Category: How Money Works

You can’t save money when you’re spending.

Anybody that knows me — either through this site, or in real life — knows that I love to save money. I think it’s one of the best feelings in the world to know that I have a stash of cash at my disposal. I’m a firm believer of paying myself first which is the process of saving/investing just after getting paid instead of waiting until the end of the month when money might be tight.

While I’m putting away money every month and building my reserves, most consumers are saving in a different way; a way that isn’t really saving at all.

I’ll start this off with a questionIf person A goes to the store and buys an item that normally costs $10 for $5, and person B decides to put $5 into a savings account; who saved more money? Without reading ahead you might think that both people saved $5, but really person B is the only one who has committed his money to actual savings.

When referring to money the word “save” can mean one of two things. The first definition is the one where you end up having more money: “accumulate money: to set aside money for later use, often adding to the sum periodically”. The other definition is the one that marketers use to take advantage of consumers: “conserve something: to avoid wasting something or using something unnecessarily”.

With the marketer’s definition it actually sounds like they’re trying to hook you up, and make you spend less money. But honestly, how could they possibly be helping you “save money” when they’re trying to get you into their stores to spend money? “Buy a new car and save thousannnnnds!” — this may be the most illogical sentence on this entire site, because you can’t save money when you’re spending money.

Now if you need to buy something, and it happens to be on sale you should take advantage of the sale. While I highly recommend buying things you need while they’re on sale, I offer a word of caution: Just because something is on sale doesn’t mean that you need to buy it. If you go shopping without a clear picture of what you actually want/need, you’re going to end up spending more money than you anticipated. The sale does it’s job by getting you into the store, and — believe it or not — there are people who go to college to learn how to position sale items to make you spend more money!

Malls, and car dealerships aren’t the only places that take advantage of false-savingpromotions. When you go to the grocery store the front-end cashiers are trained to emphasize your savings amount before they hand you your receipt. Our standard grocery store, Safeway, prints the percentage “saved” right on the receipt so you can walk out of the store feeling good about yourself, because most people will feel better about spending money if they knew that they could have spent more.

We need to shift our mindset away from the savings and onto the spending. When you buy an item on sale for $50 that originally costs $100, you aren’t saving $50, you’re spending $50. We allow numbers to confuse us and we develop irrational mindsets towards future purchases whenever we see price reductions. There’s a reason why almost everything in every store is on sale almost all of the time! A brand new TV that retails for $1,999, might be “on sale” for $1,499 which stimulates something inside the average consumer’s brain: buy this TV, save $500! No, silly-pants, you just SPENT $1500!! SPENT, SPENT, SPENT!

Saving isn’t spending, so what is it? Saving can be broken down into two main categories. The first is long-term savings which is money that you don’t really have a plan for besides the fact that it’s going to help you afford things (especially when you’re retired). The second form of saving is also known as “delayed spending”. This is when you save up for something in specific, whether it’s a new laptop or a house; in other words: this money is pre-spent in your mind, even though it may take you a few months to accumulate. It’s kinda like the opposite of having a credit card payment.

How do we fix the problem and reclaim the word “saving”? It honestly starts with the consumer; with us. We need to stop buying in to the marketing speech. Whenever you hear an advertisement claiming that you’ll save money this weekend at the mall, you need to audibly scoff. Explain this concept to children, so they can grow up understanding that spending is spending and saving is saving, and these things are completely separate topics of finance. We can still take advantage of sales, and price-reductions, but we should know that unless we are transferring money into savings accounts or investments we aren’t actually saving anything.

Having a high income doesn’t make you “rich”

One thing that drives me absolutely mental is the current American cultural definition of the word “rich”.

Back in the day if you were rich you owned cities, or huge areas of land, maybe an island or two. You at least had your own skyscraper or oil mine. Today, a family that has a gross income of $150,000 might be referred to as “rich”. Hardly Vanderbilt status.

I don’t have anything against the families that take home over six figures a year, considering that I’m part of one myself. But it does irk me when someone’s income level is brought up in conversation and people tend to determine whether they are rich or poor just by knowing what their salaries are.

Celebrities and athletes could be considered “rich” because of the significant paychecks they earn, but if they were truly rich there wouldn’t be such a high number of athletes going bankrupt (Why the Hell don’t cars/houses fall into lifestyle on GQ’s pie-chart?!).

