Posted by Mike Smith :: August 14, 2007 @ 7:45 am

Of the many topics related to personal finance, the concept of simplifying your life is one of the most obscure. It’s one of the easiest ways to improve your financial picture, but often one of the hardest to actually implement. Why? Changes of heart are often the most difficult, unlike other financial self-improvement strategies, simplifying your life forces you to change your philosophy.

The fundamental change that needs to occur is to more accurately differentiate your needs from your wants. It’s a basic idea, but one that can be uncomfortable to implement. Taking a more hypothetical approach to this sort of prioritization is often helpful. Think about what items and services would be your top choices within the various limits you can set for yourself.

Limits could be a set number, a value, or physical size of items. For example, if you were to look at your life using a limited physical size, you might ask yourself “What would I put in a suitcase if I were traveling for a year?”

What these exercises do is help you to prioritize all of the items in your life. When you put things into perspective, you quickly realize how much of your money goes towards things that are low on your priority list.

When you’re looking for ways to cut back on spending, these can be the first to go. I’m not saying that you should limit all of your spending to your needs and your highest priority wants, but rather that when you look at your life from a new perspective, you may see that seemingly necessary items really don’t matter that much.

Another method is to try to live without a “necessary” item for a week. After a week of not using your cell phone, for instance, you may realize that you can actually live without it. More likely, you may decide that you could live with a less expensive service plan with fewer features.

Once you find aspects of your life that you can live without, try to cut them out completely. Make changes to service items and sell physical items that are no longer deemed necessary. You can use the extra money for savings and investment, which will be truly beneficial in the long run.

It’s no wonder that simplicity would be addressed on this blog, just look at what Lending Club has done to simplify the loan process with P2P lending.