Monday, March 20, 2017

Live below your means and be frugal

Just because you can afford to buy something, it doesn’t mean you should.

First of all you need to define what your financial limits are. Make a budget and stick to it. Common sense tells us that you should spend only so much as you have earned during that time frame. You can set year, month or week as a time frame for your budget.

I use year and monthly budgets.
If you want to be rich, you have to live below your means, but you don’t have to be frugal. If you live above your means, there is no money left to invest and without investing in assets you can’t get rich.

If you earn $1000 and spend $800, you live $200 below your means. If you earn $2000 and spent $1500, you live $500 below your means. The best option would be to earn $2000 and spend $800.

You will then keep $1200 for your investments. It is how much money you are able to keep. To keep is the important word.

If you don’t want or are not able to spend less, you have to focus on earning more. The fastest legal way to riches is running your own business. It is hard to get credit from the bank if you are just starting and that is why you have to save money for your later company. Most people simply are not that lucky to get a credit from someone.

Being frugal is about delayed gratification. If you save money, but never invest it, you are not using money as a tool. Saving makes only sense when you save to purchase something. The best usage of money is for keeping you safe, healthy, properly clothed and fed.

Once your physical needs are met, then the best usage of your money is for purchasing assets and then using cash flow from your assets to have some fun and purchase more assets. If you delay your gratification and purchase assets, you are on your way to financial freedom. If you just delay your gratification without specific goal in mind, you are usually losing your money because of the
inflation tax.

Most people I know either focus on earning more money or on spending less. My father focuses on spending less. Spending less is good to the point where you refuse to spend your money on assets to avoid the risks. The problem with my father’s approach is that he prefers to take no action at the present time to get rich.

Instead he says ‘I should have invested into XY in 1990,’ or at some other time in the past. Then he is unhappy that he did not invest. When interesting investment occurs, he is so cautious he will not invest or take action.

On the other hand I have to tell you that during 6 years I have lost more money than he did during 30 years. But also during those 6 years I have made more money than he did during his 30 years. We are simply different when we invest. He is guided by fear of loss and I am guided by vision of gain.

If I have to choose between spending less and earning more, I choose to spend less and earn more. It is another ‘either/or’ myth. You can both spend less and earn more. But if there were only those two options and I had to choose between earning more and spending less, I would choose earning more.

If you are busy earning more money, usually there is almost no time to spend that money because you are so busy you have only time to work, eat and sleep.

I do not believe in fanatic saving money by being too frugal, but if you are very busy, you will not have time to buy unnecessary things which you will not use. You will step out of mass consumption area in your mind which we are programmed by watching TV ads, billboards etc. Those ads are created to make you want to buy things, you will not use after few months. Or you will not use them at all. We all spend money for things we do NOT really need.

I know it, because I have been working in the advertisement industry myself. I was creating those ads persuading you to buy stuff you did not know you need so much.

All you need is a warm place to live, food and water, few clothes and shoes to protect you from the environment, means of transport (feet, bike or public transport is the best option in big cities) and tools needed for your work and study. That’s all.

Everything else is just wants, not needs.

I know some people who will travel halfway across town to save a few cents in a sale, but what they do not realize is that they spent more on their fuel, and they bought more goods in multi-packages than they really need. They lost more than they saved. What they do is wasting money and goods, which they will throw away. But more important, they also waste their time.

If they didn’t use their time on chasing good deals, they could use it to earn more money. They keep more money if they earn $50 extra during that time, than if they save $20 in sale. Those people usually don’t take their time into account in their saving equation, and think their own time is
free, so they have lost nothing of value. This is not true.

Our time is limited. Each day we have only 24 hours and we can’t use that time anymore if it is spent on shopping. Choosing how you will spend your time each day will make you either successful or not successful. Your time is limited, your money is abundant. You can always earn new money but you can’t turn back the time.

Use the approach which works for you to get the maximum amount of money you will keep in the end. It is both about earning as much as you can and spending as little as you can.

Good advice to help you stop purchasing rubbish is to act as if ‘You can’t throw it away once you purchase it.’ If you set your mind to ‘I will have to keep it, do I have a spare place to put it in?’ You will stop purchasing garbage that gets thrown away anyway.

Shop for quality items that will last longer and buy them only if you are sure you will use them. Sell your old items which you don’t use before you purchase a new toy.

Buy only what is necessary, not what is convenient. What is unnecessary, even if it only costs one cent, is expensive.

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