Stories of bankrupt lottery winners are all too common, and the reason is that maintaining a high level of functional wealth requires financial discipline. People like T. Harv Eker like to discuss the “financial thermostat” – an internal, self-correcting mechanism that automatically adjusts your level of wealth to a particular level. I think it’s a good description, but in order to regulate one’s financial temperature, one has to develop a mature viewpoint about money.
Money doesn’t bring satisfaction, but it might be true the other way around, because it’s impossible to be rich without having a wealthy mentality. As you make your money in real estate, you have to adjust your spending patterns so that you start saving more. You have to put some money away for the long term. In Rich Dad, Poor Dad, Robert Kiyosaki defines “rich” as the state of having investment income that covers all of your expenses. He says that the wealthy first put their money into investments and then use the investment money to pay for luxuries, whereas the poor spend their money first on luxuries (which are constantly depreciating) and never get into the long-term investments. Ben Stein and the author of “The Millionaire Next Door” share a similar sentiment, as do many of the brightest minds in finance and wealth management. People who can’t hold on to their money are often brilliantly creative when it comes to finding ways to dispose of it.
Very few people think they’re bad with money, but I think there’s a natural spending tendency in most of us that needs to be channeled into an effective system. Just as the best athletes are not only naturally talented, but also practice frequently, financial heavyweights usually have some sort of system in place to ensure that they uphold their wealth building principles. One way is to have a certain amount of money deposited into an account every month. Most banks will do this for you, and if not, it’s probably time to find a better place to put your money. Another good way is to budget. This is a particularly relevant practice for younger people, who often aren’t forced into budgeting in the same way as people juggling a mortgage, insurance, children, healthcare, and all of those other expenses, but it is a useful skill for everyone. Simply determine an amount you would like to save or invest each month, and find a way to fit your expenses into the remaining amount available. This causes you to think about which expenditures provide you with the greatest benefit, and will hone your shopping skills. It can also be an exercise in self awareness: I find that I enjoy good food and good people more than I do sensory excitement, so I’ve started to rent movies and invite friends over for dinner rather than forking over $12 to see a movie (and $10 for theater food). I’ve cut down the money I spend on clothing, but I’ve kept spending constant in categories such as books and modern furniture.
Human beings are incredibly adaptable. Just as lottery winners can adapt to spending all of their money, so can you adapt to spending slightly less if you commit to saving a little bit more each month. Because of compounding interest, this minor change in habits can pay off greatly in the end. There’s no greater luxury than the freedom that comes from not having to count your pennies, and putting your energy into the things that matter most to you.
For young people, no matter which income level, Ramit Sethi’s blog is a tremendous resource. Ramit recommends dividing your money into three accounts:
1) A standard checking account (ideally, with no minimum balance, and with free checking). Keep only the money you will need to spend soon in this account (no more than $1500).
2) A high-yield savings account. Places like ING have options that provide a 4-5% return, compounded monthly. Use this money for big purchases that you plan to make within the next 5-7 years, such as cars and other large, infrequent purchases.
3) A retirement account. If you can get an employer to match your 401(k) contributions, then max those out first. When no employer-matching 401(k) is available, then the best option is a Roth IRA (rather than a standard 401 (k) or Traditional IRA). Also, invest in index funds rather than mutual funds.
