I used to have a spending problem.
So much so, I treated junk mail like my personal shopping list, and deep down, I wished my life was like those photos you see on Instagram with dudes wearing fancy watches, in a driveway full of Italian exotica and a clutch of bikini babes draped all over them.
It was pathetic.
I'm not sure how I ended up that way.
Somehow I'd managed to toss out all the good lessons I'd gleaned from my parents about working hard, saving my money and only buying what I could afford.
I guess I figured if I got myself into hock and bought all the trappings of ‘success', I'd become successful.
It took me way too long to learn that it's a dumb way to go about things.
Mind you, the ‘work hard' bit was never a problem.
It wasn't unusual for me to work 20 hours straight – even 24 on occasion.
But I now know that was pretty stupid, too.
After about 14 hours, your brain is usually fried and the last six hours produce the equivalent of one good hour when you're fresh.
During that time, though, I managed to buy three apartments and two houses, a couple of fancy cars, and I started a couple of businesses (neither of which did very well).
I made good money, but I lost plenty, too.
I won't go into the cause of my dramatic fall from grace – only to say it involved The Financial Crisis, a 50% drop in income (overnight), and of course, a divorce.
The second one, in case you're asking.
But had I been more careful with my money, none of these things would have been nearly as dramatic.
Maybe I would have kept all the properties.
Perhaps I wouldn't have got divorced.
I'll never know for sure.
Still, I know that poor spending habits and a lack of ‘worst-case planning' were a big part of it.
All Sizzle and no Sausage
Maybe you're in the same situation I was.
Maybe you're trying to keep up with your own Joneses.
In today's product-saturated world, it's easy to do.
Everywhere you go, you're hammered with thousands of marketing messages.
And like anything you see over and over, you start to believe it's normal.
Well, it's not normal.
Making $100,000 a year and spending $105,000 on shit you don't need is going to send you broke no matter how much you church it up.
It'll end up making you sick, too.
You'll fight with your partner and you'll probably start drinking more than you should.
Or binge-watching Netflix or something.
Basically, it ruins everything and then you end up divorced.
Then your life really turns to shit, financially.
So what would I have done differently?
More to the point, what do I do now?
Glad you asked.
Here is my recipe for not being broke, in simple bite-sized chunks.
Figure out What's Driving You
We all have role models.
Many were given to us whether we liked it or not.
But some are optional.
Here are the main culprits:
Your Parents – what they valued; the relationship they had with money and the meaning they attached to it; whether it was a scarcity mindset, their desire to keep up with the neighbours or a ‘money isn’t important’ philosophy.
Your Peers – where they live, what they wear, what they drive, where their kids are schooled, where they holiday in the summer, and so on.
Marketing Messages – how easily you believe the bullshit you read and see on TV, whether you devour the junk mail or toss it straight into the bin, and how easily it triggers the ‘new shiny syndrome’.
All these sources have one thing in common – modelling.
The trouble is, they’re modelling the wrong groups (the ones that’ll keep you broke).
You become the average of the people you spend the most time with.
So if those people have a reckless and unbalanced relationship with money, then so will you.
If they’re echoing every marketing channel you consume (TV, radio, magazines, billboards, eBay, etc.), then you’re screwed.
Remember, broke people stay broke by living like they’re rich.
And the Joneses want to keep you broke, so sack them.
The Riches are in the Ditches
I know a few rich people.
To most observers, they don't look that rich, but their assets and their investment portfolios tell a different story.
You know what really makes them rich?
A commitment to loving the process, not the attainment of trinkets.
They've fallen in love with the work, the ‘sacrifice' and the process of delayed gratification.
They get pleasure from watching their assets grow.
And they derive a deep sense of satisfaction from knowing they could pay cash for an Aventador, but choose not to.
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They have power, freedom and autonomy.
In short, they enjoy the game.
