8 ways to live your best life with the money you have

Money is about more than just numbers. It's also about dreams, hopes and fears, but, above all, balance.

Success with money is not the result of thousands of small decisions made well – it's a function of half a dozen decisions made with intention and consideration.

Here are 8 tips to help you make the most of the money you already have:

1. Enjoy yourself and don't sweat the small stuff

The idea that at $3.50, your daily latte will cost you $76,000 over 30 years and that's why you can't afford a house is a fairy tale.

Consider this similar scenario: Your daily coffee contains 176 calories, so it should load you up with 8kg of fat a year or 240kg over 30 years!

Both notions are flawed because they assume everything remains constant and doesn't allow for change. Forgoing your coffee now to buy a house in the future is unnecessary for a comparatively cheap indulgence.

2. Bigger things which do count

"Take care of the pennies, and the pounds will take care of themselves" is outdated and can lead to poor money management.

It focuses the mind on cutting the small, more visible expenses rather than the big ones where you can make a real difference.

These are:

• Where you live
• What you drive
• How you prepare for the unexpected (emergency stash and insurances)
• How you prepare for retirement (super)
• How you make a living (stay in work and, so far as possible, enjoy it)
• Who you marry (not suggesting a tycoon or a princess!)

For example, the difference between spending $735,000 and spending $710,000 on your home will pay for a lifetime of lattes.

3. Understand your budget for what it is and what it isn't

For most Australians, budgeting is not a rationing problem unless you have very little money. It's about allocating and optimising how and where you spend your money.

Focus on rationing leads to the "debt is bad and deprivation is good" school of thought.

Some needs are more immediate than others, such as food, warmth and shelter. But the need for friendship, trust, acceptance, dignity, achievement, etc., are just as crucial for a fulfilled life. Do not undervalue them when making your budget.

4. Analyse and know your spending types

There are other ways of thinking about the money you spend beyond simplistic divisions such as needs and wants.

1. Chore spending: The first group we might call chore spending, which may deliver little joy (except for food and drink, I hope) but includes the stuff you certainly need, such as food, shelter, utilities and insurance.
2. Live spending: Live spending is my favourite as it's those discretionary items that help make life worth living. You might not absolutely need them, but you sure as hell want them and, as long as they are not too pricey or too often/too much or too bad for you or others, why not? We all value such spending differently.
3. Grow spending: Grow spending is not about instant gratification, but about the feeling you get about getting ahead and achieving your goals. It might include paying off debts, paying off your own home and making sound investments.

A creative budget aligns your spending with your core values. Just like a diet, a budget built on deprivation is not sustainable. Over a lifetime, the average Australian will spend half their total income on 4 things: home, car, kids and retirement.

5. Separate home and heart

How much home is enough? Here are 2 good rules you can follow:

• Your home should cost no more than 4–5 times your gross family income
• Your mortgage payment should not exceed 35% of your take-home pay.

The old notion of buying the largest house you can afford no longer holds water. When you were a borrower (like our parents 20+ years ago), inflation was your friend. Today, inflation has been tamed. There's a whole new world of investment options out there today that can offer you greater returns for less effort than the old bricks and mortar rule of yesteryear.

6. Don't get spun out by your wheels

No matter what you choose to drive, cars are a significant expense, even more so if your household has 2. So, let's start there – do you need 2 cars? Do you really need 1 car?

A simple rule to stop your car from eating up your income: Your car should cost no more than 3 months' pay (gross). If you have 2 vehicles, they should cost no more than 3 months' combined pay. This rule will reduce your transport costs to less than 10% of your take-home pay.

7. Do kids cost too much to have?

There are no 2 ways about it: kids are expensive. But most people spend most of their money most of the time. It explains why couples without children do not accumulate more assets than couples with children, despite the apparent cost of raising children.

According to a recent NATSEM (National Centre for Social and Economic Modelling) study, it costs a middle-income family $812,000 to raise 2 kids, lower-income families about $474,000, and over $1 million for higher-income families.

Choosing to become a parent is a big financial commitment, and there is no "one size fits all" rule. (I'm biased and have to say, so far, they are worth it.)

8. It's going to come, so make the most of your retirement income

One of our most significant challenges is to pay for 90 years of life with 40 years of income.

The bulk of your expenses will disappear when the kids leave home and your mortgage is paid. There are 2 simple tips you can do now to prepare in advance: sort out your super and make sure it's earning well with the correct type of account, then follow a plan to eliminate your debts and pay off your mortgage.

I'm not saying the 8 ways listed above will make you as rich as Croesus. But they go a long way to helping you live the best life you want with the money you have.

Christopher Zinn is a personal finance expert and consumer campaigner at Life Sherpa.

Disclaimer: The views and opinions expressed in this article (which may be subject to change without notice) are solely those of the author and do not necessarily reflect those of Finder and its employees. The information contained in this article is not intended to be and does not constitute financial advice, investment advice, trading advice or any other advice or recommendation of any sort. Neither the author nor Finder has taken into account your personal circumstances. You should seek professional advice before making any further decisions based on this information.

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