How to Spend Your Way to Wealth

  • 10
  •  
  •  
  •  
  •  
    10
    Shares

Advertisements ensnare us. The purchases of friends tempt us. Society continually tells us to buy today and forget about the consequences of tomorrow. Many of us know that the common American saves less than 5% of their income, but I don’t think that’s really the entire story. Sure, we might have some trouble putting money into our bank account, but the real issue is in the spending. What are we, some of the most wealthy people in the world, doing with our income? Where is our money going? And, is our spending improving our future or detracting from it?

how to spend your way to wealth - where americans spend their money

Source: CNN Money

Roughly 60% of our income goes toward housing, transportation, and food. The remaining 40% is divided among healthcare costs, insurance, clothing, entertainment, and alcohol, and the average American is left with less than 5% of their take-home pay to do whatever they want with.  So, it’s pretty clear that we’re fairly inept at saving, but so what? Will savings make us rich? No.

At this moment, I’m nearly 30 years old. If I were to buckle down and save $100 a month for the rest of my life, how much would I have by the time I’m 70 years old? Let’s see… 12 months times 100 dollars…and then that times 40 years… I’d have $48,000. Big whoop. At that point in my life, the price of milk could easily be over $10 (remember, inflation is a pesky bugger) and I would have to work pretty hard to survive just one year on that money!

Very few people can save their way to wealth.

How to Spend Your Way to Wealth

spend your way to wealthIn order to be truly wealthy, we need to learn how to spend. I recently read an account of a young woman that inherited $66,000 from her step-grandfather. What she spent that money on, I’m not even sure she could tell you. Sure, she recounts a few of her purchases – a camera, a headband, necklaces, and a skirt – but most of the money was just piddled away. All $66,000 of it. She spent all of her money on depreciating assets. Within a year or two, each one of her purchases was worth pretty much nothing. $66,000 wasted.

What if, instead of buying technology, unnecessary clothing, and accessories, she used the money to start her own business? Or maybe put a large amount down on a quad-plex, with her living in one unit, and then renting out the other three units to generate some cash flow for her future? Instead of writing a semi-popular post about how she ashamedly spent a large 5-figure inheritance, she could be boasting about how she multiplied her windfall by hundreds of thousands of dollars in just a few short years!

If you want to learn how to spend your way to wealth, I would advise that you follow these four steps:

1) Ask Yourself, “What’s Important to Me?”

Very few people in this world have the same list of importance as you or I, so while it’s easy for me to say, “You should value this, this, and that,” it wouldn’t really make much sense now would it? Perhaps you have children or grandchildren that mean the world to you and on your list of what’s important, they rank right up near the top. For me, I don’t have any kids, so they’re obviously not on my list. Instead, I would list “security” near the top. My life is much more pleasant when I don’t have to worry about the next bill that’s coming in the mail.

Physically write down your list of what’s important to you. I would think that you could easily come up with four or five things in the next 30 seconds. Without thinking too hard about it, my list would look something like this:

  • Relationships
  • Experiences/Adventures
  • Security
  • Teaching Personal Finance
  • Business Success

2) Imagine Your Dream Retirement

Okay, so in the first step you thought about what’s important to you in the present, but now I want you to imagine your perfect future. When you’re 60+ years old, what do you think would be important to you? How do you imagine your dream retirement? Would you like to own a cottage on the lake? Or perhaps you’d like to buy a brand new RV so you and your spouse can travel. Or, maybe you don’t really want anything extra, but you’d love to be a member at the local golf course so you can swing your sticks everyday. How do you picture your dream retirement? Again, jot down a few ideas so you can see those dreams on paper. My dream retirement might include these things:

  • Paid-for house in the country
  • Investments yielding $10,000 a month
  • Travel (perhaps internationally as well)
  • Strong relationships with spouse and family
  • Volunteering

3) How Much Extra Do You Have to Work With?

spend your way to wealthWhat does your current financial picture look like? At this current moment, how much extra money do you have that can be spent freely? If all your money is going toward your house, your car, food, your credit card payments, and insurance, then you have absolutely no extra money to work with and cannot spend your way to wealth. In order to figure out your current state of spending, you need to put together a list of your income and your expenses each month. If your “necessary” expenses total your income, then again let me emphasize, you simply cannot spend your way to wealth.

4) Spend Your Money Accordingly

“Everyone can spend money, but few truly know how.” — Derek Sall

In order to spend your way to wealth, one needs to understand the difference between assets and liabilities from an investor’s perspective. Put simply, assets produce an income, and liabilities earn nothing and decrease in value. A car wash business is an asset. A car is a liability.

