If you just started to get serious about personal finance, you probably get overwhelmed by all the information about personal finance. Credit card perks that you should get, the best savings account, and a wide variety of investments to be learned.
Trying hard to learn all of them will exhaust you and end up leaving you with a bad impression of personal finance.
Well, not until you start to know what is financial minimalism. Until today, I still adopt this mindset when managing my personal finance. So I am happy to share with you what I have learned about financial minimalism.
(My) Definition of Financial Minimalism
If you are familiar with minimalism, then you should know it is an act of simplifying our life. If you add “financial” to it, it becomes a practice that simplifies your personal finance.
Instead of making use of every personal finance tip out there, we just focus on what’s important.
Here are 4 simple steps to start practicing financial minimalism:
- Identify Your Money Goal
- Simplify your money habits
- Optimize your spending plan
- Automate your saving & investing
Let us start with our money goals.
Identify Your Money Goal
Everyone has different money goals in life. Some want to save money to pay their debts, some want to buy their own house, and some people want to build a retirement fund.
You may have multiple money goals, and that’s okay. But it is better to only focus on one first. There’s a saying that goes:
After you achieved your current money goal, then only focus on the next one. Right, I believe you already list out your main money goal, so let’s move on to the next step.
Simplify Your Money Habits
Take a pen and a notebook, then start listing all your money habits.
They can vary from “always eating outside during weekends” to “reading financial statements of individual stocks”.
After you have all of them listed down, write down your main money goal in another paper.
Align Your Money Habits with Your Money Goal
If you glance through all your money habits, you may find some money habits that are not aligned with your money goal. Start highlighting them and re-evaluate if you really need to do them in your life.
For example, always eating outside during weekends will not help if your money goal is to buy a new house. Reading financial statements may sound wise, but it will not help you to pay your debts.
So you see. Some money habits are great to have habits, but they may not align with your current money goal. To practice financial minimalism, you need to focus more on the habits that will help you reach your money goal faster.
Get rid of time-consuming money habits
Other than goal alignments, we should look out for money habits that are time-consuming. For example, applying for every new credit card just to get free gifts or one-time cash rebates. This habit may seem lucrative, but it requires some effort to get its perks.
How long do you need to use and spend to get that RM100 rebate? Do you really need another new luggage? What about the process of card cancellation?
Another example will be investing in individual stocks. Honestly, reading financial statements for every business or stock is no joke. You need to spend hours every day to understand how the business works and any potential for revenue growth.
So instead of doing that, why not just invest in an ETF? Investing in one is equivalent to investing in hundreds or thousands of businesses, which helps you to diversify your money.
Anyway, those are just some examples of optimization. You may think of your own version.
In short, we should optimize our money habits and make use of Pareto’s principle, which focuses on 20% of our actions which results in 80% of the outcomes. That is the main goal of practicing financial minimalism.
Optimize your spending plan
The next step is to focus on how we spend our money. So how do we start?
Track your expenses
To know which apple is bad, we need to look at the apples first. To know which expense can be optimized, we need to look at our spending pattern.
To achieve that, we need to track our expenses for at least a month. If you think it is tedious, don’t worry. You only need to do it once, then you can choose not to track them again.
Reflect on the extra expenses
You may think that financial minimalism is spending as little as possible. Well, that’s not true.
Minimalism is a process of focusing on things that brings value to your life and reducing those which are not. And we are going to apply this concept to our spending habits.
For example, if spending money on good foods is what you appreciate in life, keep it in your life. Then try to get rid of other spending habits that don’t bring any value to you. If you can’t totally get rid of the spending, at least reduce the frequency of it.
For me, I used to spend a lot of money on V-Soy Multigrain. I’m a huge fan of that drink. In order to continue enjoy my favorite drink, I now only buy it once a month. It not only saves money but also reduces my sugar intake.
Automate Your Saving & Investing
After we optimize some of our spendings, savings will start to flow in. So what is the next plan for those savings?
Firstly, save them up as emergency funds if you do not have one. Once it is worth 3 months’ expenses, you can start allocating the money into investments.
But with a minimalist mindset, you should make your life simpler by automating them if possible. Automation not only saves your time but also forces you to be consistent with your savings and investing.
For savings, I recommend high-interest savings account such as OCBC Flex Account. You will get 1.9% for your savings, which is 3.8 times more than the 0.5% in a typical saving account.
For automation, you can schedule monthly savings from your salary account to your high-interest savings account. For example, the above image shows how you can schedule monthly transfers with CIMB Clicks.
If you have extra money to invest every month, you can automate it too with some investment tools. As far as I know, StashAway and Wahed Invest have the recurring deposit feature that automates your money transfer. (Wahed Invest will charge RM1 per transfer)
I really wish that I can automate my deposit into Rakuten Trade though.
The true purpose of financial minimalism is to minimize your time and effort in managing your finances without diverting from your end goal. This is not only helpful for those who are very busy, but it also frees up some time for us to work on our passions in life.
Though there is one thing to keep in mind. You need time to keep fine tunes your money habits to find the best routine for your personal finance.
When you have mastered financial minimalism, you will find significant changes in your personal finance in terms of time, effort, and confidence.
So take your time. I sincerely wish you the best in your personal finance!