Don’t you just love money? I do. I love all the goodies it can buy. Trips to Europe, a new car, cool electronics, the latest fashion, fancy restaurants, etc. It’s a beautiful thing. I love money and want as much as I can get. So there, I’ve said it. But I’m guessing you feel the same way. Money is a necessary part of living and life.
The trouble with money is that spending it can become addictive. We all have voices in our heads pushing us to buy more and more stuff. Maybe the reason is because the extra stuff will make us happier, more desirable, enhance our status, help us fit in, etc.
These voices and desires are all fine and good until the spending gets out of control and the debt piles higher and higher.
Thankfully, I was able to suppress the vast majority of my spending voices years ago. I still have plenty of fun and buy quality products, but I do it with a whole different perspective in mind. Here’s how I approach money and you should too:
Keep It Real…
1. Be Honest With Yourself – Let’s face it, there are only a few truly legitimate reasons to have a lot of debt (other than buying a home). They include medical hardship, inability to find a job in two or more years, or having an uninsured home that is destroyed by a natural disaster. I might have missed one or two other major events, but that’s about it. If you’re piling up debt for other reasons, you may have a spending problem. If so, be honest with yourself and commit to making a change.
2. Put Wealth Building Ahead Of Spending – Start by believing in every fiber of your being that building wealth for the long term is more important than getting a temporary high from buying useless stuff. This strong belief is the seed that will begin to shift your mindset and then your actions.
3. Perform “Need” vs “Want” Analyses – There really isn’t a lot that we “need” in life, right? Sure, there’s food, shelter, protection, and basic things of that nature. But no one “needs” to live in a multi-million dollar house. That would fall into the “want” category for many people.
So before you spend money on something, determine if it is truly a need or a want. If it is a want, compare it to what your budget will allow. Be sure you’re already generously contributing to your saving and investment accounts. If there’s still room to buy the item, go for it. But before you do, see if you can find a lower cost version or alternative.
4. Live Below Your Means – This is a simple one. If your salary is $50,000 per year, for example, then decide right now that you’re going to live a $45,000 or $40,000 lifestyle. Put the difference in your wealth-building accounts. What you’ll discover upon settling on this decision is that you’ll have just as much fun in life. You might not visit fancy restaurants as often or have a new luxury car, but you won’t miss them either. It’s amazing how easy it is for us to make the best of what we have.
5. Pay With Cash More Often – You should pay cash for small items and save up money to make larger purchases. This will prevent you from unwisely using credit cards and installment loans to prop up your lifestyle. Remember to keep it real…and honest.
6. Buy a Modest Home – I’ve seen so many people fulfill their dream of owning a home, but go about buying it the wrong way. Personally, I rented an apartment for many years before I purchased a home. I did it because my rent was dirt cheap and I loved the idea of socking away loads of money in my 401k, mutual funds, and IRAs.
Honestly, renting gave me a sense of freedom. And the only reason I bought a modest home is because my employer agreed to pay all the closing costs as part of a job relocation package.
Oh sure, I could have purchased a large home. But I didn’t want the responsibility. And I didn’t want to be one of those people who had a great home but couldn’t really afford to furnish or maintain it properly because of hefty mortgage payments. Hey, I enjoy sleeping soundly and having peace of mind.
So, if you must, then only consider buying a modest home (relative to your income) where the payments will be easy to make and you’ll have enough left over to enjoy it and other aspects of your life.
7. Always Be Saving (ABS) – It doesn’t matter if the amount you’re saving is $25, $50, or $100. To build wealth, your mind must be in ABS mode. Sometimes that can mean increasing the amount of money that is deducted from your paycheck and deposited in your savings and investment accounts.
Other times it can mean delaying the decision to replace your old, but fairly reliable car for another two or three years. Become obsessed with saving, but not to the point where it takes all the fun out of life. If you want a number to gauge how much you should be saving, then start with a minimum of 10% -15% of your salary.
8. Establish a Wealth Goal Amount – One of the questions that most people find difficult to answer is “What should my ultimate wealth goal be in terms of dollars?” Well, allow me to give you a starting point if this is the dilemma you’re having.
Start with a goal of having $1,000,000 in liquid savings and investments by the time you reach age 65. You might be wondering where I got that number. Did I just pull it out of the air? Kind of, but not totally.
I calculated the Required Minimum Distribution (RMD) percentage that the IRS requires you to use when you must begin withdrawing money from your 401(k), 403(b), and similar retirement plans at age 70.5. Currently, it’s around 4%. That would give you $40,000 (4% x $1,000,000) per year to live on.
You could start withdrawing more than 4% of your money prior to age 70. I’m just giving you a way to begin thinking about what you want your financial situation to look like later in life, so that you can plan for it now.
Of course, if you want to get a little more precise in calculating a wealth goal, then read and follow our mini-course called “Calculating Your Retirement Money Needs”. It will show you step-by-step how to determine the amount you’ll need for your retirement.
In conclusion, implementing the above items will require a bit of discipline and self-control, but they are all quite reasonable. Understanding your relationship with money and achieving wealth will involve being honest with yourself, putting wealth ahead of spending, analyzing purchases based on needs versus wants, living below your means, paying with cash more often, buying a modest home, saving money consistently, and establishing a specific wealth goal. Keep these elements in mind when analyzing your personal finances and developing your long term wealth building plan.
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