If I’ve said it once, I’ve said it a million times: It isn’t how much you make, it’s how much you keep. If a family earning $200k also has a $200k lifestyle, then they aren’t rich. By definition “rich” means that you have an abundance of money or assets. It doesn’t mean you have a big paycheck. It doesn’t mean that you have a Mercedes or a McMansion. Lottery winners can be considered “rich” (until they hit the five year mark and end up filing Chapter 11).

In most instances spending and income are directly related to each other. The more money you make, the more you have to spend. For most people, this equates to mindless lifestyle inflation. More money? New car. Bigger house. Shopping without looking at price tags. Daily Starbucks trips. Although many rich people do all of these things, there’s one key thing they’re doing first: Investing at least some of their income. Either that, or they are earning so much money that their accounts continue to grow even with heavy, careless spending (usually this leads to bankruptcy once the source of income is removed).

I work in an industry where I occasionally brush shoulders with people who generally do the same work as me yet they make double or three times what I make. Wow, they must be rich!! While they have the potential and way more capital than I do, in most cases I’m keeping way more of my money every month that I put to work for me.

So why aren’t my co-workers saying that Johnny Moneyseed is rich? First of all I’m not rich, but I do have considerable amount of money saved, and magically that amount grows every month.  My co-workers know basically how much I earn from my job (military and government pay is public information), so they assume that my disposable income could never be enough to launch someone into the “rich” category. The concept of saving/investing is almost non-existent to so many people, so it’s hard for them to imagine the process of money growing passively.

The same people that tend to think that people who have high salaries are “rich” also confuse the concept of wanting and wanting to spend. What I mean by this is that, whenever someone is curious about my portfolio I’ll show them what it looks like. I swear it’s word-for-word the same exact reaction every single time, “Holy shit, I want that much money”. I feel like it’s pretty healthy to want a lot of money, but what these non-savers are really saying is: “I would love to take that much money to the mall with me”.

While I never want to be the chef-on-hand and latte-a-day kind of rich person, I will be rich someday. And it won’t be due to the fact that I make an incredible amount either (because I don’t). I just have foresight to tell me that saving money is the right thing to do. While my co-workers, and the better portion of Americans fail to plan ahead. It’s okay though, because you and I will be saving as much of our incomes as possible and becoming rich. It’s a way more reasonable plan than planning for a Millionaire’s salary or to win the damned lottery.

Our job now is to correct this social issue that’s bastardizing the word that describes what we should all be striving for. The next time you hear someone refer to someone else as being rich solely based on the fact that they are high income earners, stop the conversation and tell them: “Being rich isn’t about making a shit-ton of money. It’s about having a shit-ton of money.” Of course you can interpret the message in a curse-free manner, if that suits you. Eventually, we can change the meaning of the word “rich” or perhaps create a new word for high-income/high-spenders.

Financial illiteracy breeds financial idiocy

From the time you’re sucking your thumb in daycare until the time you receive your diploma from high school or college you’re provided with an education to make you a well-rounded and hirable person. A person who has the skillz to pay da billz skills to achieve success in the workforce. When you’re in school and you think to yourself, “Why do I need to know this crap?” It’s because the people that have come before you believe that this is the knowledge that will help you land a career.

You already know what the point of being successful in the workforce is: Money, Money, and more Money. Typically, the more well-educated you are, the more money you will make. Yet some of the highest earners in the country (and the world) are in debt. Mo money, mo problems, right? A family making $30k annually, who are in debt, might look at a family who brings in $500k annually, who are also in debt, and think “If we made that much there’s no way we would have debt”.

What this family doesn’t understand is how people are affected by lifestyle inflation. To bring those people up to speed, lifestyle inflation is basically the increase in your expensesas your income increases. This essentially negates any pay raises. People that are affected by lifestyle inflation can go from making $1,000/year to $1,000,000/year and still be in the same financial shape. These people will be followed by a life in debt, as most people’s spending habits are only accentuated with increases in income.

How do you combat lifestyle inflation in our consumer-driven economy? Is it possible? Is there hope for the younger generations?!

Financial education (whether self-taught or classroom-style) is the most effective way to avoid lifestyle inflation, and more importantly to learn how to build wealth. Would you go into a job interview without the appropriate skills for the job they’re hiring for? Hell no, sucka! So, why would you start earning an income without knowing how money actually works? I don’t care what you’ve heard, or what you’ve learned in the past. Personal finance can’t be learned in 5-minutes, because it’s a lifelong lesson and it’s the most important information that no one ever teaches you.

