Financial intelligence is key to successful management of finances. Widespread financial stress among the household points to a huge disconnect between the demands of prudent financial behavior & what the vast majority actually does. The stress mostly stems from low levels of financial reserves. Saving is the difference between the earning & expense. While the earning aspect is rightfully the focus of much attention, spending aspect does not get as much mind space. It is treated as a downstream effect of earning the income & is largely ignored as far its impact on wealth creation goes.

The obvious benefits to spending less are saving money for investment, paying down debt & freeing up room for really important stuff. To fix the approach to spending & take accountability of financial decisions, one has to know the nature of the expense to find its solution.

Expenses could be of any of the following nature –

• Fixed – Standard expenses that happen every month at a certain date – EMIs, electricity, memberships, subscriptions, internet
• Recurring – Day to day expenses – groceries, petrol
• Non-Recurring – Annual or few times a year – clothes, shoes, social events
• Unpredictable – House repair & maintenance, car breakdown, medical emergency

Spending Mindset

The key to making progress towards financial freedom is a mindset that frees oneself from shackles of circumstances & takes control of life & money. Unless, lifestyle is aligned with the objective of financial freedom, any effort on managing the expenses will amount to little. There is a sliding scale to attacking expenses & it all boils down to the mindset, with which one approaches one’s spending.

Frugality is at the severest end of expense scale & is the lifestyle option where in lowest cost & zero waste solutions are targeted each & every time. The sharp focus is on price & utility, instead of quality or brand value. Hunt is always on for the best deal, buying in sale, using coupons, free use options etc. It is a serious attempt to stretch the rupee as far it goes by upcycling current possessions & finding ways to improve available stuff. It is the only viable option available for those with limited potential for income increases &/or for those in debt trap. Savings however little, can be invested into assets that generate income, thereby loosening the stranglehold of poor cash flow. With strict control on expense & increasing income, opportunities open up.

Minimalism is the more evolved lifestyle mindset, income side permitting of course. The philosophy of minimalism is to liberate oneself from the clutter of unnecessary belongings. Such lifestyle is wanting to live with less, buy only what is needed & keep only things of value. It strives to limit oneself to things & experiences that truly matter & define you as a person.

Financial minimalism works towards freedom to enjoy life, overcome stress of constant consumerism & financial freedom. It is best achieved by tracking your expenses & segregating them into ‘wants’ & ‘needs’. Half the battle is won if one is able to identify the spending which only gives momentary pleasure & does not contribute to personal growth. The ‘Pareto Principle’ (the 80/20 rule) applies to everyday life as well i.e., often 20% of our possessions are used 80% of the time & therein lies potential for eliminating the long tail of expenses that create clutter & stress. Such an approach leads to more intentional buying that gives better value over time but may not necessarily be the cheapest option.

Keeping-Up is much of the middle-class experience. Just as income begins to flow into enough-but-not-too-much region, that expectations of society & peers begin to guide lifestyle choices. Comparing oneself to others at same or level above, is a human frailty that is omnipresent & leads to financial decisions that are psychologically & financially self-defeating. Life happens day by day & one needs to be conscious enough & disciplined enough not to be dragged into living a life that you are expected to live as against life that you want to live, in order to be happy. The financial cost is paid in form of being in debt, always playing catch-up, accumulating things that are not used or just being in stress of living somebody else’s vision.

Profligate lifestyle is the other extreme of frugality, in which all things are defined on materialistic scale. The latest, the largest, the best, the flashiest or just the costliest, is where spending is directed. Such lifestyle is more often than not facilitated at the start by availability of too much income or wealth but no wealth is large enough to forever sustain a profligate lifestyle. History is a witness to many examples of kings & rich celebrities falling into financial distress, as well as those who have lost everything in an attempt to be seen in a select circle. Profligate spending is antithesis of wealth creation. 

Lifeblood of Financial Freedom

Financial Freedom is possible for anybody who has moved beyond the subsistence income level. The formula is simple but needs lifetime commitment to it. Management of expenses is fundamental to building the corpus & sustaining it for an undefined period. It is a key hurdle to cross. The journey towards financial freedom is going to be short lived if we continue to pursue fulfilment in material possessions. The pleasure of the new dissipates very quickly & the dissatisfaction of not having something else returns. No amount of spending can cure discontent of that the chase for better lifestyle is trying to find. The lifeblood of financial freedom is to be content, find value in life experiences & being satisfied with current situation.