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How to Optimize Your Spending – The Definitive Guide

This post is meant for peasants. Why do I say that?

At Investment Moats, a lot of what we discussed is on the growth aspect of wealth building. Probably, I haven’t delve into the aspect of how you look at your spending expenses.

So this post sought to address that.

Now if you earn a lot, such that saving money is less of an issue, and you do not wish to spend effort to right size your spending, then this post is not for you.

However, if you are interested into how I think about spending, then do stick around for this short article.

I am not going to show you some extremely lucrative ways to save money, or get unlimited supply of food at a low cost.

Rather this post will be a pretty high level look at optimizing your spending, and with that, you can live your life holding on to some of these spending philosophy.

This article, is the hallmark of how you should think about expense spending es for your life. To be reflected very often.

Before that, we are going to go into some terms such as your Saving Rate, your Spending Rate. If these terms sound unfamiliar to you, do read up my article on What is Your Savings Rate, Your Spending Rate and Your Personal Free Cash Flow?

If not, parts of this article will sound a little Greek to you.

The Overall Goal of Optimizing Spending

Money is a scarce resource. With money, you can obtain a better quality of life now, or in the future for yourself.

Now when we carry out budgeting, what we are doing is to match what you value to what you are willing to pay for what you value.

Sometimes you do not know how much you value something, so you end up overpaying for it or underpaying for it. In some cases, you don’t even value the item or service, yet you paid for it.

Optimizing your spending is to re-calibrate between your values and the money you spend.

And often, it is to gear up so that you will have enough for some future goals, which is a future spending.

For example, if you are a parent, you wish that you will have enough when your kids need to go for their university.

You wish to gear up to build up wealth capital, in case you get retrenched and that you need some wealth capital for security, so as to spend down temporary.

For most people, they yearn to be secure, or to have options in life. Thus, one of their goals is to accumulate wealth.

the power of having wealth

If you accumulate X amount of wealth (vertical), your wealth would give you an annual wealth cash flow (horizontal) at 3%,5% or 7% rate of return, while keeping your capital intact

The upside of building up wealth is that if you have a future goal that requires funding, that you have not thought about, building up wealth greatly contribute to fulfilling it.

My Wealthy Formula - How Average People Achieve Wealth

In my wealthy formula, I sought to explain in detail how optimizing spending together with earning more and building wealth wisely is the way most people from different walks of life could accumulate wealth. In the article, I also shows what makes the most impact to build up wealth.

While earning more and building wealth are the important ingredients, what is much more doable at the start is ensuring that you are spending on things that you value greatly.

The Breakdown of Your Cash Outflows

In my article on what is the spending rate, saving rate and personal free cash flow, I defined how I categorize some of your common cash outflows.

Defining spending free cash flow gross income disposable income

There are a lot of cash outflows but usually there are 2 types of cash outflows: the mandatory expenses and discretionary expenses.

Your family would spend on some things that make your life livable in just the right amount. These are mandatory expenses.

To make your life joyful and comfortable, you spend on the discretionary expenses, hoping that you achieved that.

Outside of this, the rest of the cash outflow are channel towards building up wealth assets to fund future / potential future spending goals.

Could you increase your saving rate or decrease your spending rate?

Your saving rate and spending rate is the opposite of one another. In 2 different articles that discuss the spending rate by Michael Kitces and J.D Roth, both of them agree that what you can affect is the spending rate.

In other words, if we debate the chicken and egg issue of which one comes first, your saving rate is a byproduct of you spending less.

Spending Rate=Total Spending / Disposable Income

If you get inspired to work towards a financial goal, I tend to see less people being motivated to increase their income by jumping into another position. However, optimizing spending tend to be something more readily doable.

There are those who have been job hopping every 2 years. They would probably accelerate it. However, most tend to be a little conservative and think that secure a higher paying job entails, going for a few interviews, and one of them succeeding and eventually working out.

This would breed inaction.

For most people, you cannot control your saving rate.

By controlling your saving rate, it inevitably result in you spending less. This is a problem. And for those of you who are prudent, you would say: “But Kyith! You should always pay yourself first before you spend!”

Let me perhaps highlight some blind spot of mine in the past and perhaps yours.

You cannot increase your saving rate if your fixed expenses is high

Kitces highlighted an important point.

