A Simple Technique for 'Spending less and Saving More'

"Do not save what is left after spending, but spend what is left after saving"

This is how the great investment guru warren buffet, explains the importance of Spending less and Saving more.

Our own Thiruvalluvar also explains the importance of spending less and saving more by telling us 'You need not worry if your income is less provided you know how to spend within your income'.

We all know the importance of spending less and saving more. But do we give enough importance to it?

Are we able to control our spending?

Is there any simple technique or easy method to spend less and save more? So as to find out a simple technique for this, we need to understand why are we not able to control our spending?

In order to control anything we should know what is the bench mark and what is the deviation. Then only we can control it.

For example, if a diabetic patient would like to control his blood sugar levels, then he should know what his current blood sugar level is. If the deviation is minor, then that can be controlled with diet. If the deviation is severe, then that needs to be controlled with some medication plus diet.

But, the first step is to identify what is the current sugar level. Similarly if you want to control your spending the first step is to identify your current spending? Then only we can calculate how much we are over spending? Where we are overspending?

Do we know how much we are spending every month?

Our earlier generation had a habit of writing down all the expenses. But we are living in a very complicated world. We don't have time for writing down and updating all the expenses. But we have time to update our face book status! We have time to comment on somebody's face book status!! We REALLY live in a very complicated world!!!

We are actually looking for a simple technique to control spending for this generation. So writing down all the expenses will not work out for this generation.

So we are unaware of how much we are actually spending. As we don't know how much we are spending, it is difficult for our mind to control the spending.

Can you track your spending from your bank account?

Remember your mind is a best servant, but a bad master.

Say For example, Our monthly income is 50000 and we would like to spend Rs.25000 per month. Our monthly budget is 25000. We want to limit our expenses within this 25000 Rs.

In the middle of the month you want to know how much you have spent. So open your bank account to check how much you have spent so far. There was some opening balance at the beginning of the month. Then there was a salary credit of Rs.50000.

Then, there will be some ECS debits towards EMI payment, insurance premium payment, Mutual fund SIP.

Then there will be some debits towards the utility bills. Some debits towards household items. Some debits towards satyam cinemas. Some debits towards beauty parlour.

Though you find a complete record of all your transactions, it is difficult for you to find out how much you have spent so far. Because these bank debits are a mixture of your EMIs, Investments and expenses. So as to find out how much you have spent, you need to remove debits towards EMI and Investments.  Then only you can figure out how much you have actually spent.

Now this is a very lengthy process. To open the bank account and to check every debit is expense payment or investment payment. This is not an easy job. If we could have known how to do this tallying and if we had patience to reconcile these payments, then probably we could have become chartered accountants. So we close the bank statement without understanding how much we have spent.

Mind is a best servant but a bad master:

After a few days, you go to a shopping mall to buy something which is worth Rs 500. But you have seen some other item which is worth 5000 Rs and wanted to buy that also. Your mind knows that you need to spend within Rs 25000.  But it doesn't know how much you have spent so far. So your mind doesn't know whether to allow this expense or not.

So what your mind does is, it checks whether this expense is within your available bank balance or not. If it is within your bank balance it allows it.

I told you, your mind is your best servant but a bad master. So we end up spending more and saving less!!

What do we do now?
Now what is the solution?
We are not able to write down all our expenses?
We are not able to find out how much we have spent from the bank account?
On the top of it, our mind also plays against us?
What do we do now?

There is a very simple solution to it. That is you have your salary account. In addition to that you open one more savings account and designate that account as your spending account.

Now you have 2 bank accounts. As soon as you receive your salary, transfer Rs 25000 to your spending account. Then spend your monthly expenses from this account. This account is for all your expenses. You investments or EMI will not be mingled in this account.

So whenever you open this account, you will be able to make out how much you have spent so far.

End of the month you will have a complete history of your spending. Now you can analyse, where and all you can control your spending?

Also, there will be a countdown running in your mind now. At the beginning of the month, your mind knows the balance is 25000 and in the middle what was the balance. It starts thinking how we can run the show for the rest of the month with this balance. Now your mind becomes your best servant.

So opening a separate bank account for our spending will definitely help us 'Spend less and save more'. Don't you all think so?

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Director and Chief Financial Planner of Holistic Investment Planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in.