I don’t know what the exact reason was that I got into personal finance myself, but it’s something that I’ve been passionate about for a few years now and I can honestly say that I know almost nothing about the topic. I know enough to write about it, and share some of my experiences, but there is just so much to know and understand that I don’t think anyone could ever know it all. Including me. Not even the big finance gurus that you may have seen on TV know everything.

There was something that happened, though, when I started to care about my financial self-education. My debts started to disappear, and eventually I had almost $100,000 between investments and savings. That wouldn’t have happened if I had remained financially illiterate. I probably would have continued my trend of living paycheck to paycheck, buying luxury items, and eating/drinking the rest of my money away. Financial idiocy made me spend all of my money while I lived my life in-the-moment. “I’ll start saving for my future tomorrow”. Yeah right..

I wouldn’t expect anyone who just started caring about their finances to become immediately financially literate. Maybe “financially aware” would be a better term for those people who strive for financial literacy. The important thing is simply to want to strive for financial literacy, so you can truly understand where your money comes from, where it goes and more importantly how to make more of it.

I think it’s fair to say that most people look at financial awareness as the point where life is no longer fun. It’s the moment when you realize you have to make cutbacks, as you concede to a life of boring nothingness. I, on the other hand, look at all of the money that I’m saving by not going to the mall, by having paid off vehicles, by not having cable, as an investment for my future. The more money I save and invest when I’m younger, the more I’ll have to spend when I’m older. It’s that simple.

I’m going to get off my professorial soapbox and instead of teaching you directly how to become financially literate I will give you a few resources that will help you in your quest for the grail.. or financial knowledge, either way.

  • My blogroll — Check out all of these other blogs to learn a little bit about finances, tips on how to save money, how to invest, and how to generally improve your life. Some of these people are in the debt struggle. Some have retired early. Some have mastered their personal finances. They all offer their financial story from a different standpoint, and overall they have great stories to tell.
  • Your Money or Your Life — I can’t even explain how much this book has helped our family’s finances. You really think you know how money works, but you may realize that everything you’ve ever learned is wrong. Money equals time. Every hour of your life has a monetary value. This book changes lives!
  • Rich Dad, Poor Dad — Another amazing book that proves that high income earners aren’t always the smartest people when it comes to finances. The author tells the story about how he learned how money worked from a man, who from an outsiders perspective, looked poor, but was actually worth millions. He just knew how to make his money work for him. You can too.
  • Reddit r/personalfinance — This is where my desire for financial knowledge really took off. Sometimes I knew the answers to the questions that people were having, and sometimes I had questions that I couldn’t find answers for myself. If you’re not a fan of Reddit, you may be surprised by how friendly (most) people are in this community.
  • If you were a fan of this post, please check out this list of all of my previous posts. You may find the answers to some (or all) of your existing questions, or you may learn something you weren’t expecting to. Feel free to email me with any questions that may be too personal for the general public. Happy learning!

Winning the lottery vs. Good old fashioned hard work

I remember my parents playing the Powerball when I was younger. They wouldn’t buy tickets on a regular basis, only when the jackpot was like $75 billion. The ones that make the news. The ones that would drive millions of people to their local 7-eleven to try to get their hands on their Golden ticket, their opportunity to leave Middle classdom and take their rightful seat with the elite class.

There’s just something about a big jackpot that make you scream “I can’t let someone else get that money! That’s my money!” inside your head. As if the jackpots that are less than $10 million are pauper money.

This trend ain’t no passin’ craaaze either. People I work with talk about how they need to buy lottery tickets whenever the big ones come up. The radio and TV news probably talk about it as well, but I tend to rock out to Pandora or NPR in the car, and as you already know, I don’t have cable.

It makes me contemplate why people want to win the lottery at all. You’d probably think I was nuts if I told you that I didn’t want to win the lottery. Well, not only am I against buying lottery tickets, but I would prefer to build my wealth through hard-work, and financial cognition.

Most people would rather come into a large sum of money, because they “don’t have the ability” to build their own fortune. It’s an easy way to take responsibility of their financial house. They could pay off all of their debts (if they have any) and then they’d be able to buy everything they ever wanted.

