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I Will Teach You To Be Rich -> Conscious Spending Plan

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Continuing with Ramit Sethi’s book, I Will Teach You To Be Rich, let’s talk about a conscious spending plan.  “Conscious spending plan” doesn’t sound exciting to you?  How about “frugality?”  Are you excited yet?  Probably not, but let’s try to make these seem a little sexier than they sound.

Frugality

I always associated frugality and being frugal with being cheap.  Someone would say, “He is really frugal with his money.”  I would hear, “cheap.”  But this is not really the case, as I have come to learn.  A quick search in Google to define frugal returns:

“sparing or economical with regard to money or food.”

Well, I don’t like the way that sounds either.  Ramit made it all better as he explained frugality as “spending money on the things you absolutely love and cutting costs mercilessly on the things you don’t.”  This sounds a lot better to me.  I guess I enjoy his interpretation of frugality better than Google’s definition.  This makes sense to me.  It is saying to not waste you money on anything unless you absolutely love it.  Since I like minimalism, this seems like he is recommending we spend our money on less things and only on the important things.  I think I like frugality now!!!  If we are going to spend our money on the things we love, how do we approach it?

The 60% Method

The 60% Method, as recommended by Ramit, is about setting up your spending habits to break down the following ways:

  • Retirement Savings – 10%
    • Investments like 401(k), IRAs, Roth IRAs, Stock Market, Real Estate, etc…
  • Long-term Savings – 10%
    • Three months of expenses, Stock Market, etc…
  • Short-term Savings – 10%
    • Money for Vacations, Gifts, Down Payment on a House, and Other Unexpected Expenses.
  • Fun Money – 10%
    • The Party Money:  Dining Out, Drinking, Movies, Clothes, etc… 
  • Fixed Costs – 60%
    • The Bill Money:  Rent, Mortgage, Utilities, Debt, etc…

The concept here is, Pay Yourself First with the first 30%, have fun with 10%, and the remaining 60% goes toward the cost of living.  This is pretty straight forward.  The tough part most people have is keeping their Fixed Costs within 60% of their income.  Most people are using more than 90% or more of their income for Fixed Costs.  I guess there is no question why Americans have so much debt and very little in savings.

Cut Your Costs!!!

The obvious answer to many people’s problem is to CUT YOUR COSTS!!!  We live in a society of abundance and therefore feel like we have to have everything…every option available…everything we “need.”  We don’t need at least half the things we have.  Some of us even feel entitled, driving our costs higher.  Do you really need HBO, Cinemax, Starz, and Showtime???  I had all four of them for many years, and barely watched them.  But I paid for them.  What a waste…SMH.  I bet there are many other people paying for these and don’t really watch them much.  If you really love movies, how about cutting it down to just one or two of these movie channels?  Of course, this is just an example of where we can cut our costs.  There are many more.  Take some time, sit down, look at your expenses and ask yourself honestly what you love and what you could live without.  This will save you tons of money!!!

Final Thoughts

Ramit provides a pretty simple approach to a Conscious Spending Plan.  He talks about being frugal and only spending on the things you truly love.  Cut your costs on the things you don’t need.  Don’t build up your Fixed Costs so high that you can’t afford to implement The 60% Method.  If you can Pay Yourself First and keep your costs down, you can really enjoy your Fun Money.  If you want to truly build your wealth, limit your costs and implement The 60% Method.  I leave you with a quote from Epictetus,

Wealth consists not in having great possessions, but in having few wants.

Be frugal and only buy the things you absolutely love, and don’t buy the things you ONLY want!!!

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