Perhaps it is a bit of checking our privilege.

High fixed expenses relative to your disposable income

Suppose this is your disposable income. If try as you might, your mandatory expenses is 80% of your disposable income, and that your discretionary expenses is 15%, that leaves little room for you to maneuver.

You could possibly cut out 50% of your discretionary expenses so your savings rate can be boosted to 12.5%.

Reducing the mandatory expenses, in reasonable measurement, will impact the life of your family.

In this case, it is difficult to boost your savings rate because there is nothing much to cut.

So who fits this group of people?

  1. Those living in high cost of living places, where large spending are dear
  2. Low income family or individuals

If this configuration matches what you are faced with, the general solution that makes greater impact is to increase the cash inflow.

This would be a topic for another day, but it is to increase with another job, get a promotion, and with that comes more salary.

Do not proportionately increase your spending. In this way you have more money to be channel to savings.

Of less impact but doable is that you need to seriously reflect on your discretionary expenses and whether you gain value out of them.

If not, cutting them out will increase your savings rate.

You would also need to seriously review your mandatory expenses, to see if they are really mandatory.

I went through this exercise with some folks who are in this category. Their saving rate is low and I do agree that part of their circumstances result in a low saving rate by product.

However, if I ask the hard questions, a few of those discretionary expenses can be cut. Some of those mandatory expenses are not so mandatory in the grand scheme of things.

So sometimes serious reflection of your life values and your expenses are required.

Low Spending Rate is often linked to Privilege

If you have a low spending rate, relative to your disposable income, then, despite what you can say, you are in a privileged position.

High Income Low Spending RAte

If your disposable income is high, your mandatory expenses is low.

In this way, you have that optionality to balance between comfort now, and in the future. You balance between your discretionary expenses and your savings.

If you favor safeguarding your future, you can have 10% discretionary expenses and 55% saving rate.

If you favor living life now, you can have 50% discretionary expenses and 15% saving rate.

This is what the former group yearn for, to have this luxury to choose between spending now or saving for the future.

For this group they can pick a scheme of budgeting and go with it.

This fits those who choose to pay yourself first.

Pay yourself first is a form of reverse budgeting, where you focus on how much wealth you wish to achieve in the future, break it down into monthly savings.

Then you ensure that you save that monthly savings amount, and spend the rest. To do that, you need to have ample personal free cash flow.

Despite a low spending rate, some folks in this category might feel extra motivated to push themselves to

  1. Strongly match their values to the amount that they spend, and minimize wastage
  2. Hit their wealth accumulation target faster than they anticipated
  3. A combination of #1 and #2

This is why they would still sought to optimize.

From this point onward, I hope these philosophy helps.

Become a Valuist When You Decide Whether to Purchase Things

I first heard this term from the host of ChooseFI and I think it perfectly describes how we should shop.

The general idea is that we spend based on how much we value something.

To be a Valuist, often you need to have a pretty good sensing about

  1. your financial position
  2. quality and grading of the items or services you wish to purchase
  3. what are your life’s priorities

When you try to make a purchase decision based on this, you are said to be a valuist.

For example, your disposable income may be low, but you realize that if you can give your child the tuition she needs, and this doesn’t affect putting food on the table, you can go ahead and find the best teacher within what you could pay.

You can buy the cheapest laptop around, but if your laptop is something that you use in your freelance work, and you use it so often, it might make more sense to get a better grade one so that you rid yourself of some small niggling inconveniences instead of living with them.

The overall idea is that

  1. understand the three points above
  2. try to spend as little as possible to get the best thing you need

Focus on the Expenses that Makes the Most Impact

If you examine the categories of expenses, you can figure out what are the line items that constitute the largest amount.

For those largest amount expenses, if you choose to spend them, you have to make sure that you get good value out of them.

There is an asymmetric behavior that we sometimes observe.

People tend to be more familiar with getting the best deals for those line items that makes up a small percentage of their disposable income. So they try their best to get the best deal out of those.

For those large ticket value items, they do not scrutinize whether they are making a good decision.

Net net their expenses are less optimized.

Generally, a family large expenses are:

  1. food
  2. transportation
  3. home
  4. child related expenses
  5. vacation

If you focus on optimizing these expenses, so that they fit close to your values, the impact is much larger than those smaller expenses.

