5 Ways to Improve Your Spending Habits

We all have spending constraints. This post describes 5 ways a family office will improve your spending habits.

Why improve spending habits?

Because, we should all live “within our means”, even when we’re rich. This means spending less than what we make.

When you’re wealthy, it can feel like you have few financial constraints. Afterall, your income is very high, and you can buy whatever you want. So, its easy to take your spending for granted. Should you spend $100,000 renovating your boathouse, or $500,000?  Should your golf club membership be $10,000, or $50,000? Oftentimes, it’s tough to tell what amount of spending is appropriate.

That’s why we need to put our spending into context.

Moral Constraints Matter

When your income can support high levels of spending, moral constraints become more important than financial constraints. Re-affirming your core values can help put your spending habits into context.

• What are you trying to achieve?
• How do your spending habits support your goals?
• What do your spending habits show your children and family?

Spending recklessly can saddle us with guilt and regret since “the best things in life are free”.

What do families with intergenerational wealth do?

Wealthy families that successfully transition their wealth through multiple generations often constrain their spending for moral reasons. Because those families realize that living a simple life focused on the achievement of goals, our relationships with those we love, and our health, are far more important than material consumption.

This doesn’t mean these families live without any material pleasures. It just means they live a lifestyle that blends in with other middle-class families. Well off, but not extravagantly so.

Living a financially sustainable lifestyle supports greater financial peace of mind, confidence we will reach our financial goals, and will reduce the stress we have about money.

5 ways to improve your spending habits

1) Keep Track

The first way to improve your spending habits is to account for them. If you don’t already do this, keep track of how much you earn and how much you spend.

Here is a monthly task for your family office:

• Save your bank statements and credit card statements to a folder on a shared drive.

• Enter those statements into a bookkeeping software such as Quickbooks or Xero.

• Provide you with an income statement each month or quarter showing you how much you made and how much you spent.

2) Make a Budget

Once you know what you’re spending each month, instruct your family office to make a budget for you. Use your current spending habits as a baseline. With this budget, you’ll be able to see where your biggest expenses are coming from and get ideas on where you’d like to make improvements.

Oftentimes, reviewing a budget is a good way to illustrate where you’re getting value for the money you’re spending. You might find some expenses are good to cut and others you might even want to increase.

Having a budget will also help you decide whether you can afford to take on new expenses, or whether you should hold back or save up for the planned expense instead.

3) Conduct Regular Reviews

Once your family office is tracking your income and expenses using bookkeeping software, another quarterly task for your family office is to conduct a regular review.

With the data at hand, your family office should be able to create customized tables and graphs that illustrate your spending habits and embed them in a standardized quarterly report they provide to you. This way, you’ll be able to work with your family office to analyze your spending habits and identify trends over time.

From a financial perspective, your spending should be balanced against the new wealth you generate. From a moral perspective, your spending should be compared to your values and goals. Through regular reviews, your family office should put your spending into context and coach you towards more successful choices.

4) Be Accountable (to someone else)

One of the alluring parts about being wealthy is calling your own shots. Since it feels like you can spend whatever you want without financial constraints, it also feels like you don’t need to be accountable for your spending. But beware of this mental trap. Accountability can also help keep our emotional impulses in check.

Wealthy families who constrain their spending by living frugal lifestyles often do so because they want to be accountable to their community, their values, and most importantly, to each other.

If your spouse and kids aren’t always a source of support, lean on your family office instead. Just like someone might use a personal trainer to keep their fitness routine on track.

5) Put Your Spending into Context

As mentioned earlier, the best way to constrain your spending is by putting it into context. This means confronting the moral constraints of your spending.

Here is what your family office should do to help you with this:

• Define your values
• Identify your financial goals
• Create and continuously revise a financial plan based on your unique values and goals

For example, if one of your core values is “environmental sustainability”, then this should factor into whether you might buy car A or car B. It may also determine the food you eat and the products you buy. Alternatively, if you value “leadership”, then your spending should provide a positive example for others.

More than Money

Usually, bad spending habits are emotional and the result of looking for fulfillment in material consumption. Confronting these emotions can be difficult. But, if we can step back from the emotional side of our spending, we can often gain perspective and attain financial freedom.

Creating plans and reviewing progress in a systematic business-like manner as described in this post is a way to reduce the emotions that cloud our spending habits.