A slow approach to strengthen your personal finances
If you aim to improve your personal finances, two fundamental strategies can be pursued: you can focus on earning more money or you can work on spending less money. Both approaches can be effective in enhancing your financial situation, and both have their advantages.
Personally, I have found merit in both. However, this summer marks a decade since I decided to leave my regular job in pursuit of a slower, more intentional lifestyle. In these ten years, I have gained a crucial insight regarding personal finance that is essential for anyone seeking to embrace a slow life.
To truly enjoy a slow life, having a sense of peace regarding your finances is highly beneficial. It's not about amassing wealth to the level of becoming a millionaire. If that is your primary goal and you seek easy ways to make a lot of money, you might want to look elsewhere.
I have yet to uncover the secrets to effortless wealth accumulation, and that is perfectly acceptable. Instead, the focus should be on living well with less, but which path you take—earning more or spending less—will determine your success.
Many people might instinctively believe that increasing income is the more effective route to financial security. While this viewpoint is understandable, it is important to recognize some potential drawbacks. Generally, higher earnings come with increased work demands. This could mean longer hours, additional tasks, and more responsibilities.
The added pressure often leads to more emails and meetings, further complicating your financial management. Additionally, with a rise in income, there are often newfound expenses, such as maintaining an appearance that aligns with your wealth, which can detract from your free time.
Thus, before you commit to seeking higher earnings, you should consider whether this approach aligns with your desire for a peaceful and fulfilling life. Ask yourself if you are willing to sacrifice the time and energy that are essential for activities you truly enjoy and value.
Another important concept to consider in this context is the Diderot effect, named after the 18th-century French philosopher Denis Diderot. In 1765, Diderot transitioned from a life of poverty to sudden financial support from Empress Catherine the Great, which led him to purchase a beautiful robe.
However, he soon realized that his existing home furnishings did not match the elegance of his new robe. This prompted him to buy a luxurious carpet to complement it, leading him to replace his old furniture as well. Ultimately, this cycle of purchasing led him back into financial hardship.
This Diderot effect is a common trap when one experiences an increase in income. If you start to associate higher earnings with indulgent purchases, it can lead to a cycle of spending that undermines your financial stability. Therefore, if your goal is to cultivate a simpler, slower, and more meaningful life, it may be wiser to focus on spending less, rather than pursuing fleeting pleasures associated with greater income.
Here, the concept of the Latte Factor becomes relevant. Coined by author David Bach, the Latte Factor is discussed in his book, "The Latte Factor – Why You Don't Have to Be Rich to Live Rich." This idea revolves around the importance of identifying and cutting out small, unnecessary expenditures—like buying a daily coffee from a café.
The premise is simple: small savings can accumulate over time to create significant financial benefits. For example, if you spend a mere 35 kroner on coffee every day, you will end up paying 12,775 kroner in a year.
By analyzing your minor, daily expenses, you can realize how those costs add up over time. Consider how those funds would multiply if invested, rather than spent carelessly. I have run the numbers myself, and the outcome is often surprising. You can conduct this same analysis to see how much your small expenditures really cost you over years.
To help you implement the Latte Factor in your life, here are ten practical tips. I believe that even Diderot would have found value in these suggestions.
Start by reviewing your daily small expenses. Look for impulse buys, food and drink on the go, and snacks that you may not think twice about but could easily eliminate.