The caveat here is that, make sure you do not have a lot a lot of those smaller expenses!

If Your Personal Free Cash Flow is Low, Do Not Have Too Many High Grade Things You Value

Whenever I show someone how to budget, I will explain that how you spend your money should reflect your value systems.

If you look at your spending, and you think that is not how you prioritize life, then you have to tweak your spending.

My co-worker tells me she values a lot of things in her life, so she cannot increase her savings rate.

So here is the thing. You can do something like that, but the consequences is that you would have less for your future self. You value things for your future self less than these things right now.

While their free cash flow is limited, they have a lot of high priorities items.

Normally, if the items are high priorities, then it is alright to spend more on them.

However, if you have a lot of these high priority stuff, then almost all your personal free cash flow will be devoted to discretionary expenses.

Suppose you have 7 hobbies and you really like all of them. So you proceed to spend money buy purchasing high grade items and services pertaining to these hobbies.

This ends up sucking away all or majority of your free cash flow.

If your disposable income is high, you have greater free cash flow, you can indulge in more of these high grade things.

You do not have to Acquire the Highest Grade, Highest Quality for Everything

I think there is an over exuberance of wanting the best of everything.

When we are buying things we can separate things to different grades, high grade, medium grade or low grade.

When we say grade it is that there are some differentiated difference between what you are purchasing.

For example, I can buy a hosting package where they give me a 20 Terabyte worth of transfer limit. I can go one grade down to a 40 Gigabyte one. Each of them have different price.

Within one grade, say medium grade, you have different quality. This can range from high quality to low quality. So for some competitor within the 40 Gigabyte transfer limit one, how they count and compute whether you hit your limit is different.

If we were to use another example, a condo is a high grade living, with a lower grade being a 5 room HDB flat. The differentiating factor is the amenities and perhaps the people that you can network with.

Within the high grade condo, you have some that is higher quality and those with lower quality.

Now, if your free cash flow is small relative to your disposable income, do not have too many things that is of the higher grade and highest quality.

If you get the highest of grade and quality, the price tag is often not going to be low.

I do observe folks that tell me, “I would rather buy something really good, and be done with it and not think about it”

If you have that kind of mentality for everything, you are going to buy a lot of stuff that you might not use all the higher grade factors that comes with it.

You need to think about what are high priorities, and whether you can afford them. Then for those that are low priorities you can then get a lower grade.

Combining this with one of the previous point about focusing on your big expenses, you can choose the appropriate grade.

Lifestyle inflation happens when you get a a higher income, and you upgrade the grade of your things accordingly.

Having agency in your life is to understand which one of these you hold a higher priority for the disposable income available to you.

And then you make a conscious choice.

Communicate, Negotiate and Influence on Your Peers

As we go down this list, it becomes harder and harder to do.

But the rewards becomes proportionately big.

Now not buying the highest quality or the highest grade might be easy for you.

However, you might find it extremely hard to:

  1. let your spouse know you guys should not go for the best every time
  2. let your family know your free cash flow does not allow you to always have the highest grade
  3. let your boss or colleague know you cannot go for every farewell treats

And this is the aspect that I find the highest mandatory and discretionary cost optimization.

A shift in vacation grade, food grade and transport grade would really impact the expenses.

However, people do not understand what is on your brain. And we tend to think we cannot influence people to make this happen.

This is a subject by itself and do let me know if this is among the hardest.

Turning Your Annual Spending into a High Yield Saving Account

Now, for those that have control over their spending and achieved financial solvency, one very popular thing that the savvy ones try to do is to optimize their spending, so that they either get cash back value or they earn miles.

On credit cards, and debt cards, when you spend on different types of things such as supermarket, dining, certain bills, there are different level of cash backs ranging for 0.3% to 7%.

Now suppose your disposable income is $50,000 and you spend $40,000. You might not have a portfolio of $40,000, but imagine by spending well through choosing the right cash back credit card, you can earn $40,000 x 3% = $1,200.

There are certain nuances to this such as:

  1. minimum spend on your credit card needs to be $500 – $1,500/mth
  2. some spending are exempted

So doing this will require some effort.

However, if you do it for 10 years, I would say the amount of “interest” might be substantial.

