In this post, I will describe the very simple system I rely on to make sure, that I don’t spend any “underserved” or “unjustified” amount of my income on things I may desire.
To begin with, I decide on a ratio. A ratio that determines the relationship between the sensible and the lesser wise ways I am allowed to get rid of the money I earn.
Let’s say I earn 10.000 DKK (sorry for the weird currency – I am from Denmark) of unexpected income tomorrow, and my decided ratio is 50/50. That means, I am allowed to spend 5.000 DKK on whatever I want (although, I try to be smart about what I want), while the other half would have to go towards some destination that could enhance my long term financial situation e.g. investments or paying off debt.
This is extremely simple, and it requires some measure of discipline, but the basic idea is, that you never spend any amount on things you don’t need, unless you have a matching amount in the other hand, ready to invest in something that might be more boring, but wiser – like stocks.
My own setup
Depending on your own current situation, you might decide on a different ratio than me, and you might choose to invest your “smart money” differently from what I do. But currently I am on a 2/5 ratio, meaning I have to invest 5.000 DKK before I am allowed to spend 2.000 DKK.
So If I want to buy some semi-superfluous object or service that costs 4.000 DKK, I need to invest 10.000 DKK first, which means I cannot buy it before I have 14.000 DKK.
This might seem tough to some people, but I find it to be a very nice guideline, that helps me see clearly when I deserve some kind of costly treat. At this point, I choose to invest all of my “smart money” in financial assets like stocks, as I am currently out of debt, and see no better way to put money aside for the future.
To make this as easy as possible for a beginner, you might decide to start with a 5/1 ratio, meaning you have to put 1 aside for every 5 you spend. In the long run, this will make a bigger impact on your financial situation than you think.
What do you think about my simple rule for not being and idiot with personal income? Would you consider following it?