My simple tips to stop spending
I would like to share with you two simple tips that I use to discourage me from spending money on things that I don’t actually NEED. These may not work for you, but they really work well for me to help me stop spending!
Value items in terms of hours worked
The first cheat I use is to determine how long I will have to work based on my current wage to afford a certain item.
For example, I’m considering going out for a meal tonight, which will probably cost me around £40.
The UK average wage is currently £26,500.
Assume that the average wage worker contributes 2% to an employer pension and is repaying their student loan.
Their take home pay is therefore approximately £18,400.
Assuming we work 230 days in the year, again approximately the average in the UK, and we work 8 hours per working day (probably an underestimate for most).
This means our hourly wage is £10 per hour.
So, when I think that its £40 for the meal, I think why not.
However, when I think that I will need to work 4 hours (an entire morning at work) to pay for that meal, I suddenly think twice.
Future pricing strategy
In my opinion, the second strategy I use to stop spending is slightly more complicated, but even more effective.
The idea is to calculate the cost of something not at its current price, but instead at its future cost.
Let’s use the meal example again.
Tonight, I have two choices.
1) Spend £40 on the fancy meal
2) Add £40 to my long-term investments
I want the calculation to be possible immediately. Therefore, I use the rule of 72. This says that if you divide your annual interest rate into 72, this is the number of years it will take to double your money.
I’m going to assume that I can earn 7% on my investments (less 3% average inflation) in the long-term, netting 4% yield. Therefore I will double my money (approximately) every 18 years.
I currently use the period between now and my state retirement age, which is currently around 37 years. I will, therefore, double my money twice before retirement.
So, when I calculate the cost of something now in future terms, I need to times its cost now by 4.
Therefore, instead of the fancy meal costing £40, the true future cost of that meal is £160! Suddenly, I’m not so keen to go out tonight!
Let me know what you think of my methods? What other methods do you use to help you restrict discretionary spending.
I like to think about how long I have to work. That usually stops most spending!
kelly @stayingonbudget says
For sure, when you think about how many hours you actually have to work for something, it makes you stop and think!
Budget and the Beach says
This reminds me of the book your money or your life. It’s not about JUST the cost of something…its about how much of your time, energy, etc. would go into making that purchase. Makes you think…
Laurie @thefrugalfarmer says
We started valuing spending in terms of how long we have to work for it, and it’s really helped us change the way we spend. It really clarifies what’s important, doesn’t it?
Hayley @ A Disease Called Debt says
4 hours work for a £40 meal would definitely make me think twice! I like this way of calculating the true cost of something!
I love the way you think. If I start thinking like this I will definitely be saving more.
EL @ MoneyWatch101 says
I like both methods. I tend to use the first at times when figuring out expenses. The real secret to save money is to spend in the areas where you love and cut back on everything else. So you do not feel like your cheating or missing out on life.
Simon @ Modest Money says
Thinking in terms of just how much of your life you have to sacrifice to afford something is a sure way to stop in the tracks before making a purchase. I can’t count how many times that simple calculation has stopped me in my tracks!
Very useful tips, I thank you for posting them and I will consider them when I am next in the spending mood.
In simple terms our goals are A) retiring in our late 50s, and B) travelling annually in the meantime. Anything beyond the bare essentials is counter productive to those two goals so we think long and hard before spending on anything. We’ve consciously decided to take an annual tip even though it delays our retirement by 3years. To us that’s a tradeoff we’ve decided to allow.
For everything else it all comes down to the cost of retiring early. We’ve competed the savings we’ll need to cover us from age 65 onward when government benefits will start to roll in. For the years before 65 when we’re funding it completely on our own we’ve worked out a monthly retiree budget. Take that and divide by 31 to get the daily price of a day in retirement. Now consider the price of a dinner out, or a costly pair of shoes, or the extra cost of a new vehicle over used. Is that purchase worth delaying your retirement for a day? Ten days? A month? Six months? If you can see a purchase in terms of hours of work, or in our case lost days of early retirement it comes down to deciding what’s really more important to you. With every purchase you are saying that something is more important than your goals.