This post is based on a talk I gave to the Brighton Minimalist Group in July 2019.
You probably don’t associate minimalism with the finance profession. Financial advisors, for instance, are keen to boost clients’ assets. After all, they often only get paid when you become wealthier.
As a financial coach, my priority is a client’s wellbeing. Sometimes we’re working to reduce their income so they can spend more time enjoying life. Typically, this involves helping them to spend less so they don’t need to earn as much or can retire earlier.
So, financial minimalism, I think, is about minimising your efforts and stress when it comes to money and adjusting to living on less. The more money you can save for the future, the more choices and control you have over your life.
I have devised five principles of financial minimalism to share with you:
1 Stick to a budget
Think about what you spend each month. Does every pound either support your life goals or make you happy? Money should be working for you.
First, cancel any unnecessary expenses. Many of my clients are paying for insurance policies that benefit ex-partners, or extended warranties on contraptions that have long since perished. Do you have subscriptions to Spotify, Kindle Unlimited, or Audible? Are you getting enough use? I’ve paid £60 to Spotify over the last six months. When I looked at my history, I’d repeatedly listened to the same three albums – two of which I already own. This is not very bright.
2 Invest in assets rather than renting stuff
There has been a significant shift in business models over the last decade. Whereas once we would purchase expensive items outright, now we are encouraged to rent or lease them. One example is the mobile phone. Many of us pay a monthly subscription that covers the handset, calls, and data use. While this looks cheaper than buying the handset outright, it isn’t always a better deal for us.
I bought my high spec Android phone just over 3 years ago. It cost me £150 and then I got a SIM-only monthly subscription for £7.99. If I add up the total amount and divide by 39 (which is the number of months I’ve had my phone) the monthly cost works out at £12. This has saved me around £400. The longer it lives, the more I’ll save.
If there is a choice, consider whether renting is definitely better than purchasing outright. If a subscription looks more appealing, that’s probably because it benefits the company behind it. Of course, there are also situations where renting is better – for example, things you use only once or occasionally.
3 Get rid of debt
There’s a lot of talk in the media about the difference between good debt and bad debt. Generally, good debt refers to borrowing that services an underlying asset – for example, if you borrow money to buy a car that could help you travel further for a well-paid job, or if you use that car for your business. Mortgages are also typically referred to as good debt because the value of a house generally increases. But is it really a good debt?
Let’s look at a simple example. Suppose you borrowed £300,000 at an interest rate of 3.5% over 25 years. The total interest you would pay would be £150,715. According to the Land Registry last year, average house price inflation was 1.4%. This means by the end of your 25-year mortgage term, your house would be worth £425,633. So, you’ve actually lost around £25,000. Nobody knows what will happen to house prices or interest rates in the future – this is just a very simplistic illustration. Nevertheless, I think it shows that while mortgages might be good debt, they’re not necessarily beneficial over the longer term.
Naturally, house ownership is a complicated area. We want to buy our own home for various reasons, including security, inheritance and freedom. However, it’s worth thinking about your motives. If you see home ownership as an investment, do the sums to see whether it really is appreciating or if you are effectively just renting an asset that ties you to one place.
4 Simplify your finances
It’s easy to end up complicating finances, for example by juggling credit cards or trying to be clever with when we pay bills. This can result in overdraft charges and quite a lot of stress. Wherever possible, it’s a good idea to automate finances through direct debits or budgeting. This reduces the number of decisions and also the possibility of something going wrong.
It’s also tempting to pursue rewards for our spending. I did this with an Amazon credit card a couple of years ago. I started to buy larger, more expensive items to boost the likelihood of receiving a gift certificate. I was so seduced by the idea of points, my brain wasn’t noticing the unnecessary expenditure.
As a financial coach, I really don’t like the idea of rewards for spending more money – it sends the wrong message. The reason they exist, of course, is that they are highly profitable for the credit card providers. They know exactly how our minds work. When you’re buying something, consider your motivation. Is it something you really wanted, or is there an external force compelling you to buy it?
5 Find cheaper alternatives
Something I’ve noticed from financial coaching is that many clients feel pressured into spending more money than they can afford, especially in social situations. We don’t like having to say we don’t have enough money. Often, I encourage clients to have the “money conversation” with their friends. This involves saying, “actually I have less cash to spend this month – could we go somewhere cheaper?” In all cases so far, the friends have been hugely relieved at this suggestion. They also felt pressured into overspending. Some friends will be happy to stay in with a pizza rather than going out to a fancy restaurant.
In summary, be intentional when spending your money. Cut what you spend on the boring stuff, then you’ll have more cash for priorities. And to make it even snappier: minimise your spending, maximise your wellbeing.