This article is the first part of a four part series, discussing 4 characteristics that accumulators of wealth share.
You’ve most likely noticed that those people who seem to live in the gym are the fittest people! And you probably think, what the hell are you doing here? You’re already so freaking fit now run along and stop hugging MY squat rack. But they only got fit because of their discipline. The same concept applies to wealth accumulation: If you have the discipline to budget, and control your expenses, your net worth will surely increase!
My favorite personal finance book called The Millionaire Next Door, shows that millionaires spend more time budgeting and planning than any other demographic. If you wish to be rich (i.e. grow your net worth) and retain it, you must be able to answer YES to these 4 questions:
Question 1: Do you know how much you spend on food, clothing, and shelter per year?
I’ve gotta admit I can’t *categorically* answer yes to this question because sometimes I get busy or too lazy to plan ahead and end up spending more than I should on take-out. However, I do have a good idea. If you can say exactly how much you spend on these categories each month, show me your ways!
Budgeting and tracking your consumption, especially with regards to these three items I call “basics”- food, clothing and shelter (in the form of rent, utilities, mortgage, and home insurance) is very important as they tend to take up a majority of the average person’s income. Controlling these expenses will greatly improve your chances of achieving your goal of financial independence. If you cannot monitor how much you spend on basics,
Consumption will control you, rather than you controlling consumption.
Let me explain:
Scenario #1: Blair’s Story
Consider Blair, she makes $48,000 (after tax) per year. However, she has poor financial habits.
Food: Instead of planning ahead and taking food to work, Blair eats out almost every day, although she spends money buying groceries every month. Depending on where she decides to eat, the cost varies. Range: $200-$550
Clothing: Blair loves shopping and is an impulse buyer. She regularly goes to Zara, J. Crew, Banana Republic etc. whenever she gets the chance. This shopping habit makes it hard to track the amount spent on clothes every month. Range: $0-$1,200
Shelter: Blair decides to live alone in a very nice one bedroom condo in the heart of Toronto which she pays $1,200 for every month. After all, she can afford it (or so she thinks).
Result: Cost of basics = $1,400- $2,750
(Debt)/Savings: ($150) – $1,130
Blair’s lack of knowledge about how much she spends on her basics is problematic. She spends anywhere from 35%- 69% of income on basics alone! Because Blair is not able to track how much she has to pay for these things, she is not able to plan ahead for saving/ investing and other financial goals. Also, since she has no idea how much she would spend each month, she is constantly worrying about money; in other words she is not financially secure. This dictates her lifestyle: For example, although she really wants to go for The Weeknd’s concert she can’t go because she’s already spent all her money, or worse still, she dips her hand in the money saved towards her retirement to pay for the concert tickets.
Let’s assume her other monthly expenses such as transportation, student debt payment, utilities etc cost 30% of her income. This leaves her with savings between $250- $1,130 every month. In December, she actually has to borrow money to sustain her lifestyle!
Scenario #2: Serena’s Story
Serena makes $36,000 per year however she is disciplined and is working towards her financial independence.
Food: Serena is disciplined and makes sure she plans ahead, taking her own lunch and snacks to work. This way she only spends money on groceries every month. Range: $250
Clothes: Serena is not an impulse shopper but a savvy spender and thoroughly plans her shopping trips to ensure she gets the best value for money. She has a monthly clothing limit of $100, but finds ways to reduce this so she can save more money! Range: $0-$100
Shelter: Serena lives with 3 roommates and pays $400 for rent. This means she can put more money away towards savings and other financial goals.
Result: Cost of basics = $650 – $750
Savings: $1,350 – $1,450
As a result of careful planning Serena can have a stable lifestyle and not worry about her finances. She lives within her budget, and never worries about if she would have to borrow to maintain her lifestyle. In other words, she is financially secure.
Although, Blair makes $12,000 more than Serena, Blair is not financially stable and she is constantly worried about the future. Serena is able to tuck away way more money than Blair each month, saving $7,350 more than Blair each year ($17,010 compared to Blair’s savings of $9,660). Overtime this adds up (especially with compounding), and Serena finds herself amassing a higher net worth than Blair, although Blair has an income much higher than Serena’s.
This shows the importance of knowing how much you spend on your basics: food, clothing and shelter. If you are not able to figure this out, your money will control you rather than you controlling it! Just ask Blair!
For tips on how to build a budget that works for you. Read my article:Build A Budget That Works [With Free Budget Template]
Watch out for Part 2 of If You Can Answer Yes to These 4 Questions You Will Grow Your Net Worth!