They could buy everything they ever wanted.

What are the important things that need to be done if you ever win the lottery? Pay off your mortgage? Pay off your parents’ mortgages (if they have one)? Invest enough to live the rest of your life with a moderate lifestyle? Maybe donate the rest to charity? It all depends on what you value.

In some cases, winning tons of money can destroy people and drive them into depression.

When you go from being a financially-unenlightened consumer to a mega-millionaire, you skip the whole stage of learning how money works. It would be like giving a little kid $1,000. They’d probably ask to go to the toy store, and they’d blow all of their money on new toys. The result is that they’d have a bunch of new toys that aren’t special or unique to them, because the child has passed the point of fulfillment. They would also have no residual money.

Adults who come into money are a lot like children. Things start off great. They can go on shopping sprees, transplant their family into the most wealthy communities, pay cash for high-end vehicles, and basically anything else that they deem necessary for a successful person to have. They do the things that they think rich people would do, because they never learned the secret to becoming richthemselves. They fill their lives with the things they couldn’t afford when they were living at a modest income, or in some cases, paycheck-to-paycheck.

You know the expression “Money doesn’t buy happiness”. The same thing can be said about possessions as well. Humans have a psychological point of “maximum fulfillment” programmed into their brains. It’s the point where you have just enough. Anything past this point in either direction will make you feel a little less complete. So, having too much stuff can make you feel just as bad as not having enough.

Here’s a personal example from my more spendy days: 3 years ago I got a taste of how awesome board games could be, so we ran out and bought one. Extremely satisfied with our purchase, we played all night. The the next day we went to the store and bought another one and we played it just as much. Every so often we’d buy another game or two, and they would continuously get a fair amount of play.

But one day I got a pretty hefty bonus from work, and decided to buy 15 new games at once. We’ve maaaaybe played 2 or 3 of them. Ever. They now collect dust. They’re a constant reminder of wasteful spending and they bring me no joy whatsoever. My point is that I probably would have been happy buying all 15 of those games if it had happened over time, but instead they remain shelved, and I, a victim of over-fulfillment.

You don’t find depression or overspending as frequently with the millionaire next door type of person. If you’re unfamiliar with that term, a millionaire next door is a regular person who builds wealth off of a moderate income over time. These aren’t lottery winners, or corporate fat cats. They could be a postal worker, a computer technician, a nurse, a military member, etc. These are people who choose to use money as a tool rather than a way to keep up with the Joneses. They diligently tuck away money every month, and tend not to indulge themselves with the newest gadgets, clothes, or vehicles. Every purchase is calculated and Return on Investment is usually the determining factor.

When you figure out how money works, and you work hard for the money you earn, you develop a sense of responsibility and pride for what you have. Your few possessions will bring you joy, and you will subsequently take very good care of them to extend their lives. You will realize that you aren’t the car you drive, the clothes you wear or the things you have.

You are how you feel and more importantly you are how you spend. A good way to figure out what you care about is by looking at your financial transactions over an extended period of time. Do you spend a lot in the grocery category? You might be a foodie. If you put a significant amount of money into debt repayment or investing, then it’s pretty evident that you care about your future.

Most people would prefer the easy way out instead. Caring about money is too hard, waaaahh! And reducing wasteful spending isn’t possible, because most people don’t know what the term waste actually means. If you’re one of these people who would rather win the lottery than work hard, save and reduce waste to become financially independent, then I wish you luck, because no matter what you think, you’re going to need it.

Life isn’t always sugar and rainbows for all-of-a-sudden-millionaires. Almost half of lottery winners spend their entire winnings within the first five years and 40% of families claim to be unhappier after their big day. [Source] Winning the lottery can also be a great thing, though. Especially for those that have the financial know-how to make the money last (at least) a lifetime.

Next time the jackpot’s in the hundreds-of-millions, stop to think about the difference between being self-made and allowing a new found fortune to make you. You might realize that you actually wanna do this thing on your own, the old fashioned way. Save that dollar, it’s a great start to a new life!

**I am by no means saying that I wouldn’t take a winning lottery ticket, as I would in a heartbeat. I just wouldn’t play the lottery in general, so the odds aren’t ever in my favor. If you are a financially-reponsibile adult, and would just love to enter the passive-income phase of your life, then power to you.