The other camp is the miles camp. In this way, instead of using cash back credit cards, you choose cards that allows you to earn airline miles.

These miles allow you to exchange for airline tickets. By optimizing in this area, you could offset the cost of your holiday ticket and hotel costs, which are pretty big costs.

If you are able to do that, your annual expenses will go down.

This is a competency by itself, and something that I heard about but not done extensively since my expense is not normal (read low).

Leverage on the Community To make Things more Efficient

I believe that not everything, you have to get it yourself. There are some things that can be shared since they are not used so much.

Thus, if you have a community there are more options.

Used goods market place such as Carousell in Singapore is a community that you can perhaps find what you want cheaper. That reduces the costs.

When I was part of the Freegan community, I learn a lot about the supply chain of the life of various food and used items. I learn about where the opportunities were and how frequent are those opportunities.

For every thing that you need, if you go deep to a certain extend in the community, your competency and knowledge also become deeper to a certain level that might translate to money savings because you do not buy the wrong stuff and service that does not fit your needs.

You learn that for a casual listener at a certain point, you cannot discern the difference between very good earphones and good earphones. This saves you money by finding the sweet spot.

Often you will need to incur search cost to garner information like this. However, this is sped up when the experienced folks within the community shares their experience.

Reflecting Instead of Rationalizing

A lot of the tactics offered in this article are pretty general and up to you to make a good decisions.

The more good decisions that you make, the more your expenses look like a realistic version of what you want.

However, when it comes to expenses, what I notice is a problem my ex co-worker referred to as rationalizing more than reflection.

There is a difference.

Rationalizing: You try to reason that your decision is right.

Reflecting: You take a look at the evidence, and the conclude whether your decision is right.

There is a lot of rationalizing due to endowment effect for a lot of people. After you buy it, you self justify that buying this grade and this quality is the right reason.

In a different way, you also have people rationalizing all of their spending is mandatory and not discretionary.

If you struggle to reflect, you cannot separate between mandatory, discretionary expenses and those items that will build wealth for future spending.

What if I Cannot Cut My Spending in Any way after All This??

Now after you tried going down the rabbit hole, and tried to implement all this, and you still have no way of optimizing your spending.

What does that mean?

The idea of doing all this is to implement a self-audit of how your family spend your money.

If you ensure that you stay objective, and reflect upon it as an exercise, and you cannot optimize lower, that means that your solution is to increase on the earning side.

The upside of this audit is to ensure that, when done right, you figure out there is really not so much that you can cut.

However, my thinking is that most are less than rational about their spending and there is nothing much you could do.

This is especially so for the communication, negotiation part. That is difficult to do.

Let me know of any Optimization Strategies, in broad categories that I might missed out, that is impactful enough.

Here are My Topical Resources on:

  1. Building Your Wealth Foundation – You know this baseline, your long term wealth should be pretty well managed
  2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
  3. Learning about REITs – The Deeper stuff on REIT investing
  4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
  5. Free Stock Portfolio Tracking Google Sheets that many love
  6. Retirement Planning, Financial Independence and Spending down money


Optimizing your Spending



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Monday 8th of October 2018

Great article!


Sunday 7th of October 2018

May I ask if it is possible for people of lower income groups to be able to break free of the poverty?

Your article that mentioned about 'privilege' as a factor why the rich gets richer, and the poor gets poorer -- the rich (as well as the middle class) get to squirrel some of their discretionary income for savings and wealth building. It is not easy, as a high portion of their "income" (including social assistance) goest towards basic necessities, and they also do not have much emergency funds to buffer against sudden shocks in their lives.

It is also unlikely for them to read articles like yours to gain knowledge about wealth building, investments, and financial planning, but they are also the very group which needs such information the most.


Tuesday 9th of October 2018

Hi Ying, it is possible that they break out of it. And we have many that have shown to do this in the past. Their situation is challenging because many would be in household that they need to be more than students. The Singapore support system allows them to continue to go to school. There are those who were able to mature beyond their peers and work and study, and still get good grades. They would be able to go up one rung in the social mobility ladder.

How high, I am not sure.

I would like to think I was part of this group. I wouldn't say that I am in a super challenging position. those who have problems is sometimes... not about the money but how their surroundings wear them down.

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