It's Not About What You Make, But What You Spend (or Don't Spend)

Life is all about choices. Good choices lead to good results. Bad choices lead to bad results. If we change our choices, we change the results. This is so true when it comes to money management. So many people are never satisfied when it comes to money. Many people say that if only they made x amount of dollars, they would be on easy street, with no worries about money. That is not always true. Often times, the more we make, the more we spend. How many times have we heard about famous athletes or celebrities that have made millions, only to end up broke due to poor money management? People need to think before they spend. I am convinced that debt is the number one thing that leads to financial ruin. Let's look at two scenarios:

scenario #1: an individual makes a gross yearly income of $30,000 per year
mortgage: $0
credit card debt: $0
car loan: $0
student loans: $0
other debts: $0

scenario #2: an individual makes a gross yearly income of $100,000 per year
mortgage: $300,000
credit card debt: $5,000
car loan: $25,000
student loans: $20,000
other debts: $15,000

Some people automatically assume that anyone who makes 6 figures has it made, with no money worries at all. The person in scenario #2 has a lot of their income eaten up be debts which require monthly payments where varying rates of interest are charged. I would rather be in scenario #1. The person in that situation has no debt obligations so they can put a large percentage of their pay towards retirement investments. That person may actually retire earlier than the person in scenario #2. The person in the first scenario may be able to put 15% of their income towards a 401k where the second person only can contribute 3% due to all of their debts. Person #1 may very well have more disposable income to spend on enjoyable activities. Now, these scenarios are extreme, and avoiding debt all together may not be realistic, but still it is food for thought. The term "rich" is relative. Someone can make one million dollars per year and be poor, and another person might make a modest salary and be rich in comparison when debt load is considered. So, next time you see someone driving a brand new Cadillac, they may not be rich at all. The person in the 10 year old car that has been paid off for years might be better off. You can't judge a book by its cover.

Thin Waist, Fat Wallet

As Americans, we struggle significantly with losing weight and being financially fit. In the new year, no doubt, many resolutions will revolve around those 2 subjects. These two concepts have more in common than you might think.



1. Both require making the right choices to produce favorable results. Different choices can make all the difference. What is the better choice: eating fast food and drinking pop, or eating foods like fruits, vegetables and whole grains and drinking mostly water? We all know the right choice, but we often choose the wrong one. Choosing exercise over a sedentary lifestyle is important too. Everyone will not be a marathon runner, but just 30 minutes of exercise per day can make a big difference. It can even be split up into 3 sessions of 10 minutes each. The key is to find something you enjoy doing. Financially, what is the right choice: spending money on frivolous things or spending it only on necessities? Let me clarify, I am not saying to never eat junk food or never buy something fun, but those who are physically fit and financially fit make the right choices the majority of the time. Different choices yield different results. What kind of results are you seeing?



2. Both require one to have patience, sacrificing short term rewards in exchange for long term benefits. It feels great to have lots of cookies or ice cream right now, but that action means we push back the time where we can be proud of weight loss. Nothing tastes as good as thin feels. It might feel great to go and buy a $500 new watch or new clothes right now, but that money spent now means it cannot be used for other, more important uses down the road. Many say they have no money for the essential things in life, but they seem to have plenty of money to spend on frivolous things. It has been said that money moves from those who don’t know how to handle it, to those who do know how to handle it. It is all about priorities, and being patient. Too many people say that they want to be thin right now, or they want to be rich right now, but those who practice patience, and restraint, get the best results. The old adage is true, patience is a virtue. Get rich quick or get thin quick programs are scams that will not work over the long term. In building wealth, time is the investor’s best friend. If a person makes $40,000 per year and they put 5% of their gross income into a 401k that earns 8%, starting with a balance of $1,000, if they invest from age 25 to age 65, they will have $1,176,915 at retirement. If only 1% more is invested, the balance would be $1,407,954, about $230,000 more! It is not about how much we make, but how much we spend (or don’t spend). Plenty of people who make 6 figures or even 7 figures, end up broke since they do not manage their finances well. Conversely, many people who make a small income are perfectly able to pay for a decent place to live, a decent car, and other needs.



3. Both losing weight and gaining wealth can be accomplished by making small, incremental changes that add up significantly over time. Suppose that someone spends $8 per day eating out at lunch time. Do this 5 days per week and that adds up to $40 per week, and 52 weeks per year adds up to $2,080 per year. That is a lot of money. Think about what you could do with $2,080. You could pay off debts, take a vacation, buy gifts for others, or invest it. Losing weight is the same way. 3500 calories reduced per week can yield one pound of weight lost. That breaks down to just 500 calories per day. Examine what you eat, and examine where you can cut out 500 calories. We can all do that. So many times, calories are taken in without even thinking about it. How many of us mindlessly snack on chips or cookies or other junk food without thinking about how many calories we are taking in? I have found that paying attention to liquid calories is essential too. It is easy to drink 500 calories worth of pop or other drinks without even realizing it. One pound lost per week may not sound like a lot, but over a year it is 52 pounds.