Spend extravagantly on what you like and cut back mercilessly on what you don’t care about. This is the advice of financial expert Ramit Sethi, author of the book “I Will Teach You To Be Rich”, which perfectly sums up the concept of conscious spending.
Conscious spending is a different way to focus your saving and, above all, your spending. It involves focusing on what really matters to you, what makes you happy. It’s about turning money into a tool, making it a means and not an end in itself.
It doesn’t matter if you’re a fashionista, a techie, a runner or a hardcore traveler. When you practice conscious spending, it’s easy to figure out your passions just by looking at your accounts. Could a person do it now just by looking at your spending? Probably not.
If you are like most people and make the typical money mistakes, you will have a lot of expenses that say nothing about you and which are literally eating away at your budget and hard-earned money.
An example of conscious spending
Would you spend 2,000 euros a year on shoes? This may sound outrageous, but it doesn’t have to be. And no, it has nothing to do with whether you earn a lot of money or just a little, the key is conscious spending.
This is the case of Sara, who buys 10 to 15 new pairs of shoes and sandals every year simply because she loves them. Sara has a good, slightly above-average salary, lives in a shared apartment in the suburbs, drives a low-end car, has a mid-to-low-end cell phone and always takes her own lunch to work.
As you can see, Sara is able to adapt her spending to focus her money on her passion: shoes. But the most important thing is that Sara not only spends, she also saves and invests every month.
Is 2,000 euros on shoes still too much? Possibly for someone who doesn’t like them yes, but if it’s your passion and you have the rest of your finances in order, who can say that you are doing anything wrong? Would it be too much if, instead of shoes, we were talking about a trip, for example?
How to implement your conscious spending plan
A good conscious spending plan is a different approach to your personal budget. If you’re struggling to keep on track, conscious spending can help you get there, or at least make it less of a burden.
How to get started with yours. There are four steps to getting started.
Step 1. Think about your life goals and the expenses that make you happiest
The goal of conscious spending is to align your spending with your interests. In other words, focus your money on what makes you happiest. That is why the first thing you need to figure out is what those things and their related expenses are.
Why should you do this before you have your budget or plan? Because normally how you use your money and how you would like to use it are two different things. Thinking about your life goals first and then reviewing your expenses will help you to get a different perspective.
Step 2. Categorize your expenses
As with a budget, in order to spend more consciously you also need to know how you are using your money now. You should be able to establish four basic categories.
- Fixed expenses
- Savings goals
- Remorse-free spending
Here’s what you should include in each of these.
Fixed expenses or what you need to live on
This is where you should put expenses like rent, household utilities, telephone, transportation, and so on, and then add an additional 10% to each one. This way you will be covered against potential price increases and fixed costs that you have not anticipated.
Ideally, these expenses will account for 50-60% of your budget.
Investments: plan your long-term future
To be able to spend without remorse and on the things you like, you must first do your homework. This includes planning for your retirement and investing to secure your financial future.
At least 5% to 10% of your income should go into your long-term investment plan.
A new cell phone, this year’s vacation, replacing appliances and even buying a house. We all want things and the best way to get them without mortgaging your future is to save.
This part of your plan is for your short-, medium- and long-term savings. For example, that new cell phone you’ve been wanting to buy, a new car, or the down payment on a house.
Of course, if you don’t have an emergency fund, your first savings goal should be to create one.
How much should you devote each month to your savings goals? The percentage will depend on how much you invest and what your goals are, but around 15%-20% of your income can go towards this.
This is the most important part, where conscious spending really comes into play.
In a normal budget, these “free” expenses would come under variable expenses. If you have done your homework and followed the points above, you will be able to spend between 20-30% of your budget as you wish and without any regrets. This is the part of your income that is for you to enjoy as you wish.
The only thing you have to ensure is that you do it according to your priorities. That is why the first step in the process is finding out what makes you happy and where you want to focus your money.
For example, if buying a house is a priority for you, you can focus all your efforts towards that goal by increasing your savings and reducing these variable expenses.
Step 3. Automate the whole process
Now that you know how you are spending your money and how you want to spend it, it’s time to start.
To do this, you just have to decide what percentage of your income will go to each category and set everything up so that it works automatically (always up to a certain point). This way, the system will keep running without relying on your memory or your willpower.
In this article we tell you how to save automatically using a model that you can also apply to your investments. In fact, there are products such as PIAS that will directly handle your investment order.
Once you have automated all the fixed payments (savings and investment included), the money that is left is for you and you will be able to do whatever you want with it.
Practice conscious spending and the management of your personal finances will be more personal.