Understanding WHY you spend
In the words of Will Rogers, “Too many people spend money they earned “to buy things they don’t want “to impress people they don’t like.” Seeing a shiny new car in your driveway might make you feel great, but is it the best thing for your long-term financial success?
Humans are hard-wired to compare themselves to others. It helped us get through much more challenging times when trying to catch up to others in the community meant survival. Today, this hard-wiring manifests itself in the syndrome known as Keeping Up With The Joneses. You need to spend money for shelter, food, clothing and paying down debt, but on top of that, a lot of our spending falls into the discretionary bucket. So how can you be a more conscious spender?
First, understand how to bucket your expenses? Look at your after-tax income and categorize it into
- household spending, including fixed and variable expenses,
- discretionary spending,
- debt reduction, and
- savings.
A good way to distinguish between the first and second categories is that the first are needs and the second are wants. Be cognizant of your wants and ensure that they don’t exceed 30% of your budget. A good budgeting app can help you categorize your spending and is a great way to set a baseline and keep you on track.
Second, plan your purchases. Don’t buy anything on a whim. Wait a day and research the options, especially for expensive items. Also, get to know the companies you’re spending your money with. Follow your money and make sure it’s being spent with companies that you’re comfortable with. You worked hard for your money, so make sure where it goes aligns with your values and the world that you want to live in.
Finally, take a look at all of the stuff that’s made its way into your home. Remember, that stuff was once money, and that money was once your time. How much of it do you truly value when you look at it that way? How much of it is functionally important? And how much is just stuff that you could have done just fine without? Is this stuff the best way your time and money could have been spent?
Remember, it’s not how much you make, but how much you keep. That’s the key to a successful financial life.
Control your credit cards
Credit cards can be a great way to pay for expensive purchases over time. And in some countries like Singapore, they’re an important factor in building your credit history. Credit cards are designed to make spending money easy, seamless, frictionless. A quick tap or face ID on your phone and cha-ching you own that new thing.
Credit cards are also brilliant at generating revenue for the companies that give them to you by charging interest rates and fees and hooking you in with those reward programs. These reward point programs are true rewards if you pay your credit card in full each month. Otherwise, the interest you’re paying is paying both for your rewards and for people who aren’t paying interest.
So here are some guidelines for managing your credit cards.
Your goal should be to pay off your credit card in full every month. It means that you pay no interest and helps you build your credit score. Pay more than your minimum every month. Otherwise, it’ll feel like you’re taking forever to pay off your debt. If you use a credit card, try only to use it for big purchases and have a plan to pay them off as quickly as you can. And this is a tough pill to swallow, but if you’re spending more than you earn each month, you shouldn’t be putting the difference on a credit card long-term. Everyone has good years and bad; just ensure your bad year practices don’t become permanent solutions. So, here’s a few tips to stay within these guidelines.
Set up an auto-pay. It’ll ensure you don’t miss a payment and have your interest rates shoot up. If you do have a big purchase, pay it off fast. Even pay some off before it appears on a bill. This will help keep the interest rate you owe a little lower and keep your credit score a little higher. Credit agencies like to see lower balances on your credit card. If you are carrying a balance, look for promotions to transfer your balance to a 0% interest card. There’ll probably be a fee for the transfer, so do the math on how much interest you’ll save.
Consolidate your debt by rolling all your credit card debt into a single fixed-term loan. You should be able to get a lower rate. Just don’t go back to old spending habits and charge up those old cards. Use all the benefits your card offers. Use cashback, car insurance, extended warranties, and loss protection. All of those things will add value to your card. If you’re close to paying your balance off, pay it all off. If you have a $1000 balance and you only pay off $999, you’ll be charged interest on your average balance, which will be closer to the full thousand, not the dollar of the remaining debt. Know your rights if your credit card company tries to reduce your line of credit, raise your interest rate, impose new fees or penalties. Having a credit card can be pretty great. It’s super convenient and can have lots of great perks, but carrying a lot of debt on your card can be destructive to your financial wellbeing. Every dollar you pay down will reduce interest payments, which means more money in your pocket.
Spend on Assets
When you buy something, wouldn’t it be nice to be able to sell it later for at least the same price or more as what you paid? Imagine buying a pair of shoes for a hundred dollars in January, and selling them in June, for the same hundred dollars. Well, things don’t work that way. Many things that we buy in life are consumed and used and lose their value soon after purchasing. It’s part of our modern world. Things are made to be disposed of, wear out or become obsolete, but there are things that we own that do hold their value; these are assets. And if you want to make the most of your spending, think of spending money on assets, not just consumables.
So what is a good asset?
The best assets are things that keep most of their value over time. Most people would think of a house as a good asset, which is true for the most part. As long as we maintain them, houses can retain or even increase in value. And this is great because the house is the single largest purchase most of us will make in our lives. Having it keeps its value gives us financial options later in life.
There are four major issues that can affect the value of any asset.
Quality. If you have something of high quality, it will be worth more than an identical item of lesser quality. Think of two cars, same model, the same year, but one has lots of dents, and the other is in mint condition.
Supply. If your asset is one of the millions, then you really can’t demand a high price for it. Think of a Picasso poster versus an actual Picasso painting. They may look similar, but one is much rarer and more expensive than the other.
Demand. If many people want what you have, you can set a high price. Think of the price you can get for tickets to a sold-out concert, for example.
A market. It would be best if you had a place to sell your assets easily. Otherwise, you may be stuck with something of value that you can’t sell. Think of art auction houses or used car dealers here.
Many products tick these boxes; these include cars, art, furniture, collectables and housing. Think about cost peruse. Cheap shoes, for example, are expensive if they only last a few months. So having an asset mindset when it comes to how you spend your money. Research resale values when you buy big-ticket items like cars. Look at product reviews before spending money to make sure the product you want will last. Think of going to auction houses, estate sales and resell sites to buy furniture, jewellery, or fashion that already have retained their value. And look to high-quality names for products that have a reputation for durability. And it’s not just about to resell value but longevity. Don’t think of stuff as disposable, but utilities that you put to work for you that you can then resell when you’re done with them.
Save well, invest wisely.
The best investment is investing in yourself and choosing the best environment to nourish your life — Entrepreneur, Wealth Management, xMD, xAdvsior and xMilitary.
