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Lesson 2: Spend Less Than You Make

Video Transcript

Once you put together a list of your income and expenses, you’ll know exactly how much you make each month, and how much you spend. So add up the numbers and compare them. Is one more than the other? Which one is it?

The basic idea behind managing your money is simple: spend less than you make. It’s not hard to understand, but you have to live it out daily.

So how do you do that?

Well, the first thing is to take a look at your spending patterns. A spending pattern is basically just how you usually spend your money, and it may seem like we make our own decisions, but there a lot of things that influence what we buy. There’s what we see on TV, the way our neighbors spend, and all kinds of advertising, just to name a few. If your best friends like fancy clothes, you’ll probably want to get them too.

The problem is that spending patterns affect personal satisfaction, because it’s nice to have all the latest gear, but what happens if you max your credit card to get it?

So how do you improve your spending patterns? It’s by asking yourself this one question: “Do I really need this?”

Of course you have to answer honestly, but you also have to know the difference between what you want and what you need, and that brings us to the second step in spending less.

To spend less, it’s important to separate the things you buy into two categories: the things you want to have, and the things you need to have. You might think it’s easy to tell the difference between the two, but let’s say you look at what you bought last month. There’s probably a category for clothing, because you need to have clothes, but did you buy a 200 dollar shirt when you could’ve bought one for 20?

So now add two columns to your list of how you spent your money. One column will be for things that you wanted and the other will be for things you needed. If you bought that 200 dollar shirt, put 20 dollars in the “need” section and 180 in the “want” section.

It’s OK to splurge sometimes, but if buying a “want” means that you’ll have to take out a loan to pay for a “need”—like your rent—don’t get it. Your everyday spending reflects your financial goals, so make sure you use your money in ways that contribute to long-term health.

So to recap, how do you ensure that you spend less than you make? Ask yourself, “Do I really need this?” and separate your wants from your needs.

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