If you’re serious about becoming financially independent, you already know that you need to develop a plan that is compatible with your lifestyle. But if you’re struggling to put money aside to build wealth or make the purchases that are important to you, it might be time to take stock of what that lifestyle entails.
Financial minimalism might sound like the latest buzz phrase or trend, but taking a minimalist approach to spending your money can be life-altering. It can also mean that you have money and time to invest in your life for the things that matter to you.
But what exactly is financial minimalism? How does one adopt the concept into their life? Read on to find out.
What Is Financial Minimalism?
Like the broader concept of minimalism, financial minimalism can mean different things to different people. But at its core, it is an idea of being more intentional with your money by reducing unnecessary expenditures and focusing on the things that matter.
Though financial minimalism is often associated with frugality, it’s not necessarily about not spending money as much as it is about putting money to better use. That might mean investing, but it might also mean saving for big purchases or buying items that will bring genuine long-term benefits instead of wasting it on impulse buys.
The Benefits of Financial Minimalism
For some, adopting a minimalist mindset regarding money and the stuff they buy is too daunting of a prospect. But the trade-off for letting go of certain excesses has a plethora of benefits that may include:
– Reduced monthly expenses
– The ability to pay off debts quicker
– Reduced chance of getting into further debt
– It becomes easier to put aside money for big, important purchases
– More money available to put aside into retirement funds or for investing.
– A reduction in work-related stress and commitments
– Reduced clutter around the house due to keeping impulse purchases in check
– Being better prepared for emergencies and unexpected expenses
If the prospect of achieving any of the above sounds exciting, then financial minimalism might be something you consider adopting.
The 7 Rules of Financial Minimalism
Rule 1: Start a Budget & Prioritise Your Spending
Any good financial strategy or plan always begins with setting a budget, which is the same regarding financial minimalism. However, the difference here is how critical you’ll be when assessing what does and doesn’t count as a necessary expense.
The key here is to prioritize your spending between the things you need, your long-term goals, and the things that don’t necessarily bring lasting benefit to your life. More specifically, you’ll want to assess how these expenditures relate to one another.
Let’s say, for instance, that your goal is to save enough money to put a deposit down on your first house. You can put more money towards this goal by removing minor expenses such as streaming services, a contract on a nice phone, or eating out. You may even consider downsizing the place you rent to save more money still.
While such sacrifices may seem painful in the short term, they can result in fundamental, long-lasting changes happening to your life in the long run. Of course, that’s not to say you shouldn’t indulge in any small luxuries, but by prioritizing the more valuable things in your life, you can obtain the things that matter to you more quickly.
Rule 2: Pay Yourself First
The second rule of financial minimalism is something that makes the first rule (and several of the others) much easier to achieve. And that is the concept of paying yourself first.
Paying yourself first means that instead of waiting until the end of the month to put money aside for savings, big purchases, or anything else, you put that money aside as soon as you receive your paycheck.
By paying yourself first, you remove the temptation to spend money you want to put to good use on impulse buys. And you also ensure that you avoid going over budget because the money won’t be there to do so.
Of course, paying yourself first will only work when you budget correctly. After all, the last thing you want to do is leave yourself short and unable to pay for basics like utilities and food. But once you’ve got a carefully thought-out budget, paying yourself first is a powerful strategy for sticking to your financial plan.
Rule 3: Pay More Towards Debts
We’ve already talked about the importance of prioritizing your spending. But one of many financial minimalist’s biggest priorities is removing and avoiding debt.
Paying the minimum on all of your debts is a good start. But if you want to start enjoying the benefits of being a financial minimalist, you’ll want to remove your debts as quickly as possible. And that means paying extra towards your debts whenever possible to eliminate them quicker.
Again, prioritizing your spending is critical here, not just concerning your other expenses, but (if you have several debts) regarding which debts you should concentrate on putting extra towards paying off first.
There are two key strategies to consider here. The first is to concentrate on paying extra towards the debt with the highest interest rate. This strategy is sometimes known as the debt avalanche method and will likely save you more money in the long run.
