I had one of those moments. You know…one of those “AH-HA” moments when I was trying to think about personal finance and my spending habits. Here it is…”I need to treat my personal finances like a world class business would treat its finances.” Let me tell you, this has changed everything.
Every time I spend money, I think to myself, “Is this purchase going to increase my net worth?” If it doesn’t then I think about if the purchase is necessary; such as a purchase for basic needs (shelter, food, transportation etc.). If the spending of the money does not fulfill an established need, I get upset. I cringe when I swipe the plastic or when I fork over the cash. I actually get mad. This is how people should think with their money.
If an individual is truly serious about becoming wealthy, this is how one must think. Plain and simple. If you were the CEO of a business, would you recklessly spend money on things that don’t fulfill needs or return profit? The answer is no. Everyone is their own CEO (of CFO for that matter) regarding their own personal finances. Wealthy people understand this. Poor people do not. A choice must be made as to whether you want to build wealth or drain it.
How I Understand Money
I never used to care this much about money. When I realized that money is the key to freedom; my view on money drastically changed. I always just thought that it’s all about “how much money you make”. This could not be further from the truth. Although, a strong flow of income is important, it is only a small component of building wealth. In our younger years (and this is key), it is not about how much money you make…it is about how much money you save and what you do with it.
As a result of this thinking, I drastically cut my spending. Thankfully, I learned about the power of finance and saving directly after graduating college. However, I did not fully grasp how important it is to track every dollar the flows into my bank account. There are two ways to directly increase your net worth…increase income and cut spending. The latter is the easy part and usually is the first step for someone interested in beginning to accumulate wealth. Here is a key point: Individuals need to cut spending and invest what was saved. Stop buying pointless things that don’t add value to your life. You will be very thankful once you start and realize just how beneficial this concept is.
How Millionaires Do It
In my obsession over personal finance, I have done extensive research. I have read about how wealthy individuals treat money. Let me tell you, they take it very seriously. One thing that they all have in common…they are cheap. Very, very cheap. Every single wealthy and successful person I know are cheap as well. In fact, some of them are ruthlessly cheap. Some people ask, “Why is john doe so cheap he makes all kinds of money.” I smirk and reply, “Because he understands money.” Those who are not cheap are usually the ones that do not understand money.
Kevin O’Leary aka Mr. Wonderful has published a couple finance books that I have read. He points out two great concepts. First, he suggests you treat an individual dollar as a soldier in your army. You are the general and you are in command of all of your soldiers (your cash). He pushes the notion and asks the question, “Are you going to send these soldiers out to win your war?” He is suggesting that the more soldiers you possess, the easier the battle with personal finance. Second, he suggests the notion of “Ghost Money”. He defines it as “dead money, money wasted on stupid things, money that should’ve been invested instead.” If I recall, he mentions that he fires interns if they buy Starbucks. Obviously, he is advocating that spending $2.50 on a cup of coffee is obscene…and I whole heartedly agree. Basically, his concept suggests that money should not be spent on stupid things and it should be spent on things that can return assets for you (cash).
There are numerous articles summarizing the notion that wealthy people are cheap. Just go ahead and google it. You will find that 99% of millionaires are cheap.
How You Can Do It
The good news is that anyone can improve their personal finances and re-think how they spend money. The concept is simple. The bad news is that you will feel the pressure from outside variables. Whether it be friends or temptations, the variables will try to break you. Don’t let this happen. I personally receive a great deal of grief for being cheap and for saying no to things I use to say yes to (spending money as a consequence.) But I have made a choice to become wealthy. You must make the choice as well. It is all about sacrifice.
I’m going to break it down into three easy steps. But first, if you have not acquired Personal Capital, you need to do that first. It is basically a software program that links all of your financial accounts designed to track you’re spending. The program does all of the work for you. Please see main page for “Personal Capital”.
This is the easiest part. Just stop spending money on things that don’t matter. Stop going out to eat as often, stop buying rounds of drinks at the bar, stop buying expensive clothes that you will only wear once. Now of course, you need to spend money on the necessities as mentioned above such as shelter, transportation, food, clothing and etc.
Once you stop wasting money, you can track the cash flow of your money. Personal Capital creates a budget for you and you can label every single transaction as a category to relay where you are spending money. For example, I realized that I spent $4,000 on Ubers and Transportation this year. That’s a lot of money! However, transportation is a necessity.
This is the exciting part. Once you understand and track your money, you can hopefully realize various savings. Once you do that and invest the difference into assets that generate cash or provide utility (measurement of usefulness used by economists), I guarantee your jaw will hit the floor. Not only are you done wasting money, you are saving and investing money. A complete swing in the cash flow process. That’s a grand slam.