Spending money is like fire. You can do a lot of useful things with fire. It’s very helpful. But if you’re not careful, you can get burned. Badly.
It’s the same thing with spending money. You have to buy necessities. And it’s fun to buy things you want. But if you’re not careful …
So let’s look at spending money in a different way.
For this discussion, you’ll need to get out your crystal ball. If you haven’t used it in a while, that’s okay. Just dust it off and it’ll work fine.
Now, peer into your crystal ball and look into the future … 10 years from now. 20 years. 30 …
What do you see? What does your life look like?
A better question is, what would you like your life to look like?
Because you get to decide. It’s up to you.
Whatever your vision for your future, it’s going to require money. That’s where what you spend today comes into play.
You see, every time you spend money, there’s an opportunity cost involved. The $125 you spend on a new pair of shoes … that money’s gone forever. It’s no longer available to buy anything else.
More importantly, you can’t use that money to pay off debt, save for the future or invest in the stock market.
Let’s say that next month, you cut back on your spending and manage to save $500. Awesome! Feels great, right? And let’s say that, rather than spending that money on something else, you take that $500 and invest it in a simple index fund (which tracks the overall performance of the stock market). And then you leave it alone.
Some analysts say that over the long term, you can earn an average of 7% a year in the stock market. (Others say it’s more than that, still, others say less. But let’s go with 7%).
Given these assumptions, your $500 would double in about 10 years. In 20 years, it’ll be worth $1,935. And in 30 years, your $500 will have grown into $3,806. Not bad.
Now just think what would happen if you added another $500 to it every month!
With that kind of saving and investing, can you see yourself living the life you really want?
HOW TO ACHIEVE YOUR IDEAL LIFE
It all starts with getting your spending under control.
Try this … Add up all the money you spend each month. All of it. The money you spend paying for food, drinks, gas. Your utility bills, credit card payments, cable TV. Add up everything.
Once you know how much you’re spending each month, ask yourself, “Can I cut that number by 1/4? How about by 1/3? Better yet, can I cut it in half?”
Once you know how much you can cut out, now it’s simple. You’ll know how much you need to spend each month. Spend only that amount, and save the rest.
Do that every month. After a while, it’ll become a habit.
And don’t keep all the money you save in a savings or money market account paying almost 0 interest. Start investing as well. Take advantage of the magic of compounding. Put it to work for you.
One expert says: “You can permanently boost your wealth simply by cutting the percentage of your income that you’re willing to spend.”
“HOW DO I ACTUALLY DO THAT?”
Here are some ways to cut the percentage of your income you spend …
- Don’t buy stuff you don’t need. We’re all tempted to buy things we don’t need, whether for ourselves, our children or someone else. But ask yourself whether you really need to buy that thing. And keep in mind the true cost of buying that thing … that money will be gone forever. How much could it grow if you save it instead?
- Buy lower-cost versions of what you do buy. If you are going to buy something, are you paying the lowest price possible for that item? Look for sales and promotions. Shop at discount stores and websites. Use price comparison apps on your phone. Keep track of how much money you’re saving. Make it into a challenge: “Can I save more money this month than I did last month?”
- Do it yourself. If there’s something you want or need, can you make it yourself instead of buying it?
Here’s an example. A couple in Pennsylvania wanted an archway for the entrance to their garden. So they went shopping. The cheapest suitable arch cost $750. Instead of buying it, they bought the necessary supplies and built it themselves. Total cost: around $100. They saved $650! That money was then available to buy something else or, even better, to save or invest.
Obviously, you can’t build everything you need or want yourself. But it’s another way to save money whenever it makes sense.
TO SUM THINGS UP…
Most people don’t think about spending money beyond whether or not they can afford something. Some people buy things they can’t afford by throwing it on a credit card and worrying about it later. But every purchase you make costs more than what’s on the price tag. The added cost is what you can’t do with that money because now it’s gone. We should all remember that.
If you can reduce your spending and save and invest the difference, in time that image in your crystal ball can become your reality.
National Credit Educational Service [NCES] is a 501c3 nonprofit credit repair, education and counseling company. We can teach you how credit works, how to fix your credit report, and – most importantly – how to overcome the financial hardships of your past while building a brighter, more secure future. Everybody deserves a second chance!