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.