Tuesday, 11th November 2008

The practical way to riches, part 3

Written by George Traganidas Topics: Habits, Personal Finance

In the last two posts we talked about the first two habits on the practical way to riches. These two habits are putting aside money to invest and save. This first will help you grow your wealth and the second will help you in a case of emergency. We need to plan well and get organized if we want to get rich.

Today’s post is about the third habit. The first two habits talked about managing the money that is flowing in. Now it is time to monitor the money that is flowing out. This is a very painful topic for many people and also an eye opener. If you do not get a good handle on this habit, then nothing else matters. You are moving away from riches fast.

Habit 3 – Control Expenses

We need to know where we spend money. The most important thing is that we should spend less than what we earn. The real question though is how much less? Here there are a lot of schools of thought. People recommend that you should cut down on everything and live a very simple life. This will save you so much money. Others recommend to spend less than what you earn, but at the same time you should enjoy the little joys of life.

Let’s start from the beginning. The first step is to take an honest hard look at your expenses today. See where your money is going today and do some average calculations. From the last two posts we saw that we need to keep money for savings and for investments. So, here is the plan.

From your income every month you put aside the money for investments. Then you put aside the money for savings. What is left is the money that you have to spend this month. This money is to pay your bills, pay your loans/mortgages, eat, buy clothes, have fun, etc. You must make 100% sure that all your expenses can be covered by this amount of money. If not, then you need to cut back on things. If you spend more than this amount it means that you either not keep as much money for investments or you do not save enough. Not a good idea.

I like a lot the view of Robert Kiyosaki (author of Rich Dad, Poor Dad) on this subject. He recommends that you should not try to save every pound and deny the joys of life to live below your means. You should make an effort to expand your means and then enjoy everything. So for example, let’s say you want to go on an expensive cruise around the Greek islands that costs £1,500. According to your calculations of what you can afford at this moment (income-invest-save=spend money), it is something that can not be done at the moment. This is fine. How can you expand your means to afford this? You need to generate more income. Therefore, instead of giving up on your dream, you spend the next few months generating the extra income. Once you have done this and your calculations show you can afford the trip, you go. Therefore, you do not have to deny anything you like in life. You just have to find out how to expand your means to achieve this.

Expenses are what will leak your wealth away. You need to get a good handle on them and manage them well. You do not have to give up the pleasures of life, but you need to be aware of where your money is going. As Warren Buffett said after he became the richest person in the world, “If you want to know why I passed Bill Gates, it’s because I spend less. It’s a tribute to thriftiness.”

Next week I will tell you the fourth habit.

Follow the practical way,
George

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