I am sure everyone reading this can relate. It does not matter how much money you have made in a year, it’s about how you spend it. I know individuals making $15,000 a year going to college full-time who have more money than someone who worked full-time making over $100,000 a year. It seems crazy to think that someone making over 6 times the amount of someone else has less assets and less money than their counterpart. This is a prime example of investing in yourself or investing in others.
Lets compare the two and see how one invested in themselves and the other invested in others.
The individual making $15,000 a year, lets call him Mike, did many things to make living on that salary doable for 4 years of his college education. Mike had roommates to make the cost of living cheaper. Mike did not go out to eat often or buy Starbucks coffee every morning. Mike did not purchase things if they did not have a use to him. If he needed help with something and he did not have the resources, he found someone who did and asked for help. Mike was still able to enjoy his life while going to school, he was able to take a vacation each year but he made sure the vacation was planned out, allowing him to save money and then budget for the trip. He found hobbies that were inexpensive and could consume his spare time. Mike bought a car within his means in cash and always got clothes on sale. Lastly and most important, Mike paid himself first. Mike would invest money into his Roth IRA every month, he would take a portion of his income out of his checking account and put it in his savings account for investing at a later date, when he had more.
The individual making over $100,000 a year, lets call him Joe, did many things to make his lifestyle more extravagant. Joe had roommates but did not save the extra money to invest. Joe loved going out to eat or to his local Starbucks any chance he got. Joe bought the newest trending styles of clothes at full price. He had a nice vehicle with a big loan that he paid the minimum monthly payment on. His main hobby, consisted of going to the bar with friends. This cost Joe a lot of money and was not contributing to his health or longevity. If Joe wanted something, he would buy it, it did not matter if it had a use to him. If he liked it, he bought it. Joe surrounded himself with people who were not in the game of life to succeed but in the game of life to have “fun” every chance they got. Joe paid his expenses before investing or putting money in savings. By the time the next paycheck came around, Joe was out of money and could not put anything in his savings.
Which one of these individuals resemble you the most? Are you someone who is paying yourself first, making sure you are setting yourself up for a better life or are you living paycheck to paycheck and having “fun” every chance you get? One thing I like to note about these two is, Joe could never afford a vacation, he always talked about going on one, but could never afford it. Meanwhile, Mike, who planned his vacations, always talked about the vacations he went on and his next vacation he was planning. This proves, it does not matter the amount you make, it matters how you allocate your income.
There is a book called “The Richest Man in Babylon”, written by George S. Clason that outlines the pay yourself first method. In the book, one of the main ideas is, if you do not have anything to show for what you make, you might as well be a slave and work for food, clothes, shelter, etc. and go on about your existence. You are investing in other people when you are purchasing things or paying expenses and not investing in yourself. The book has a very easy concept that anyone can follow. PAY YOURSELF FIRST, set aside 10% of every paycheck to save for investing in assets. This allows you to invest in the fruits of your labor.
If you think saving 10% of your income is impossible and you are already maxed out working paycheck to paycheck, take a moment to think of how you survived when you made less. If you cannot relate to that, think of something in your expenses that are not your basic needs. Here are some examples:
- Do you have a vehicle loan? If so, you have to pay comprehensive insurance, which can cost over double of liability insurance (which would suffice if you owned a less expensive vehicle). There are two major expenses here: The first is your monthly payment, how much could you save a month if you did not have a vehicle payment? I bet its more than 10% of your income. Second, your insurance, by having a newer vehicle with a loan, you are paying full coverage (comprehensive) insurance, instead of liability insurance. For me, this cost difference was around $120 for comprehensive and $40 for liability. A savings of $80 a month.
- Do you have a roommate? If you have room to add a roommate and you do not have one, this could allow you to split the cost of rent or mortgage and split the cost of utilities. Rent or mortgage tend to be the biggest expense an individual has. Just by adding a roommate, you could be at your 10% a paycheck goal.
- Do you have a coffee or tobacco addiction? This may not seem like much but this is a daily expense that adds up fast. For example, if you are going to Starbucks every morning and getting a cup of coffee for $4.00. This may not seem like much, but over the course of a year, that comes out to $1,460.00. If this is you, please consider switching to making coffee at home and saving $3.75 a day. If you spend $27.40 a day, you will spend $10,000 a year. It really puts it in perspective of how quickly things will add up.
- Do you like to buy the new trending clothes that rarely go on sale? Could you look for a cheaper alternative to those clothes that are on sale at a store like TJ Maxx or Ross Dress for Less?
- Do you go out to eat often or get an adult beverage while you are out dining? Maybe you could save some money and cook more meals at home or get a glass of water instead of a beer. Then have a beer when you get home, which you bought for way less than it will cost at the restaurant.
These are some examples to get your mind turning on whether you have any expenses in your life you could cut out. I am not saying do not go out to eat, grab a beer with friends, or have a cup of coffee but do it in moderation. If you want to continue doing all those things, maybe see if there is another way to make extra money. Get a part-time job or work more hours at your job, if allowed. This could help counter-balance what you are making and allow you to save, while still having “fun” and enjoying yourself at every chance you get.
Whatever you make, you can find a way to spend it, so start with paying yourself first! Go through your expenses today and see where you could cut expenses to start saving 10% of your income every paycheck. I recommend reading “The Richest Man in Babylon” if you have the chance, it is a great book with a lot of useful tips.
I hope this was helpful and I look forward to growing with you in life.
Your life Tutor