Why less is more
How much of your monthly income do you spend on living?
Beyond the essential living costs like housing, food, energy, clothes and transport, there is also likely be the ‘extras’ that make life both comfortable and enjoyable, like socialising, hobbies, designer clothes and holidays.
Where some people get into a problem financially is that they spend too much on the lifestyle ‘extras’ so they never manage to build much in the way of a short-term cash reserve or long-term wealth.
Companies spend a lot of time and money trying to convince and manipulate us to spend our money NOW. Their central message is that their goods or services can make us happy, save us time or give us more pleasure.
Because we are human, we are highly vulnerable to spending on things that we neither need nor will make us happy, purely as a result of impulsive and instinctive behaviour, encouraged by marketing.
But there is always a bigger price to pay for spending now. The problem we often don’t realise until it is too late.
As income rises, particularly in the first 20 years or so of our working life, there is a tendency for lifestyle spending to rise in line with our income, known as ‘lifestyle creep’.
Think about the last pay rise or bonus you had. Did you find ways to spend more? Is that spending still making you happy? Could you have been just as happy without increasing your ongoing spending and instead saved the money?
Learning to be frugal, particularly at the beginning of your working career, and ensuring that your lifestyle spending rises at a lower rate than your income, is an essential principle to understand and adopt.
Growing your income faster than your spending has three great and very tangible benefits:
1. Create spare cash for saving – This will enable you to build a short-term emergency reserve, so you avoid taking on expensive unsecured debt to meet unexpected expenses. It also enables you to save towards other important goals like buying a house or financial independence.
2. A lower retirement savings need – If you get used to a lower cost lifestyle now, then the income you’ll need when you stop work in later life will be much lower. This means you might be able to save less throughout your working life, take lower investment risk, or be able to fund a more lavish lifestyle later on. The chart below shows the lower ‘cost’ of funding a pension income at different proportions of final salary.
Source: Adapted from The 100-Year Life by Linda Gratton and Andrew Scott
3. Greater happiness – Beyond a certain level, which will be different for each person, higher lifestyle spending doesn’t actually make you any happier or fulfilled. Michelle and Frank McGagh went on a year-long spending diet and found more happiness and contentment from spending very little, other than on the essentials. They also generated £22,000 which they used to reduce their mortgage, and get one step nearer to their dream of being debt free.
So, have a long hard think about what is important to you in life and how you might adopt a more frugal spending mindset, to enable you to avoid expensive debt, build wealth and feel more in control of your money.
Instead of talking about or showing off the ‘stuff’ you’ve wasted your money on, why not tell people about all the things you didn’t buy and the money you’ve managed to save as a result.
If you live frugally, particularly while you’re young, the chances are you really will be happier, healthier and more contented than the spendthrifts.