It’s the immutable law of finance: if you spend more than you earn, you’ll find yourself in debt. The great thing about this law is that it applies the other way around too: if you spend less than you earn, you’ll dig yourself out of debt. Simple! And yet, in practice, the spending habits that allow us to build wealth are easier said than done.
Why is this?
Because the obstacle in the path of financial independence and security is a truly formidable adversary: ourselves.
More specifically, our emotions. Debt problems are emotional. If we were rational about our spending, far fewer people would be crippled with debt. With this adversary in mind, let’s look at the spending habits that could make or break you.
Spending Habits That Break: Retail Therapy
We’ve all done it: gone out shopping to make ourselves feel better about the aspects of our lives we perceive as lacking. Feeling a little depressed? A new outfit or three will make you feel better. Bored? A new design theme for the home will inspire you. Celebrating something? An expensive bottle of wine and/or an extravagant dinner are in order. In other words: spend money.
In all of this lies a glaring irony: allowing our emotions to control our spending habits just makes things worse because we dig ourselves into deeper debt. This, in turn, drives us to greater heights of despair and frustration, which fuels the need for more retail therapy. It’s a vicious cycle.
Emotional spending - and the endorphin rush we get from acquiring new stuff - is one of the most destructive spending habits there is and it will break you if you don’t learn to rein it in.
How can we change?
- Spend money on the things you need, not the things you want.
- Save up for big-ticket items, rather than buy on credit.
- Plan your purchases rather than buy in the moment. Instant gratification is a costly indulgence.
What all of this requires is a solid plan, which brings us to the fundamental financial habit that can “make you,” as it made some of the richest and most successful people on the planet.
Spending Habits That Make: Having a Plan
People who find themselves in crippling debt have long ceased to keep any kind of record of their earnings, spending, and savings. There is no budget, no short or long-term financial plan, and no strategy for improving their situation. Month after month, it’s the same story: money in, more money out, deeper debt. Another lap on the rat race.
Changing your circumstance, no matter how bad, requires you to stop what you’re doing, sit down with pen and paper and make a plan for a different future:
- What do you spend on essentials every month? Rent, electricity, food, petrol, medical, etc.
- What money do you have left over and how should you partition this to allow you to dig yourself out of debt and build wealth?
- How you can tighten your belt to save more?
In addition to creating a strict budget, you should put in place plans for foreseen and unforeseen expenses, which means signing up for medical aid, insurance, and a retirement plan. It just takes one accident or a medical crisis to land you in debt that could take you several years to pay off.
Ultimately, debt is not the problem: it’s a symptom of bad spending habits and of not having any kind of financial plans in place. Of course, there are some debts we can’t avoid: student loans, mortgages, and buying a car, for example. However, developing smart, rational spending habits and putting together a solid financial plan will allow you to pay these debts off quicker and then build the wealth you need to do the things you want.