If you want to be financially independent, you need to focus on the magic number: your savings rate. You must increase and defend this magic number at all costs.
How do you improve savings rate?
First, to keep it simple, your savings is measured by deducting expenses from your income (income – expenses = savings); and, your savings rate is measured by taking your savings and dividing it by your income (savings/income = savings rate).
So, to increase your savings rate, you could decrease your expenses and/or increase your income. The ultimate goal is to do both at the same time, always keep expenses low while increasing your income whenever possible.
Increasing income regularly can be a challenge, and, for some, beyond immediate control. Your expenses on the other hand is a variable that can be controlled entirely by you. If you want to save more, you have to spend less.
To reduce or control your expenses, it all starts with the decisions you make every day about your money.
If you get extra money today from a bonus, raise, or tax refund… what would you do with it?
If your answer begins with “I would buy…” something, then you’ve already lost (or delayed) the game. Instead, if you answer “save it” and or “payoff high-interest debt and then save,” you’re on the right track.
At the end of the day, you have to make a habit out it. You need to train yourself to save and spend less like you’re training any other muscle in your body. Eventually, it will be second nature and you can cruise on autopilot.
What if some friends are going out to dinner followed by a night out… quick, what do you do?
Well, if your goal is to save money, you’d say no, of course. If you want to save money and still have some form of a social life, however, you can make your decision based on how often you usually go out, and how far along you are with your savings goals. It doesn’t have to be black or white.
An additional option might be that you can go to dinner to socialize but not eat (instead eat at home); or, just meet everyone after dinner. I don’t know about you but most dinners with a bunch of friends usually turn out to be a choir when the bill arrives, and more money is spent then the meal itself was worth.
What you spend or don’t spend directly impacts what you save. The more you save now, the more options you’ll have later. It takes time, but, trust me, your future self will thank you.
This is why having some form of a budget is so important. A budget helps you to keep track of your spending and your savings “score.” It gives you a way to prioritize what spending is necessary, and what’s not.
A budget is like a financial compass, guiding you to better money decisions. Without it, you can get lost!
In fact, you can even use your budget as an excuse… “sorry, can’t go tonight ‘cause I’m on a budget!” Anytime I’ve used that excuse—which was always true—most people understood, and some actually changed their plans because they felt the same way. Before you know it, it becomes acceptable to say no to nights out or expensive dinners because of budget restrictions; instead, everyone finds something to do that doesn’t require a lot of money.
The point is, always stay focused on your savings goal and budget and avoid excessive and unnecessary spending along the way.
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