What is Financial Minimalism and How Can It Help Me?
Minimalism is a growing lifestyle trend that sees you simplify your life by reducing the number of things you have so you can focus on the things that really matter in your life. Well, what if we took those same principals and applied them to our finances? Financial Minimalism is a method to minimize your spending that allows you to focus on the things that really matter in your life. It is a similar concept to the minimalist lifestyle but it focuses more on your finances than how many pairs of pants you own.
Before we dive into how to practice it we should clarify what Financial Minimalism isn’t. It isn’t a plan that is telling you to never spend money. It isn’t going to see you eating rice and beans for the next year. It also isn’t a get rich quick scheme. Yes, if you follow Financial Minimalism you will save money, but it won’t be large amounts and it won’t be fast. This also isn’t a method for getting out of debt. Yes, if you’re in debt putting Financial Minimalism into practice will help you succeed in having the money to pay off your debt but this shouldn’t be used without a bigger plan in place. With all of that in mind, let’s jump into Financial Minimalism.
At its most basic level, Financial Minimalism is about reducing the amount you spend on things that you don’t want or need and learning to live below your means. It’s a change in how you think about money and what you should use it on.
Ask Why
When you’re first starting ask yourself why. Why do you want more money? Be specific. “Saving for Retirement” is good but “Having a net worth over 1 million at retirement” is better. Picture the life you want to live. Be realistic, chances are you aren’t going to be living in a Beverly Hills mansion. Why do you want to own your own home? Do you want a yard for a dog or maybe even chickens? What kind of car will you drive? Why do you want to save up for your kid’s college? Get specific and write down everything that comes to mind. Ask your spouse to make a similar list then compare them. Combine those lists and now you know what it is you’re working towards. This makes it far more likely that you’re going to succeed.
Cut Back on What You Don’t Need
Do you need a Netflix subscription every month? Could you instead save money by only subscribing for a month once or twice a year? Do you need to get Starbucks every morning? These are the sorts of questions you need to ask yourself when you’re cutting back. If at any point you say yes, you do need those morning Starbucks runs then that’s ok! So long as you identify what is important to you and why. If you’re paying for a subscription just because you hope you might get something good…is that really a good use of your money?
Learn to Live Below Your Means
You’ve heard of living within your means but the core idea behind Financial Minimalism is living below your means. This means having money left over every month that you can use to invest or pay off debt. To do this you need to know how much money you make and how much you spend. So if you aren’t already doing so keep track of where your money goes for 2 months. At the end of those two months take a look at everything you spent money on and ask yourself “Is that worth my dream?” Look at the places where you can make changes to reduce the amount you spend without lower your quality of life more than you’re comfortable with. If you aren’t making enough money to live comfortably and continue to save then it is time to look at ways to bring in more money like a second job or a side hustle.
Always Look for Value
This doesn’t just mean to always be on the lookout for a deal, though yes, by all means, you should always be doing that. Looking at value also means looking at how much of your time that item is worth and how much you’ll enjoy it.
For the first, how much of your time that item is worth, you need to know how much you make per hour. I like to figure this out post taxes, because really, if you’re making $15 an hour you aren’t bringing home all 15 of those dollars. So, find out how much money you make per hour of your take-home pay. To do that divide the amount of money that goes into your bank account from your paycheck by the number of hours you worked in that pay period. Once you have that number worked out compare every purchase you make with the amount of time you have to spend working to pay for it. If your take-home is $10 an hour and you spend $7.50 at Starbucks every day, ask yourself, is your Starbucks worth working nearly an hour just to get it? The answer might be yes, and if it is then that is ok. If it isn’t then look for cheaper alternatives like bringing coffee from home.
The next thing you need to consider is how much fun or enjoyment you will get out of the item versus if you spent it on something else. For instance, consider the cost of going to get a bagel with all the toppings. Depending on where you are this might cost you $7 or more. But, if you went to the grocery store and bought all the materials you need to make a bagel yourself, you’d be able to buy a whole lot more bagels for the same price as one. So you can have bagels several times, extending the pleasure you get out of that money you spent. This is the dollar to enjoyment ratio.
Invest Your Money
The final part of financial minimalism is investing your money. Once you have a thousand dollars saved up (that doesn’t include your emergency fund, which everyone should have) it is time for you to begin investing. How you do that and where is something for you to discuss with your financial advisor.
So there you have it, now you know how to practice financial minimalism. It’s time to get started!
