For some people, financial struggles are due to not bringing in enough money. But for most of us, the problem comes from spending more money than we make.
If you think the problem is that you’re not making enough money, when I started investing I was a river guide in the Grand Canyon making $4000 a year. I did that for ten years, no problem, because I was good at not spending money I didn’t have. Of course, I was living in my VW bus, supplemented with nights on the floor of the Transcendental Meditation Center in Flagstaff, when things got just a bit too frigid.
You may not want to take it that far, but I’m just saying it can be done, and I’ll show you seven ways to watch your nickels better than you ever have so you can live on what you make. And even save to invest. It’s all in knowing a few little tricks.
1. The Trick to Tracking Your Spending
Before you can figure out how to control your money, you first need to understand where it’s going.
Financial advisors will tell you that you have to make a budget and track both your income and your expenses. Truth be told, that is not all that much fun since it requires you suddenly become as anal as Mr. or Ms. Scrooge, watching every nickel and counting every dime. Bah, humbug.
Do it my way instead. Get a bunch of envelopes. Get a black marker. On each envelope, write in big letters one of the things you know you spend money on, like “gas.” Like “eating out.” Like “groceries.” You get the idea.
Now, go cash your paycheck. Stick about what you think you spend between paychecks on each thing you have an envelope for. Get the “gas” envelope and then take an educated guess on what you spend on gas that paycheck period. I’m guessing, “$200”. Stick the $200 cash into that envelope.
Keep going until you run out of envelopes (and can’t think of any more things you spend on) or you run out of cash. I always ran out of cash before I ran out of ideas on where to spend it.
If you’re out of cash and still have empty envelopes, like “gas” is empty, that’s not okay since no money, no gas, no work. Rearrange the cash until your necessities are covered.
Now only go spend what you have in the envelope. No credit cards, no checks, no Venmo, no Paypal. Just cash.
If you run out of money in the “groceries” envelope, then no more groceries. Eat peanut butter. It won’t kill most of you.
Do this for a couple of paycheck periods, and you’ll know where you’re money’s going. And even better, you’ll have a pretty good idea where it’s going that it doesn’t have to.
2. Get Control of Your Impulses
I confess I’m impulsive. I see something I want, and I don’t think too hard about whether I should buy it. If I’ve got the money, I buy it. That sort of impulse buying was constrained in my poor old days by having zero money to spend, something like why people didn’t use to be so fat. No money, no cake.
So here is where you need a bit of discipline. Before buying anything over $50, ask yourself if you really need it. How badly? How will this thing impact me?
Really focus this kind of thinking on food buying. You’ll find you eat better, spend less on food, and might even lose weight. Who knew that getting smart with money was a diet plan?
Here are some more good questions: How long will it last? Is it going to put you in debt? Is the value you will get out of it over its lifetime worth the cost?
Go watch Dumb and Dumber again. Dumb purchases can get rid of $100,000 real quick.
Smarten up and quit tipping the doorman hundred-dollar bills.
3. Only Put Money on Your Credit Card if You Can Afford to Pay it off Each Month
Credit cards aren’t inherently bad, theoretically.
Practically speaking, they are an exchange of discipline for convenience, and that’s a lousy trade, y’all. Put those cards away while you’re working on financial discipline. They’ll still be there in a month.
Yeah, I know buying gas is a pain without a card. In fact, buying anything without a card is a pain. But no pain, no gain. Fight through it like the warrior you are, and work with cash only. Just for a while.
If you absolutely have to use a credit card, you must pay off your credit card balance each month. That will tell you where the money is going, and you won’t incur any interest charges, so it will essentially be the same as paying cash.
4. Stop Trying to Impress Other People
This is huge. Believe me, no one cares. All those people you’re worried about are only thinking of themselves. They’re worried about what you’re thinking about them.
Be Columbo. Wear a funky raincoat and drive a beater. Don’t be average.
The average person spends far too much money merely trying to maintain an image. The right cars to the right clothing, that’s for the Kardashians and other people who live such a superficial life that they’re fun to watch self-destruct.
You’ll learn this – so much of what we buy has more to do with impressing others than it does to do with purchasing something that we actually want and enjoy.
I was really good at this. I just didn’t care. Everything I owned fit in a small waterproof bag except my motorcycle and VW bus. A couple of pairs of jeans. Hiking boots. Two shirts. Puffy jacket. Undies.
