One of my lightbulb moments on The Path to financial independence came from asking myself this question about money:
Where does it all go?
You can ask this at a personal level (where does your own money go?) or at the level of society (where does everyone’s money go?). Both are great questions to ask.
Most people don’t think about the answers because money just leaks out of their life like water from a bucket shot full of holes…or like blood spurting from a neck wound in Game of Thrones.
At a personal level, there have been many times in my life where I wondered: where has it all gone? In my youth, I had a talent for irresponsible drinking (it’s important to have hobbies). Many times, I’ve turned out my pockets the morning after the night before and experienced a sense of disorientation. That sense of dismay when you discover that The Beer Pixies have shaken you down and emptied your wallet.
More recently, older and (ahem) wiser, The Escape Artist has been on the other side of the bar. Last summer, I worked as a barman at a wedding. This gave me a front row view to see where it goes.
Guests would weave up to the bar, order half a dozen shots of tequila or sambuca or whatever. Some would then immediately forget their drinks: wandering off in an alcoholic haze and leaving them on the bar. The waste was shocking. When it comes to alcohol, people will drop £50+ on drinks without even thinking. And this was not Paris Hilton or a member of the Royal Family getting married, this was Joe and Joetta Normal.
Why do we do this to ourselves? Perhaps its because, in the immortal words of Travis Mills: “it’s too good to be young and stupid”. Even when we’re not really young…or stupid.
Its also good to ask Where does it all go? in our society as a whole. Real incomes have increased roughly 4x in the period since the 1950s. And yet the evidence suggests that happiness in The West has pretty much flatlined since then.
This disconnect indicates that spending does not equal happiness. They just ain’t the same thing. More spending doesn’t lead to happiness (after you have food and shelter etc) in any sustainable way. Not that that stops most people.
If you think about what society looked like in the 1950s, it was mostly pretty good in the West. (The Escape Artist was not there so I’m relying on second hand evidence here). Apparently, for the most part, we had food, houses, jobs, children, friends etc etc. Zoom forward to the current day and things look remarkably similar in many ways.
We still have food, houses, jobs, children, friends etc. So you could be forgiven for wondering where all the extra income has gone? In some ways life is better now (the internet was painfully slow in the 1950s) but I’m more struck by the similarities than the differences. For example:
- In 1950 we spent money on snacks, cars, TVs, cigarettes, booze, sweets, toothpaste, soap and shampoo.
- In 2017 we spend (more) money on snacks, cars, TVs, cigarettes, booze, sweets, toothpaste, soap and shampoo.
It seems to me that, dazzled by the magic fairy dust of marketing, we’ve mostly chosen to pay more for the same old stuff…plus a few new gadgets. Remember that you choose what you pay for most things.
As our incomes have gone up, we haven’t always spent that extra money wisely. We could have directed more of our money into savings and real assets that were not financed by borrowing. We could have bought more freedom. We could have bought more peace of mind, more financial security, better mental health and more time in nature.
So one answer to where does it all go? is that a big chunk of it ends up with the shareholders of consumer goods companies. If you are interested in benefiting from this knowledge, a rational response would be to buy own label toothpaste and shampoo ( here comes the science bit: it’s the same shit! ) and redirect your savings into shares.
The question is not whether there are lots of people who are skint. Clearly there are. The real question is: what is most likely to actually help people in a way that is ethical, sustainable and puts them on a good path?
The Escape Artist can see that it’s not a winning commercial strategy for newspapers (who make money selling advertising) to tell their readers to stop their ridiculous spending. Similarly, its not a winning electoral strategy for politicians to tell voters to stop complaining and instead spend a bit less on binge drinking and MacDoughnuts and a bit more on Vanguard Lifestrategy Funds or ETFs. That would be fatshaming. Or elitism. Or something.
I’ve noticed that, if you’re a government minister on Question Time or working in the media, its safer to stick to earnest but empty platitudes about “Hard Pressed Working Families”. So it falls to The Escape Artist to dispense some reality-based, actionable financial guidance for The People.
The Escape Artist would like to suggest that everyone would benefit from the ridiculously simple technique of recording where all your money goes for a few months.
Here’s how you do it:
- You spend from one bank account. If there are 2 of you, you can use a joint account where you both have debit cards.
- At the end of the month, you download all of the transactions into a spreadsheet.
- You then rank the items by size (largest first, smallest last) and you see where it all went. Group each item into categories that make sense for you (eg food groceries, heating, recreational drugs etc)
- You work down the list looking for the big wins and the quick wins. For example, if the largest item in your monthly spending was your mortgage payment then ask yourself: how recently have you re-mortgaged? Are you on the best deal?
- Then move down to the next item and repeat. If the next biggest item was your power bills, when did you last switch to the lowest cost supplier?
- You then ask yourself (and your spouse) for each significant item: did I (or we) get happiness / life energy / great memories / knowledge from that spending? In other words, did you get real value from it?
- You spend less than your income. You are aiming to save 50+% of your net pay. Even if you are totally skint, you pay yourself first and take say £1 at the start of the month and put it in a jar marked “Financial Freedom Fund” or something that tickles you and captures your imagination. Next month you double that amount…and double it again the next month…soon it will be real money.
- Next month you tot up your spending again…congratulating yourself that your this month’s total spending is slightly smaller and you are slightly happier….then rinse and repeat as many times as it takes for your new habits to sink in.
- In the early days, the act of saving something (anything) is far more important than the amount. You are building a habit that will eventually become your automatic pilot.
- And finally, if you feel internal resistance at any of these stages, you bitchslap your inner procrastinator and JUST DO IT.
Here’s what you DON’T need to do:
- You don’t need to buy an app or download a piece of software. The entire purpose is NOT to automate this step. You want to make recording your spending conscious and deliberate. You are trying to make it harder to spend on automatic pilot.
- You don’t need to carry around a notebook and a pen to record every item plus an observation of your emotional state in your mindfulness journal (although you can if you want to).
- You don’t need to leave angry comments that The Escape Artist does not understand the plight of Hard Pressed Working Families.
- You don’t need to stop to check out the kitten photos on Facetweeter. The Escape Artist mixes compassion and empathy with Tough Love so I’ve included a free kitten picture for you below.
Can’t we get back to talking about effortless passive income, advanced investment strategies and fun achievements?
Well yes we can and yes we will. But you can only know when you are financially independent when you know what your required level of spending is.
You are financially independent when you have >25x your annual required spending invested wisely in real, wealth generating assets. That’s why its 25x more powerful to reduce recurring spending by £1 than to earn an extra £1.
And, as Shakespeare himself may once have said:
How can thou know thyself, if thou knowest not thy spending?
Further study materials:
Image credit: http://www.flickr.com / Daniel Moyle