When people first graduate from college/high school, they make a humble salary and find a way to make ends meet. Maybe they don’t save very much, but they do alright. Along the way their salary likely doubles, triples, or quadruples. With their salary increasing by such a huge amount, there ought to be some money left over to be put into savings. Sadly, that is rarely the case. Most people spend as much as they can.
There is no correlation between how much people spend and how much they need to spend. You’d think if you were one day living fine on $30,000 a yr and that eventually morphed into $90,000 you’d be able to save some money. But that is not the case. We are not good at saving.
I’m going to list some reasons why we’re not rich, and its not because we don’t make enough. Like the literature says, “we are very good at offense (making money), but very bad at defense (saving money).”
1) You buy things you don’t use – most people get some high from shopping. They buy and buy and buy. And a lot of the things they buy they don’t need or use. If you’re not going to use it, don’t buy it. Or if you’re going to use it once and it costs $500, don’t buy it. If you’re gonna use it once, you don’t need it. If you’re gonna use it once a day for a month, then you probably need it.
2) You have a sense of entitlement – Many people think that they deserve a certain lifestyle or quality of life. Maybe its because they worked really hard in college, maybe because they won some award, or maybe it is because they got a fancy schmancy job on Wall Street? In any case, you need to be able to afford something before you are entitled to it despite the salesman of the month award you won at work last week. If you have worked hard enough and saved enough, then maybe you deserve it.
3) You started too late – to be able to retire, the early yrs are the most important. If you save $1000 a yr from age 20 thru age 30 you’ll have more than if you save $1000 a yr from age 30 thru age 60. You don’t have to save much if you save it when you’re young.
4) You care what your car looks like – You don’t own your car like you own a piece of art. You own your car to take you from point A to point B. If your car has a mechanical problem that prevents it from getting you to point B, then that problem needs to be repaired because one of the point B’s you need to go to is work (where you earn money to support yourself). So if you have a problem with the engine in your car, you have to fix it. But if you get a scratch on your car, you don’t need to fix it. Cosmetic fixes on cars are more expensive than mechanical ones. You can buy a new engine for most cars for under $2000, but the slightest little fender bender will cost you twice that in body work. And don’t spend $8000 on new spinner rims – that’s just silly.
5) Your house is too big – You don’t need a 5000 sq foot house. You just don’t. As the size of your house gets bigger, the expensiveness of your life gets way bigger. A bigger house means more than a bigger mortgage, it means more expensive insurance, more expensive utility bills, more expensive upkeep/maintenance, more taxes, worse interest rates (jumbo mortgage vs regular mortgage), etc. As I showed in my last 2 posts, there are better places to spend money than a house. So if you’re gonna buy, buy what you need, not twice what you need.
6) You don’t understand value – Warren Buffett said, “price is what you pay, value is what you get.” You want to get the most you can for your money. That’s why you don’t want to buy that $500 shirt that you are only gonna wear once. That is a lot to spend on one night out, its not giving you a lot of value. You wanna spend $30 on a pair of jeans that you can wear 300 times, thus each wear only costs you a dime. That’s value.
7) You don’t understand the word ‘afford’ – If you can buy something by maxing out your 4th credit card, that does not mean you can afford it. If you can pay it off by the end of the month along with all your other expenditures/credit cards/etc, all while savings 15% of your income, then maybe you can afford it. Just because you can find a way to finagle your finances so as to let you walk out of the store with the purchase under your arm does not mean you can afford something. If it fits in your budget and you will not accrue any interest payments because of the purchase, then maybe you can afford it.
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