Sun 23 Mar 2008
“Self-Made in America” a book by John McCormack, suggests that if you are investing less than 25% of your income then you aren’t serious about becoming wealthy. But how do you afford to do this without suffering? The answer is here.
You can do this by eliminating waste and impulse spending from your spending habits. Studies have shown that the average person blows around 25% of their income in these two totally unnecessary areas; waste spend and impulse spending. Let’s see what these two types of unnecessary spending are and how to eliminate them.
First I will define waste spending. There are two main types of waste. Firstly waste is when you spend more money than you need to in order to get the result that you want. Secondly waste is when you buy more than you need in order to get the result that you want.
Here are two examples around food.
An example of Type 1 Waste would be buying a sandwich for lunch for $5 when you could have made the same sandwich at home, and brought it with you, for only 50 cents. You are paying ten times the true value of that sandwich by buying it ready made. You probably also spent more time standing in line to be served than the time you would have required to make the sandwich at home.
An example of Type 2 Waste is when you buy more food than you need and then have to throw it away. Because you couldn’t be bothered taking the time to calculate the amount that you really needed you overspent on your food bill.
The facts are that people are regularly guilty of both type 1 and type 2 waste on a regular basis, and not just with food. They tend to buy without asking for discounts and they over buy in all areas of their life.
Now let’s define impulse spending. Impulse spending is when you buy something that you had no intention of buying until you saw it by chance. It is no coincidence that supermarkets put chocolate bars and magazines next to the checkouts. They are there because the supermarket is well aware of the profit potential for them from impulse spending.
Impulse spending does not enhance your lifestyle. You are simply buying something just because you saw it and quite often you don’t even really want nor need these items. I was amazed to discover that most books purchased are never read. In fact the statistics are that 80% of books purchased are never even started and half of those that are started are never finished, People buy books on impulse, usually because they are attracted to the title and the cover design.
The main areas of impulse spending are sweets and magazines and anything that is “on sale”. People also tend to impulse spend in their areas of interest or hobbies. Young women will impulse spend on clothes, shoes and makeup. Musicians will impulse spend in the music shop, and so on.
If you can eliminate waste spending and impulse spending then, if you are like the typical American, you will free up around 25% of your income that you can put to investing. But how do you cure yourself of these costly habits? You can do this easily by developing two new habits.
New Habit Number 1:
The self-made rich decide in advance where and how they are going to spend their money. The average person spends their money randomly as the urge seizes them. Deciding where you money is going to go, while you are still at home, eliminates impulse spending. Making a conscious decision as to the value you will receive for each dollar spent will help eliminate waste spending.
Develop the habit of deciding, on pay day, where your money is going to go, write this down and then read over it and ask yourself if any of that planned expenditure is in the waste spending category.
When you are going shopping take a list and stick to the list. This will help remove the impulse spending habit. Developing the habit of deciding in advance where your money will go is a great way to ensure that you still maintain your quality of life in the present, but you free up money for investing so that you can become rich and enjoy a much greater quality of life in the future,
New Habit Number 2:
The self made rich have the habit of writing down every cent that they spend, as they spend it, so that they are fully aware of where their money is going. The average person is surprised when their money runs out because they were not fully aware of how much they where spending. As a result, bad money managers find that they have too much month at the end of the money whereas good money managers find that they have too much money at the end of the month.
Develop the habit of recording your expenditure as you spend it. Become fully aware of where your money is going and always ask yourself if this particular transaction is going to truly enhance your life or not. If the answer is no then don’t go through with that transaction.
Developing these two simple habits will free up a surprising amount of money for you to put to investing. So how should you invest that money in order to maximize your profits? Unfortunately this article is long enough already so that secret will have to be revealed on another day.