growing your wealth and moving closer to financial independence.
A few years ago, I was sharing a flat with two friends. They had regular jobs with regular, decent salaries. I was an entrepreneur and my company was struggling. I was only paying myself when I could afford it, which meant not every month, and not 100% of what my contract said.
One of my flatmates complained about his salary, saying he didn’t have enough cash to live like he wanted. For reference, he was making 1.5x to 2x what I was making at the time. He bought a lot of expensive clothing, food, and spared no expenses. I was living frugally, trying to save towards things I considered more rewarding, like travelling or investing.
He said something that stuck with me:
How come I make so much more than you, yet I feel poorer than you?
His issue was a fundamental mis-understanding of a properly balanced budget.
Save what you don’t spend…
Many people think that savings are the result of your budget. Namely, that you save what’s left at the end of month. And therein lies the rub. In their mind, the math goes :
Salary - Fixed Expenses - Discretionary Spending = Savings
In this model, your savings are subject to high variability and are not your target. This model skews towards instant gratification and neglects the long-term benefits of having money in your account.
Spend what you don’t save…
Savings is not only a way to improve some far off retirement, it’s also a way to afford a holiday when you want it, a new laptop when you need, or to handle an emergency should it arise. As such, savings should be a target, a priority.
The math should really be :
Salary - Fixed Expenses - Target Savings = Discretionary Spending
This approach makes saving an objective in and of itself, and correlates your discretionary spending with your fixed costs and target savings. And remember, you’re not only saving for your retirement. You could be saving for travelling, for a down payment on a house, for your wedding, or who knows what.
So why did my friend feel poorer?
He was saving what he hadn’t spent, while I was spending what I hadn’t saved.