The biggest obstacle to saving money and becoming financially free is probably the most obvious one, but very often, is not looked at in the right way. The biggest obstacle to saving money is not taxes, investment performance, a low paying job, or any of the other common culprits. The biggest thing that is standing in the way of saving money is…you might want to write this down…spending money. That’s probably not the pearl of wisdom that you were hoping for, but in so many cases, even if people realize that it is the biggest obstacle, they do not realize how much they are actually spending. One of the tools that I use to keep my spending in check and save more money is KYE (know your earnings).
Introduction to KYE
When I talk about KYE, I’m not talking about any type of crazy scientific formula or money hack that people have never heard of. All that it is is a slightly different way to understand and think about the money that you make and spend. When I say to “know your earnings” what I mean is that you should always know exactly how much money you are ACTUALLY making. The second part of this is to look at the money you make in the same way that you look at the money that you spend. This will lead to smarter decisions and ultimately, saving money.
How to know your earnings
Obviously, you probably know your exact annual salary or your weekly or monthly take home pay. However, the challenge that most people face is that when they are making purchases, they are thinking about the price of that purchase in the same terms that they are thinking about their income. For example, you may think “I make $50,000 per year, so only spending $125 per month on cable and $100 per month on a gym membership is not that bad.” Maybe this person is right. But, the problem is that they are comparing a cash cost that comes out of their after tax dollars against a pre-tax salary. This is silly. To truly know what you can and should afford to spend, you should know exactly how much money you are taking home after taxes, social security, contributions to a 401k, etc.
Let’s use an example
$50,000 per year is a pretty decent, above average income for most Americans. Let’s say that Diane from Fresno makes $50,000, she probably expects a lot of the luxuries that the average American can and does enjoy. Diane may think that since she makes $50,000 per year, spending $300 per month on a car lease (fairly standard for many people) is a tiny drop in the bucket of how much money she has. After all, she can afford it, right? She makes almost $1,000 per week, right?
Of Diane’s $50,000 salary, after exemptions, around $39,700 will be taxable income. This means that her federal income tax will be $5,696.25 and her state income tax will take another $1,791.08. Now, Diane’s income is $42,513.67. Next, there is social security ($3,100) and medicare ($725). Let’s say that she is a savvy earner and is contributing 3% of her check to her 401k. Now, the money that she’s taking home is $37,188.67. That $1,000 per week just became about $715.
For my personal finance management, I take this a couple of steps further. I like to think about how much money I take home each day. In Diane’s case, she is making just over $100 per day. After taking out the expenses that we talked about above, she is effectively “making” $18.59 per hour (assuming an 8 hour work day, five days a week, with two weeks of vacation). When you also consider that you have certain fixed costs like a mortgage and utilities, your actual spending money will come out far lower than even this calculation illustrates.
Saving Money with KYE
Personally, I started by doing a similar calculation to the one above, then subtracting my fixed costs like housing, utilities, cell phone, etc. I then find my exact hourly rate that I’m making that actually ends up in my pocket as discretionary income. This discretionary income number starts to look a whole lot different when you think about it weekly, daily, or hourly. When you stop thinking about your annual salary and how rich you are because you make [fill in the blank] dollars per year and start thinking about the fact that you have to go to work for an hour to buy a cheeseburger, you start to rethink eating lunch out every day. When you realize that the first 12 working days of a month goes entirely to your car payment, buying a much more affordable used car starts to seem like a better idea.
I have a sheet that I keep handy (on my computer desktop, in my wallet and in my home) that shows how much “KYE money” I make per year, per month, per week, per day and per hour. I reference it fairly regularly as a reminder that any purchase I make is directly coming out of that money. A $55 purchase doesn’t seem bad when compared against an annual salary of $50,000, but when you equate it to everything that you earned during your last three days in the office, it starts to seem a lot more significant.
To save a lot of money, you have to train your brain to think about money in new ways. You simply cannot (and probably don’t want to) spend money just like everyone else. Using the simple “know your earnings” method will help you to re-evaluate a lot of the decisions that you make on a daily or weekly basis with your money and force you to spend based on your own goals as opposed to just “what everyone else buys.”
It’s a simple trick. It’s one of dozens that I have used to achieve my goals of cutting spending and saving money. It is definitely one that I would recommend trying out for a while and seeing if it helps. If not, at least you have the visibility and awareness of what you are making, even if it is not something that you continue to use on an ongoing basis. So, give it a shot. Calculate your true earnings and break it down to whatever interval you want. Then, decide if that $12 burger is actually worth it.