They like to create stuff, they love to accumulate wealth and they love knowing that if the shit really hits the fan, they'd be just fine.
For them, hard work is a privilege.
They know what they're good at and they've tripled down on it.
They block out all the noise from status-seeking friends and they stick to their game.
They ascribe to one of my favourite sayings: “What you think of me is none of my business.”
Debt is for Wealth Creation and Nothing More
Borrowing money to buy a car or a TV or God forbid, a holiday is stupid.
Buy a five-year-old car and pay cash for it.
Buy your TV on eBay or Amazon.
Holiday where you can afford to holiday.
Kill off your consumer debts as fast as you can and never get them back.
Use the points on your credit card to get cash back and use that money to buy your stuff cheap online.
Never exchange points for products.
And don't even think of taking up interest-free offers from big-box retailers.
Before you know it, you'll be paying 25% p.a. on a fridge that's now three years old.
Always pay cash, and where possible, buy someone else's ‘mistake' second-hand.
You'll save bucketloads.
And a two-year-old Miele dishwasher still looks like a new one, only it costs half as much.
While we're on the subject, I've recently written a book on killing debt.
It's only nine bucks and it'll pay for itself thousands of time over.
If you have debts, you need this book.
Get it and thank me later.
Pay off Your House Faster
Personally, I'm not interested in paying off my house.
I'd rather pay interest only and use the difference to buy another one and let the tenant help pay for it.
But if you're still clinging to the dream of owning your own home, here's what I suggest.
The first option is to get an offset account and make sure all your income goes into it.
Pay all your bills with your credit card, then use this account to pay off the card in full each month.
If you have a $500k mortgage and $50k in your mortgage offset account, interest on your mortgage will only be calculated on $450k.
You'll also accumulate all those lovely points on your card which you can then exchange for cash back.
If you lack the discipline to leave money sitting in an account like that, or you worry you'll overspend on your card, do this instead.
Assuming you have a principal-and-interest loan, split your monthly mortgage payment in two and pay it fortnightly instead on monthly.
A $500k mortgage over 30 years at 6.5% will cost you $3,160 a month, and $637,722 in interest.
Pay $1,580 a fortnight instead (half of $3,160), and you’ll pay off your mortgage six years earlier and save $146,869 in interest!
This is a biggie.
If you wait to have left-over money to invest, you'll never do it.
If you wait till you're earning more money, you'll never do it.
The two most important elements of investing are ‘time in the market' (starting early so the magic of compounding can happen), and fees.
Leverage is also important but for 99%, it only applies when investing in real estate.
I'm going to give this to you as bluntly as I can.
- Do NOT try and trade stocks or you will lose.
- Do NOT try and time the market or you will lose. The only exception is when you first get in. If you can buy when the market has crashed, you're effectively buying when everything is on sale. If you're in any doubt about the fallacy of timing the market, read Tony Robbins' book, Unshakable.
- Do NOT get a financial advisor. You don't need one.
- Do NOT invest in ANY managed fund that is actively managed (meaning they buy and sell stocks). The fees will destroy your earnings.
What do I recommend?
I recommend the same thing Warren Buffet has recommended since time immemorial.
Set aside at least 10% of every dollar you earn (much more if you can) and automatically deposit it into a Vanguard Index Fund.
Since as much as 95% of stock traders never beat the index, you'll be way ahead of the game.
It isn't sexy, I know, but the fees are minuscule and the tax benefits are real.
That means most of the earnings go to you.
Then, and this is key, DON'T TOUCH IT.
Don't fiddle with it and don't withdraw it till you're old and crusty.
Let compounding do its thing.
To diversify further, get yourself a few index funds across different groups.
The thing here is to stay in the market.
Every time it goes up, you win.
Ever time it goes down, your regular contributions buys more units (because everything's cheap).
Got it? You sure? Good.
Alright, there's obviously much more we could cover here but if you follow these guidelines, you'll be ahead of almost everyone you know.