Buy the things you enjoy, and don’t fall prey to the feeling that you must spend money to impress other people.
5. Figure out What Habits Drain Your Budget
Having lived for 13 years on almost no money, I didn’t have any bad spending habits. If you do, that’s a good sign that you have more money than you think.
So check it out. Start looking for habits that are poking holes in your money bucket. These habits could include expensive hobbies, so for those who are playing too much polo or out there racing Porsches, you gotta chill.
And you gotta chill if you’re eating out too much or can’t fit your new shoes in your closet.
You gotta have the gym and trainer, really? Can’t do pushups at home?
And the real killer bad habit? Buying crap your kids don’t want or need. Stop it. They will learn to be frugal by watching you, and they’re not going to learn it if you’re killing yourself to satisfy every little one of their childish whims. Put ’em to work and pay them, and then quit buying them stuff. Make them do it for themselves. You won’t believe how much of your future you spend on those little twerps.
Stop the bad habits and prosper.
6. Learn to Value Investing Over Products
Another horrible piece of advice from the financial advisor world is to love socking away money in a savings account. That is a terrible idea.
Just try teaching your kid,
“Son, you should put money away in a savings account.”
“Okay, Dad, I’ll put $1000 in it.”
“Great idea, son, and now watch it grow.”
He puts in $1000, and a year later has $1010. Meanwhile, the bike he wanted has gone up from $1000 to $1080. He’s going to think you’re an idiot.
Savings account suck. But saving and investing… now we’re talking some sense.
When you don’t buy the $1000 bike but instead learn to invest in the right things, the right assets, that $1000 could be $1200 at the end of the year.
Remember that the apple doesn’t fall far from the tree.
You will be handing down generational ignorance if you’re not investing wisely. That’s what got handed down to you, right? I know that’s what got passed down to me from the generations of financial morons who went before me.
Getting out of that loop takes some doing, but you’re here reading this, so at least you’re getting started; you’re making an effort. That was the beginning of the great journey that I took – making an effort to try something different.
You gotta develop a mentality that values savings over products. Understanding the power of compounding is the key to that mentality. Warren Buffett knows.
Some guys were riding the elevator with Mr. Buffett and noticed him looking down at a penny on the floor. When they got to his floor, he got out, turned around, smiled, stepped back in, picked up the penny, and as the door closed, he said, “Beginning of the next billion.”
Compounding money works a miracle.
Here’s a chorus from a song to that effect, albeit a bit on the dark side, from Les Miserables “Master of the House”:
Charge ’em for the lice
Extra for the mice
Two percent for looking in the mirror twice
Here a little slice
There a little cut
Three percent for sleeping with the window shut
When it comes to fixing prices
There are a lot of tricks he knows
How it all increases
All those bits and pieces
Jesus! It’s amazing how it grows!
In the end, money saved and invested will almost always benefit your life more than money spent on products that will wear out or become uninteresting in little time at all, and once compounding starts, “it’s amazing how it grows.”
7. Learn to Invest NOW
Spending your money by buying pieces of great companies is the wisest way to spend money. Period.
Great companies compound your money without you doing anything except buy-in. That’s it.
From that point, well-run businesses make 15%, 20%, and even higher every year on the equity in the business. That equity is your money.
How great a thing that they can do that for you. That’s how most of the wealthiest people in America got rich. Elon bought a chunk of Paypal, then a chunk of Tesla. Peter Theil put $1700 in his Roth IRA and bought 17,000 shares of Paypal with it. Then when Paypal got sold to eBay, he had $30 million. With that, he bought Facebook and a couple of other businesses. Now his Roth IRA has over $5 billion in it. He turned $1700 into $5 billion. What if he’d spent that $1700 on a new refrigerator? Today he’d have nothing but an old refrigerator to show for it.
This is how the wise get rich. They put their money to work with people who will work their money. Learn how.
You will change your life and your children’s lives by knowing that the smartest thing to do with your money is to buy the business, not the product.
No matter how young (or old) you are or how little you have to invest, putting your money into quality companies that will compound the value of your money over time is always the wisest way to spend.
Need a little extra guidence when it comes to spending money wisely? I’ve created a valuable 14 Day Financial Challenge that will help you get your finances on track.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.