My last post was about some secrets to saving money. This one is about spending money wisely, so that you either save, or make an investment that pays off later. Here's an example, albeit an extreme one.
One secret about acquiring wealth is to not think linearly. Just because you make "this much" does not mean that you cannot enjoy luxuries. It's question of whether you can learn to wait on your purchases. It's not a matter of frugality per se, but of figuring out ways to "multiply your talents" and your money.
Say you have an interest in different topics - as many people do - and you have an equal choice between spending some money buying either of two unrelated items or services. Which should you buy? Well, I'm not going to tell you what to do with your money, but unless the purchases are both necessities, I would tend towards the purchase that is most likely to somehow payoff for me later. So unless, you have a really good reason to buy something that has only temporary or decreasing value, don't get it.
Let's take an extreme example, just so you have some concrete idea of what I'm saying. Feel free to extend the concepts to your own situations. Hopefully, that's exactly what you'll do.
You've been considering taking a course that will upgrade your skills in an certain area. Doing so would mean an eventual or even immediate increase in earnings. The drawback is that you have to pay for the course yourself. You also have to invest time each evening to go to class and do the necessary studies. That means you have to sacrifice watching some of your fave TV programs or what have you.
You know that you have the ability to complete the course and make use of it, but you don't have quite enough money. And there's a really cool new smartphone or Blackberry or Palm Treo PDA you want to have, which you almost have enough money for. The course has to be paid for in cash only. You're thinking, you can always take the course next year. Surely you'll have saved some money by then. You can put the PDA on credit and you just you'll pay for it when the monthly credit card bill comes.
So what do you? The typical human response is the path of least resistance. If you put in no effort to decide your own financial fate, then you'll have to accept come what may. You end up buying the PDA on credit and lament that you "didn't have enough time" for the course, and/or not enough money. Except, now you've got to pay off the PDA, and your salary hasn't changed any.
But say you had saved your money in a money market fund or a high-interest online savings account for, say, 6 months. This sort of investment is liquid enough that you can withdraw your money at any time without penalty. You are not going to make as high a return as you might on the stock market, but you are also not going to have to suffer the risks or have your money be locked in long term.
Keep in mind that, had you taken the course, not only might you have been able to pay cash for the PDA with your new salary, you'll likely be able to write off the education expenses (including transportation, to a degree) on your taxes. It would mean waiting longer for that PDA, but then you'd probably get the benefit of the newest model.
You could forgo using a bank account at all and stuff your money in a sock. Or worse, in a regular bank savings account, which pays you diddlysquat. But besides not gaining any interest, the point of a specially-designated savings account is to tell your subconscious that you plan to carry this project through. You plan to "sacrifice" gratification now for a much more rewarding gratification later.
My own experience is that it's darned easy to spend money to enjoy a luxury now. It's the direction our culture has gone. However, if you get into a saving habit, it's even more enjoyable to look at your assets and realize that you've made money simply by deferring the spending of it (and putting it into a high-interest savings account).
That's exactly the kind of reflecting you need to do before you spend money on a medium-ticket or large-ticket item, if not a small-ticket item. Do this even if you have the luxury of making a lot of money. Sure, you "can do whatever you want with it," but you are still reading this article, so you obviously want to save money.
My example is extreme, and these days cellular providers offer cellphones and even PDAs at discounts for long-term plans. (Do you want to be locked in for 3 years?) But you get the idea. Ask yourself, do you want that new cellphone, watch, or expensive coat that you don't really need now, or something big later on (down payment on a home, yearly vacations)? What is more important to you? What gives you passionate feelings?
I relate this story a lot, and may repeat it in the future, but someone I know worked very hard in her very low-paying work purely to save the money and vacation around the world for as long as she could each time. When she ran out of money, she'd come back into town and work and save some more, even if took her two or three years before her next long-term vacation. That's been her life for more than the decade I've known her.
Everyone was always surprised at how often she went on vacation and for how long, given how little her job(s) paid her. She knew both how to save wisely and spend wisely. Now she doesn't does this herself, but I know other people who also travel a lot and sell photographs or articles based on their experiences. Sometimes they write restaurant reviews. Their spending pays them back, so it becomes more of an investment. Occasionally, their effective expenditures become zero.
So if you are inclined to spend your money anyway, apply tough-love to yourself and think twice about what you are buying. Maybe you cannot save money now, but maybe your expense will pay off in the future. Find your own opportunities for increasing the value of your money.
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