“We spend money we don’t have on things we don’t need, to make impressions that don’t matter.” – Tim Jackson.
Americans spent 1.2 trillion dollars on good and services that weren’t needed (dining out, drinks, clothes, games, apps, gadgets, shoes, jewelry, deal websites, daily coffee trips, premium cable, expedited shipping, etc.) With approximately 123 million households, this amounts to roughly $10K/year or $800/month. If you lack conscious financial disciple, you will always struggle with money whether you make $10K or $10M annually. When we speak of financial discipline and budgeting, we often focus too much on the macro or fixed expenditures that are easier to anticipate and manage (rent, insurance, car note, loans, etc.) However, what hurts us even more are the seemingly insignificant impulse buys that slowly but surely add up and eat away at our potential savings and assets. We call those, The Tiny Giants.
Over the years, research has shown that there’s just one key distinction between the rich, the middle class and the poor…and that’s in budgeting – how they spend their money.
- The Poor – On paydays, the poor often spend their money on “stuff.” These are mostly things they don’t need to survive. Their houses and cars are overwhelmed with so much “stuff” that there’s absolutely no breathing room left, and yet they’re trapped in a cycle of buying more “stuff” each payday (shoes, games, apps, gadgets, jewelry, decorations, you name it.) They simply justify buying all these “stuff” by claiming that they costs so little because they came from the flea markets, dollar stores, garage sales, online deals, etc…And over the years, that’s all they’ll ever have: “stuff” that can never generate cash! Adequate budgeting can rescue such mentality.
- The Middle Class – Those in the middle class appear rich, however, they spend their money acquiring liabilities that require monthly payments such as cars, houses, boats, etc. Although they make 6-7 figure salaries, their expenses often equal or even outweigh their income. This could possibly be another reason why the middle class in the United States seem to be dwindling. Once again, adequate budgeting is the key!
- The Rich & Wealthy – The rich simply spend their money acquiring assets (assets are things or investments that generate cash) such as stocks, bonds, real estate, education, etc. The cash generated by these assets are then used to acquire more assets that generate additional cash and the cycle is simply glorious and endless.
Assuming a rounded salary of $100k, let’s set up a quick monthly budget and show how those seemingly insignificant impulse expenses can quickly add up and take a bite out of one’s finances (numbers are rounded):
Rent & Utilities: $900
Car Note: $250
Student Loans: $400
Car Insurance: $150
Cell Phone: $150
Food & Groceries: $400
Entertainment & Miscellaneous: $500
Goodwill (Family, donations, etc.): $500
With a salary of $100k, you should have about $65k in disposable income after taxes and other deductibles (health, dental, retirement, etc.) Check out Living Paycheck to Paycheck on $100k for a detailed example. This comes out to roughly $5,400 a month in disposable income.
Disposable Income: $5,400
Budgeted Monthly Expenses: $3400
Expected Monthly Savings: $2,000
Now let’s examine a few impulse expenditures or the Tiny Giants that could slowly and quietly deplete those savings and then recalculate:
- Deals – You’re watching TV and all of a sudden, an infomercial comes on for that dress or item you’ve always wanted! But wait, if you act now, you get a second dress for free! So of course you act immediately and $35 is gone even though you neither need the dress nor the additional one for free.
- Coffee Trips – You stay up late most nights so you have to make your Starbucks run before work each morning or you won’t be able to function properly so you spend about $25 each week on coffee.
- Dining Out – You cooked the night before and even brought your own lunch to work. However, your co-workers wanted to try out this new restaurant and you decide to abandon your lunch and join them. $20 later, you’re thinking maybe you should have eaten your own lunch but it ends up happening again and again anyways!
- Let’s scream for ice-cream – You get off work early and decide to go for a walk downtown on a hot day. All of a sudden, you walk by the ice-cream store. Guess what sounds really good? Ice-cream! And besides, you’ve gotta do what makes you happy, right? Within minutes, $5 disappears along with the ice-cream.
- Alcohol – Your best-friends are in town and you just have to take them to a nice spot in town! But before that, you’ve got to spend at least $70 on alcohol for your “pregame” session at your place. Cover fee at the spot is $10, you’ll have at least 2 drinks and of course get shots for your friends who drove 3 hours to see you. So you end up spending about $100 at the club. That’s over $170 of unnecessary spending within hours.
- Expedited Shipment – As your excitement level rises, you can’t possibly wait 10 days for that dress you ordered to arrive so of course you must expedite. For $15, you managed to get the dress about 4 days sooner!
- Gym Membership – It’s January and you are confident that this is indeed the year that you’ll finally ‘exercise’ some discipline and visit the gym more faithfully. After the first two weeks, you’re already struggling to make it to the gym even once a week. That’s at least $45/month or roughly $10/week for the YMCA membership.
- Rewarding Yourself – You cannot, I repeat, YOU CAN NOT reward yourself for saving $500 by spending $400. All you’ve done is just spend an additional $400 and saved a total of $100. Phew! I had to get that off my chest because one of my friends just did that after a month of brutal financial frugality.
In just a few examples that I’m sure a lot of people can relate to, we’ve managed to waste $280 that could have been put to better use. And as we’ve learned earlier, we spend on average $800/month on things we do not need. So if we factor that information and readjust the monthly budget, things start to look a bit different as we now are only able to save roughly $1,200/month instead of the expected $2,000. This is a set-back of $9,600 annually. That’s HUGE and simply must not be ignored!
Imagine what 1-time NEED you can solve with this money at the end of the year. On your quest to being debt free, you have to be a lot of things: consistent, persistent, brutal, honest with yourself, and must learn to say NO to those impulses, family and definitely friends. The less you make, the more you have to fight to overcome those impulses and take control of your finances until you are debt free and able to start investing in real assets.
Check out ‘The Last Budget You’ll Ever Need‘ for simple and easy to follow methods on budgeting and protecting you from yourself!
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