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?
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
In 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:
- 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
3) How Much Extra Do You Have to Work With?
What 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?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.