Another strategy is to pay extra towards the debt with the lowest outstanding balance. This technique is known as the debt snowball method, and while it won’t save you as much money on interest, it can help free up extra funds and motivate you with some quick wins.
Rule 4: Build an Emergency Budget
One of the main benefits of being a financial minimalist is the extra security that being careful with your money brings. That’s because by not putting your cash towards frivolous pursuits, you can more easily financially prepare yourself for life’s more unfortunate surprises and disasters.
However, the problem that some people run into is that they become a little too overzealous in the pursuit of building wealth.
While putting your money towards building financial assets is a fantastic strategy, the last thing you want is to sell these off due to unforeseen circumstances such as a loss of income.
So, before you begin the job of building wealth, it pays to ensure you have a buffer of liquid assets in place in case anything goes wrong. To do this, you’ll want to put some money aside to create what’s known as an emergency fund.
What your emergency fund looks like will depend on your circumstances. But typically, it should contain enough money to cover six or more months’ expenses. And you’ll most likely want to keep this in an accessible savings account.
Once you’ve created your emergency fund, you’ll only want to touch it in case of emergencies. And if you do take anything from it, you’ll want to replenish it at the earliest opportunity.
Rule 5: Make Your Money Work for You
Once you’ve got an emergency fund and no outstanding debts or big purchases ahead of you, you can start thinking about building wealth by investing.
Investing can be a scary prospect if you’ve never done it before. And even the most reserved investment strategy can indeed result in losses (Although this has not historically been the case).
The trick to good investing is never investing more than you can afford to lose and do your due diligence when deciding where to put your money.
You should also avoid putting all your eggs in one basket by aiming to build a diverse portfolio. Then, if one of your investments fails, your other investments can make up for the shortfall.
With this in mind, many experts recommend index funds as a great place to start for beginner investors looking to diversify quickly. Retirement fund plans are also a great option, and you may also consider real estate. But whatever you do, remember that most investments will take a long time to mature and that you should always do your research first.
Rule 6: Purchase Things That Pay You Back
We’ve discussed a lot about prioritizing your expenses. But you might be asking yourself, how do you differentiate between worthwhile purchases and those that are excessive? The answer, which is both simple but open to speculation, is that you buy things that pay you back.
This way of thinking means that you need the wisdom to evaluate whether a purchase will bring substantial improvement to your life that is greater than its initial worth.
Imagine, for instance, that you’re considering buying a new dishwasher. You might decide not to because you can make do with the machine you already have. However, if the new dishwasher is more economical and efficient, you might decide it’s a worthy purchase since it will pay for itself in the energy and water use it saves.
That’s a simple example, but you can apply this logic to everything you buy, from college degrees to the cappuccino you purchase on your lunch break.
Of course, some purchases may pay you back in time or happiness rather than money. But in any case, a financial minimalist must decide if it is worth the cost or whether they are better off spending their money, time and effort elsewhere.
Rule 7: Adopt an Abundance Mindset
Adopting an abundance mindset might seem the opposite of what a minimalist should do. But it is perhaps the most important rule when trying to achieve financial minimalism.
One of the reasons many people fail to achieve financial minimalism is that they concentrate on all the things they are sacrificing. They, as such, only see what they are losing out on as opposed to what they stand to gain.
A person with an abundance mindset concentrates on all the possibilities, opportunities, and potential when taking a frugal, minimalist approach to money. They are also not plagued by the worries of not having enough or missing out on the things that others have.
You might already have this mindset, but if not, it is something that you can learn. And if you do, then living a financially minimalist lifestyle will seem that much easier.
Become a Financial Minimalist Today
Becoming a financial minimalist takes effort, forward thinking, and planning, not to mention a possible shift in how you think about money. But if you follow the seven rules outlined here, then there’s no reason you cannot adopt a more straightforward approach to how you spend your money and achieve your personal financial goals.
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Recommended Books From the Minimalist Community:
The Power of Less: The Fine Art of Limiting Yourself to the Essential… in Business and in Life Paperback – June 11, 2019 by Leo Babauta
Minimalism: Live a Meaningful Life Paperback – Unabridged, December 8, 2011 by Joshua Fields Millburn