Spending has a negative connotation, but it doesn’t have to. It just all depends on how you spend your money. You could either spend all your money on jewelry and entertainment, or you could spend all your money on mutual funds, index funds, and real estate. There is an obvious difference between these two scenarios. One promotes happiness in the present, and one provides happiness in the future.

One should attempt not to spend all of their money in the present or the future. Instead, they should spend their money in a way that satisfies all moments of time. If your dreams in the present include a 1960’s muscle car, then perhaps you should own one! However, you need to be sure that your spending also goes toward your future dreams of producing a passive income when you can’t work anymore.

I could really care less about the size of my house or the luxuriousness of my car in the present moment, so I have decreased my expenses in those categories. My house isn’t worth a ton, but I no longer have any payments since I paid off the mortgage last year. My car is worth about $2,500, but it always gets me from point A to point B. By limiting my spending in these categories, I now have the opportunity to spend my money on little trips here and there that improves my relationships with my fiance in the present, and I have the ability to spend money on investments like real estate that will provide me the income that I desire in the future.

If you want to spend your way to wealth, you first need to find out what’s important to you. Then you have to check your spending to see where your money is going. And finally, you need to reallocate your spending to fulfill your dreams in the present AND in the future.

Do you have a plan to spend your way to wealth? What do you want your present and future to look like?

If you enjoyed this article, Get email updates (It’s Free!)


  • 10
  •  
  •  
  •  
  •  
    10
    Shares
  • 10
  •  
  •  
  •  

8 comments to How to Spend Your Way to Wealth

  • #2 is my favourite. I day dream about it everyday.

    Here’s a little trick I picked up. Before you buy anything, ask yourself “Will this purchase get me closer or further from my goals?” More often then not, it will stop you from making an unnecessary purchase.
    Mr. SelfReliance recently posted..Hanging you out to dry

    • That is a good tip MSR. I have asked myself that question many times. Unfortunately, my goals weren’t necessarily where they should have been – meaning, a few years ago, every goal I had was money related. So basically anything that cost any money whatsoever, I just kept telling myself “No”. Today is much more wonderful because one of my goals is to maintain a quality relationship with my fiance through communication and experiences. So, with this new goal I was able to tell myself, “Yes” to some Detroit Tigers tickets next weekend! We’ll have a blast and will likely be closer because of the experience.

      • Master Nerd

        Couldn’t agree more! I ask myself that “what do I really get out of this purchase” question all the time. Sure, it means sometimes I over justify a purchase, but overall it is liberating to let yourself spend on things that genuinely add value to your life experiences. All the while, aggressively investing in the stock market to ensure a comfortable future. Life is too short to wait until retirement to start living.
        Master Nerd recently posted..Investing Part 2: ETFs and Making Your Money Work, So You Don’t Have To!

  • Yes for sure, you need to enjoy life! But it makes you think.
    Mr. Self Reliance recently posted..Hanging you out to dry

  • I like the kind of “conscious spending” you describe here. If you don’t have any priorities and goals you can easily fall into a habit of spending for spending’s sake. But with some reflection and awareness you can spend with a plan. Nice post.

    • I used to have the motto, “Why spend money when you don’t have to”, but I was limiting myself to experiences that were free, and for what reason? Because I was cheap mainly. In order to spend wisely (instead of not spending at all), I needed to reassess my goals. As it turns out, some of my goals aren’t money related, which means that it’s okay to spend once in a while on experiences. In addition to this, it is of course wise to also spend money on investments and other business ventures, which I am still doing today and plan to do for many years in the future.

  • Master Nerd

    “I now have the opportunity to spend my money on little trips here and there that improves my relationships with my fiance in the present” lol, sure beats paying for couples counselling! Nice post. It’s a good reminder that the whole point of becoming financially independent is to have money to spend. It’s certainly a two way street: earning money intelligently, and spending it intelligently as well. I also like your point about spending to satisfy all moments of time. In some ways extreme spending is not much worse than extreme fragility if it means you are sacrificing a happy, healthy life in the present moment. Spend unwisely and you’re living pay cheque to pay cheque, not spend at all and you become paralyzed by fear of ‘wasting money’. It’s all about finding a sustainable balance of spending intelligently, but at the same time living a full meaningful and enjoyable life that won’t leave you full of regrets in the future.
    Master Nerd recently posted..Investing Part 2: ETFs and Making Your Money Work, So You Don’t Have To!

    • Lol. It DOES beat couples counseling! It is fun to spend money, especially when your investments money at a faster rate than your typical spend. THAT’s the way to do it,

Leave a Reply

You can use these HTML tags

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

  

  

  

CommentLuv badge