The one money habit that can change everything

Maybe it’s because of my profession, but I think about money A LOT.  I’m fascinated by the psychology of it all – how marketing, influence, and our own desires get us to that ultimate decision of “yes, I’m going to spend money on that” or “no, I’m not going to spend money on that”.  Some people have better discipline than others when it comes to spending.  Others can be easily swayed and convinced when it comes to where to put their hard-earned money.   Which camp are you in?

For me, I think it depends on a lot of factors coming together in the right direction before I will pull the trigger on a purchase.  Now, I’m talking about a “want” purchase here, and not necessarily a “need” purchase.  There is a big difference in those two things, and I encourage you to add that decision point to your thought process when looking at a spending opportunity.  That little question of, “Is this a want or a need?” has probably saved me thousands of dollars over the years, and saved me from additional clutter of unnecessary material items.

It also depends on an individual’s priorities in life.  We are quick to judge those that have fancy cars but live in a mobile home.  Obviously, they view a nice car as a higher priority than a nice home.  You have certain priorities in your life as well, and the beauty of it is that we have the freedom to decide those for ourselves.

Having discipline

Because I am in the financial space as a profession, I think I have become fairly disciplined when it comes to spending, but it has taken a lot of practice.  When considering a relatively large “want” purchase, I don’t consider myself a compulsive spender.  Instead I am usually able to take a pause and analyze the decision.  Here is a peek inside my brain.  I’m thinking of things like: Do I have discretionary spending available for this purchase (meaning, can I afford it without taking on debt)?  If yes, is this the most important thing I should be spending that money on (meaning, is it a priority)?  Is there a return on investment from this purchase?  How long will this purchase last and will I get my money’s worth out of it?  Can I get this purchase cheaper somewhere else, or will it be cheaper if I wait for a sale/discount? 

It’s also important to be on the same page with your spouse or significant other when it comes to large purchases.  Talk through the decision, weigh the pros and cons, and most importantly, come to an agreement or at least a compromise.

The secret to wealth

You might think that the discipline I was talking about is the one money habit that can change everything.  That is the underlying fundamental principle, yes.  But here’s where that can change everything….

You have to live on less than you make.

It is a simple concept but most people find it very difficult to put into practice.  We’ve become so accustomed in society that debt is ok, and credit cards are no big deal, and marketing influences us at every turn to spend, spend, spend.  All our friends and neighbors are doing it, so I need to do it too.

The truth is, you will never find financial freedom if you are constantly paying debt for things you’ve purchased in the past.  You’re rearview focused instead of windshield focused.

So what to do?  You need to understand where your money is going each month.  Analyze the last 30 days of your spending.  I guarantee you will have some eye-opening moments.  Now, look at how much money you make in a month.  Your spending needs to be less than that.  Go back to your spending assessment and adjust, make changes, cut unnecessary items, etc.  Be disciplined when it comes to spending going forward.  Is it in the budget and is it a priority? 

Be in charge of your money

Ultimately every dollar should have a purpose and you should be directing it exactly where you want it to go.  Once you get to a place where your spending is under control, and you’re spending based on your means and your priorities, it’s time to carve out a few extra dollars for your future.

There is a lot more to this process, including having an emergency fund, savings, etc. but I want to leave you with this thought.  The secret to wealth is being disciplined, living on less than you make, and taking a small amount of money each month and investing it consistently.  Did you know that if you invest $100 a month, starting at age 25, assuming a rate of return of 8%, you’ll have $351,428 by the time you’re 65?  Increase that to $250 a month and you’ll have $878,570 at age 65.  $1,000 a month starting at age 25?  You’ll retire with $3.5 million.   It takes discipline and living on less than you make.  It’s not easy, but it is possible!  I believe that you can.