We all require a certain amount of money to meet our everyday needs. But how we define “needs” is highly subjective. Some people feel they need to smoke, others feel they need to drink $30 bottles of wine. Some people “need” more clothes, others “need” a takeaway coffee every day.
Parkinson’s law says: “Expenditure expands to meet the money available.” When we get more income, we find more “essential” things to spend it on. There are useful strategies financial consultants recommend for overcoming this. They do work, and I have recommended them to many people who have become financially independent.
Bobby Jennings was a painting contractor client of mine some years ago. One year, I had to tell him that he had a large tax bill because of the profit he had made the previous year. He said this could not be as he had no money in the bank. When we went through his personal expenses, I discovered he had paid for various items, including a trip for his dad, home renovations and holidays for himself. Bobby was a nice guy who had the attitude of “make hay while the sun shines”, and had not put any money away for a rainy day.
How you think about money influences how you spend it
If you want to build a secure financial future, you need change the way you think about your income and get your language right. For many, the income they have left after paying their fixed expenses (eg. rent, mortgage and loan payments) is their “disposable” income. The term promotes the idea that their money should be disposed of.
Conversely, people with good money habits think of their surplus as “discretionary”. They have the freedom to decide what to do with their money. It can be used to enhance lifestyle, but if it is, it should be, as “The Barefoot Investor” Scott Pape describes it, “conscious spending” not just an ingrained habit. People with good money habits choose to invest their surplus or pay off debt early, thus improving their options for life and work in the future.
In business, the matter is equally important. Short-term financial success can create delusions of grandeur. A profitable contract can build an expectation of similar ones in the future. The temptation to spend the surplus money on “vanity” assets (eg. expensive cars) will make you feel good in the short term, but may lead to regret in the long term.
Managing surplus cash flow with clarity – about what is yours to spend, what you should spend it on and what you invest in – is key to building a secure financial future.
Some things to consider so you can spend more consciously:
- Pay yourself a reasonable salary – but no more – from your business.
- Hold tax, superannuation, long service, etc. in a separate account until due.
- Regularly transfer cash surpluses to an interest-bearing account for investment or debt reduction in the future.
If you’re in doubt as to what is yours to spend or invest, get your accountant to clarify it for you. If you want help with your spending or investment decisions, get a money mentor. Within six months, they can help you can change your money habits – and your self-talk about it.
Contact me at firstname.lastname@example.org and let me help you get the clarity you need around what to do with your surplus.