Saving vs Spending
Do you want to be wealthy or appear to be wealthy? Do your actions around savings and spending reflect your answer?
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Do you want to be wealthy or appear to be wealthy?
Do your actions around savings and spending reflect your answer?
Remember, being a millionaire and spending a million dollars are exactly opposite. The path to financial independence is paved by living within one's means so that a significant amount of income can be saved and invested. No matter your income, net worth builds when accumulating appreciating assets over an extended period of time rather than spending on depreciating assets. Its simple math and math wins.

But if it's so simple, why don't we do it? For much the same reason that we don't diet and exercise as much as we know that we should - Our culture's unwavering desire and pressure to consume and a perceived lack of time.  
The cash flow discussion is a foundational element of a sound financial plan. We break it down as follows:

  1. Create and commit to a vision for the future – Taking the time to visualize what life would be like after achieving financial freedom establishes a focal point. When faced with a spending decision or any decision that may impact your finances, ask yourself if your intended course of action gets you closer or farther from your vision. For example, you need a new car – do you buy the $50,000 current year model or the three year old model at $30,000 and invest the difference? Is the prestige of new car ownership worth forgoing the compounding returns of $20,000? Most millionaires have never purchased a brand new vehicle – that's how they became millionaires.
  2. Honestly assess what happens if you don't save – We are all extremely motivated by avoiding loss. It would be wonderful if the hope of a clear vision for the future we aspire to was enough to get us to change spending habits and commit to a plan, but it is not. We must examine what happens if we don't. Understand that you cannot and will not work and earn forever. There will come a time when you will need to depend on accumulated assets to maintain a desired lifestyle and your spending activity now dramatically impacts that equation. Quantifying the income gap created by not saving today can be a powerful trigger in changing behavior.
  3. Pay attention and budget – Do you know where all of your money goes each week/month/year? Shouldn't you? Do you have a system for reviewing how you are doing across a variety of spending categories? Most families that have a high net worth do, families that, even when high earners, have not accumulated wealth tend not to have a defined budgeting strategy. This does not have to be an arduous process to include pouring over line item entries on a bank or credit card statement. Simply being aware in the midst of our hectic lives is the first step, then we must ask ourselves if our spending trends in any one category align with our stated goal of becoming financially independent. My preferred budgeting strategy is simple – save first (automatically), cover fixed expenses and obligations, spend the rest stress free without going into debt. If 'the rest' isn't providing the lifestyle I want I need to make more money or reevaluate where my money is going, not pay for it later.
  4. Automate savings – If 15% of your paycheck is divided amongst a company retirement plan, health savings account, college savings accounts, and investments and then you keep your cost of living within the remaining 85%, you will accumulate wealth, period. If you reverse the order, spending down your paycheck and then determining how much you can save with what is left, you've made things so much harder on yourself. Forcing yourself to make a conscious decision to save every month is exhausting, having it done automatically expends no mental energy each month.
  5. Start right now – We give our future selves far too much credit for what they will be able to accomplish in catching up on the savings front. First, our future selves are still us – if we kick this can down the road today, what evidence is there to suggest that we will not do the same thing next year (see the United States Congress). Second, starting now, even with a smaller amount, is better than starting later with significantly higher savings. Compound interest's most important variable is time. If you saved 3% last year, save 4% this year, up it again in 2019 - do something, anything to get closer to financial freedom. Your future self will thank you.
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