OK, I’ll admit it, I’m a tightwad. After putting a lot of effort into saving and investing, I find it hard sometimes to loosen up the purse strings.
The fact is, you really need to be somewhat of a tight wad early in life if you want to make your way to financial freedom. If you are spending like everyone else around you, you’ll be broke like everyone else around you. You need to be putting money away while everyone else is taking out loans, paying cash while everyone else is pulling out the credit cards, and be cooking at home while everyone else is going out every night.
The trouble is, after being in that mode of saving and investing for a while, it becomes difficult to realize that maybe you don’t need to pinch the pennies quite so tight. You can loosen up a bit when you go out on the town or head out on vacation. Because you’ve planned, saved, and invested, your income should be higher than that of most of your peers. Even better, your should have a lot of free cash flow since you should have money coming in from assets each month rather than being obligated before the month begins by liabilities.
For fellow tightwads for me, I’ve devised the following three-step process:
Step 1: Budget
Yes, I can feel all of the spouses of tightwads out there, who thought this article would help reform their avaricious spouses, collectively sucking in a breath. I know that budgeting is normally associated with skimping and saving. I think a lot of people pinch pennies a lot tighter than they need to, however, because they don’t really realize how much they have available. How many people do you know who seemed to live in poverty their whole lives who then die with multi-million dollar estates? I’m sure you know of at least one such person.
Personally I hate being in situations where I’m being asked about a proposed expense (for example, being at a restaurant and being asked if we should have a $10 dessert) because I instinctively say, “No,” if something seems pricey. If I know that we have plenty of money remaining for eating out, however, I can happily say “Yes,” knowing that the overpriced dessert won’t put me into financial ruin. Better yet, if I and my wife are on the same page, she shouldn’t even need to ask – we should have agreed ahead of time so I don’t end up in the role of financial gate-keeper.
Step 2: Review Your Pipelines and Budget some Spending as Appropriate
As stated previously, your pipelines are assets you buy that will provide income to you in addition to your regular income from your job. These are things like bank CDs, stocks, bonds, and rental properties. In order to become and stay wealthy, you should be using some of your income to buy assets and build your pipelines. You should also be reinvesting a lot of the income received from your assets into more assets, since that is the way you turbocharge your wealth creation.
As you start to build up a large income from assets, however, you should start to use some of this additional income for spending and giving. You should also perhaps think about cutting back on the amount of money you are putting into buying assets from your wage income. When you are 20 years old, putting as much away as you possibly can into an IRA should be your first priority. If you are 60 years old and have several million dollars in assets, however, that $5000 contribution to your IRA really won’t make too much of a difference.
While I’m not saying you should go wild and spend everything you have saved, maybe you should look at increasing the amount you budget for spending and saving each month. Maybe carve off a percentage of the money you are receiving from your assets for a vacation or a kitchen upgrade. Maybe designate some of the interest from your assets for donations to your church, causes you believe in, or (most fun of all) for giving anonymously to those around you who need it.
Step 3: Execute
Once you have your budget and spending plan, do the steps needed to execute it. If you have a budget for eating out or hobbies, you may wish to withdraw cash each month and place it in an envelope specified for that expense. Then, as long as you have money in the envelope for that expense, you can spend confidently since obviously you aren’t going over your budget (no cheating with credit cards). If you plan to spend a certain amount for home upgrades each year, you may want to pick a date at which you free up the needed funds and deposit them into your checking account so that you actually do it.
Just as you may automate things when saving, you may also wish to automate some of the allocation of dollars for spending or giving. Perhaps create an account for vacation spending and have some of your paycheck automatically deposited in it each month. Perhaps have a checking account for giving setup and then write a check when different charities come knocking or you find out about someone in need. If you have a lot left over at the end of the year, maybe send the balance to your alma mater (just make the donation anonymously so they won’t be hounding you monthly after that) or pick up the check for some strangers in a restaurant during the holiday times.
I am certainly not advocating taking up the “normal” spending ways of those around you. If you do that, you will quickly find yourself in the same financial condition as them. If you do the correct planning and budgeting, however, you can transition from a tightwad to a person who does things and gives to those in need in such a way that some of those around you may change into a bit of a tightwad themselves. Hey, if I can do it, so can you!
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Photo Credits: Penny Mathews, Website http://www.credos.us/zoofythejinx, downloaded from stock.xchng.