Want to avoid financial failure... Watch the pennies, not the dollars

In the old days, your ability to save was predicated largely upon how much money you spent on a house, car, and other big-ticket items. Today you have far less discretion over your spending.

Consider taxes. Under the current revenue  law, you have few deductions, and therefore little opportunity to lower your tax bill. And because your total tax burden has never been higher, you are devoting more and more of your income to tax payments. I’m not just talking about income taxes (30% for most people), I’m also talking about Value Added Taxes (15% on most items), property taxes, gasoline taxes, and many more. All told, close to 50% of your income is lost to taxes. Then there’s housing.  Most people spend 20% (on average) of their income on rent or mortgage payments. Add another 7% for home-related expenses, including insurance, repairs, and maintenance, and you’ve just spent another 35% of your income. So before you eat dinner, before you buy a pair of pants, and before you hail a taxi or buy a car, 85% of your total income is already gone. And since a university degree is a virtual requirement in today’s workforce, you also can regard the money you’re saving for university to be a tax of sorts. Clearly, your remaining 15% must go a loooong way.

With those precious few remaining pennies, you decide to buy a soft drink with lunch. No big deal, you say. After all, it’s only three dollars. Considering the huge amounts you’re spending on taxes, homes, cars, clothing, insurance, food, and day care, what possible difference could three dollars make? A $570,000 difference, that’s what. It’s true, Spending three dollars a day (instead of investing it) for 40 years — a normal working career — on soft drinks, chocolates, even the daily newspapers, translates to $570,000 that you won’t have when you retire. Can you afford to throw away nearly six hundred grand? Because that’s what you’re doing by buying that soda or ice-cream.

Under The New Rules of Money, you simply are not in daily control over most of the money you spend. That is why it is crucial that you carefully allocate the money that is in your control. So the next time you reach for that Coca Cola  on the supermarket shelf, or head to the fast-food joint, or subscribe to all the premium channels on the cable, ask yourself one simple question; Is this expense going to help you achieve your financial goals?

STOP SPENDING MONEY ON THINGS THAT FALL IN VALUE

Without question, “the good life” is within the grasp of more people than ever before. However, many people are trying nonetheless to live a life they cannot yet afford. Too often they act like they have wealth even though they are not, in fact wealthy. For example, you probably can’t afford to buy a $15,000 Rolex; it’s likely you won’t even try. But you might be willing to spend $400 on a Raymond or Gucci watch. Not that you should, mind you. Because to spend $400, you first must earn $667, while that money, if invested for 40 years at 8%, would grow to nearly $10,000. But you won’t have that ten grand, because you’ll have spent the $400 instead. The biggest irony is that the watch won’t be worth anywhere near $400 in 40 years. In fact, it’ll be a surprise if you still have it. On the other hand, you’ll not only still have the Rolex, it will have held its value, and probably have even appreciated — not just because expensive watches become collector’s items, but because such watches are laden with gold, a valuable commodity in any form.

So if you really want to boost your ability to build a large net worth, stop buying assets that you really can’t afford to buy, like $400 watches. Either buy a $15,000 watch (which is likely to hold its value or appreciate) or buy a $25 Timex. Better yet, ask a rich friend what time it is.

OBSERVE THE NEW RULES FOR SURVIVING THE HOLIDAYS

The numbers are astounding. Retailers sell 35% of their entire year’s products between September and January — and toy stores rack up 60% of annual sales during the Christmas Season. Indeed, the holidays put people into a shopping frenzy, with budgets ignored in favour of the latest gifts and gadgets. When the bills arrive, people often realise they spent more than they could afford — way, way, way more! You must no longer allow the holidays to bust your budget. Instead, despite your best intentions, recognise that you will spend money. Every year, we will tell ourselves we won’t spend too much. But who are we kidding?

You’re going to spend a ton of money. You always do. If you don’t believe me, just look at last year’s chequebook and credit card bills (and the year before that, and the year before that). Go back to last December. I’m willing to bet that you will spend as much or more next time, too. What’s startling is that people are shocked when they discover how much money they have spent. But the holiday season comes every year, so stop acting like it’s a surprise. Instead, plan on it. If you spent $1,200 last year on holiday expenses (gifts, parties, food) you need to save $100 a month all year long. For just this purpose, banks used to offer special savings accounts called the “Christmas Club.” Regrettably, few still do. To help you survive the next holiday season, follow these steps:

1. Make a list — not of what you’re going to buy — but for whom you are going to buy: Family, friends, business associates, and so on.
2. Next to each name write — not what you’re going to give — but the amount you’re going to spend on that person’s gift.
Too often people focus on the gift they plan to buy rather than the gift’s cost. If you decide to give a sweater to cousin Sara, you’re forcing yourself to spend whatever sweaters cost, even if they cost more than you should spend. (“It wasn’t my fault I spent so much,” you’ll rationalise later. “That’s what the sweater cost.”) Therefore, you need to decide the amount you’ll spend on Sara, and if you can’t buy a sweater for that amount, then buy something else.
3. Once your list is complete, total it up. If you’re happy with that number, great. If you’re not happy, start cutting. Remove people from your list, reduce the amount you’re intending to spend on each person, or both.
4. Now your list is ready — but don’t head off to the mall yet. First, you have to go to the bank to get some cash (or travellers cheques if carrying lots of cash makes you nervous). Why bother with cash when you have credit cards? Because you’re going to leave all your credit cards at home! You overspend because your credit card is a virtual bottomless pit, but your wallet isn’t. So if your list adds up to $800, go to the bank and withdraw $800. Then head to the mall, and spend freely. And when you run out of cash, you’re done!

Following this strategy will keep you from overspending, and it will reduce or eliminate impulse buying. You will force yourself to spend your cash wisely, or the last person on your list will get a five-cent lollipop! And let me add this point; Don’t buy gifts just because you feel obligated. Spending more than you can afford is not mandatory. You can make a charitable donation for the entire family, giving each person a card saying, “I made a donation in your name to so-and so charity.” Or make your own gifts — bake cookies, even. Everybody loves chocolate chip cookies. January should start off with Baby New Year knocking at your door, not creditors.