I’ve always believed in having a spending philosophy rather than a budget. Budgets are like diets: they feel restrictive, you want to go off them as soon as you start them, and over time, they may give you a bad relationship with money.
I’d rather talk about a “spending philosophy.” A “spending philosophy” is a set of principles you believe in and follow because they reflect your values and how you want to spend/invest your money.
Rather than being restrictive and allocating money into a budget, a spending philosophy sets your priorities so you spend/invest your money in the right places and ultimately with what you want rather than rationing money in all areas of your life.
It looks something like this:
*I buy cars a few years old, with low miles, and in pristine condition.
*I drive the car for 10 years or 200,000 miles if possible. (Cars can really sap your wealth. For every car you DON’T buy, you can invest the money and it can easily add up to $250k extra in your investment account over your lifetime).
*I can afford whatever I want, but I find a way to buy it at a discounted price.
*I don’t need 10 designer handbags or golf club drivers, I can live with one or two.
*I take advantage of debt and use it wisely when rates are low, I pay off debt when rates are high. (By the way, did you know some of your credit card rates can be lowered?
Contact http://www.coastalcreditsolutions.com – if you have low enough income they can negotiate a lower interest rate for you with the credit card companies).
*I don’t buy depreciating assets: boats, RV’s, dirt bikes, jet skiis, new cars, TV’s, etc.
*At the grocery store, I check the price per ounce and don’t buy just because it’s on sale. A lot of times the price per ounce is cheaper in the larger size that’s not on sale.
*I buy appreciating assets (especially now that we’re in the tangible asset cycle) like gold, silver, art, collectibles, rare coins, gemstones, etc.
*I pay attention to the “opportunity cost” of what I’m buying. Every $10,000 spent on dinners or “stuff” this year could be worth $174,000 more in 30 years at 10% interest (a reasonable assumption as a long-term return on investments). Realize there’s a “cost” to every dollar you spend and make a wiser decision. The average person will have over $1 million (and if you earn a high income, a lot more than that) flow through their bank account in their lifetime. How much of that are you investing for your future?
Don’t have money to invest today? Then use the same philosophy in reverse – ask “is this worth buying or would I rather use this money to pay off debt?” If the interest you owe on credit cards is 10%, when you pay that off, it’s the same as if you were earning 10%. You can use the same compounding example I used above in reverse. For every $10,000 you use to pay off your credit cards, it’s like you “earned” $174,000 more over 30 years!
Realize there’s an opportunity cost to every dollar and it’s up to you whether it becomes “stuff” in your closet or garage – or money in your investment account.
Change your spending philosophy, and you change your life.