- Fred Wagenvoorde, Fiscal Private Client Services

Simple methods often yield the largest result when working out a budget. Being intentional with your spend is just one way to continue enjoying your lifestyle on a budget. If you haven’t yet created a budget do so today as it will help you understand your income and expenses. This will lead to understanding how much you spend on essentials, wants (or non-essentials), and how much you are saving.

Every person is guided by their preference for products or services within their budget constraints. These constraints exist because you have a  restricted amount to spend. Within the constraints of your budget, you will need to decide on the product and service that is most essential or most desired. These decisions will assist you in prioritising your expenditure on more fulfilling things.

Most consumers will remove all their flexible items to feel accomplished in the short term but may not see the potential diminishing benefits over the longer term. This does not add value to your life and may even cause other concerns including mental health issues. Goods and services cost money, which depletes your cash flows without you being  aware of it. A good idea, is to list the non-essential items and give them a rating to see where they stand on your ‘satisfactory scale’. Try dropping those one or two items  to the bottom of the list and see if anything changes. When changing the priorities of your spend, you will notice that your cash outflows change.

What does your Satisfaction Scale look like?

In economics, there is a term often used to understand the satisfaction of a consumer – this is “utility”. There are many variations or types of utility, but here I will use it in the general sense. Utility is defined as the amount of satisfaction or fulfilment that you receive from the consumption of a specific good or service.

The best way to understand it is via an example. Let’s assume that you are dealing with a small shortfall in your cash flow and that you have decided to remove items that are discretionary or flexible, i.e., nonessential. You have broken down the list to two items left, let’s assume it is a Spotify and Netflix subscription. Now rate each product out of 10.

Spotify subscription – 8

Netflix subscription – 7

Since the Spotify subscription gives you the highest satisfaction, you will likely decide to forgo the use of Netflix to continue using Spotify.

The other aspects you could remind yourself of, besides the satisfaction an item gives you - keeping all else equal - is how often this item will be used and how long the satisfaction will last. From this example, Spotify will produce more ongoing satisfying benefits than a once or twice a week Netflix binge. It makes sense to move on from your Netflix subscription which will reduce your cash outflows. This saving can then be redirected to something more suited to your satisfaction or go towards increasing your savings. The idea behind this use of the term “utility”, is to be more intentional with your spending so that you continue to enjoy the things that matter to you.