Do you want to be a millionaire? Or do you just want to look like a millionaire? According to the world’s richest, the hardest part of building wealth is accumulating that first million. It’s a milestone for a reason.
The biggest obstacle to this really comes down to mindset. A recent Credit Suisse World Wealth Report calculated that millionaires represent 8% of the U.S. population, with 1.7 million new millionaires added just last year. Of these, best-selling author of The Millionaire Next Door Thomas J. Stanley said that 80% are first-generation rich. They built themselves to wealth; they didn’t inherit it.
Oftentimes, it’s our spending habits that undermine our progress towards that goal of financial freedom. We mistake the trappings of wealth for what that wealth represents and, when we find ourselves strapped for cash despite earning more and more, we find excuses to explain why wealth continues to escape us. The hard truth is you have to be intentional. Building wealth means consciously focusing your expenses on what really fulfills you and investing the rest.
The key to living well lies in conscious spending
One of the easiest traps to fall into is the belief that earning a high salary will automatically lead to accumulated wealth. It won’t. Inflation, or the increase in prices for goods and services, eats away at the value of your dollar over time. Lifestyle creep is another real phenomenon, where you start gradually increasing your spending as your income increases. In order to accumulate wealth, you need to save and invest a portion of it in a wealth-building activity – not spend it.
But that’s not to say that you can only build wealth by living a penny-pincher lifestyle. You can certainly cut your expenses to the bare minimum, earn a high salary and invest most of your income, and you will probably build your wealth relatively quickly. However, saving everything for the future may not work for everyone. It’s possible to live a fulfilling life and still build wealth.
The key is conscious spending.
Conscious spending is about limiting willful spending to the things you love, while cutting expenses on the things you don’t. Think of it as maximizing your happiness per dollar. Be intentional with your money and spend guilt-free when the occasion calls for it.
How conscious spending ties in with saving
Spending intentionally allows you to benefit from your journey towards financial freedom without feeling deprived. After all, you’ve put in all this hard work, so why not enjoy some of the fruits of your labor?
The important emphasis is on conscious and honest evaluation, however. If you decide that everything under the sun makes you 100% and long-lastingly happy, then spending consciously isn’t going to save you a dime – and you’re probably lying to yourself. No one is passionate about everything all the time, so realistically speaking, you should find spending categories that don’t fulfill you rather easily. Cut those expenses and you’ll be able to better balance your budget.
For example, say you’re thinking about buying a new car. The car loan payments will cost you roughly $800 a month. If you bring home $5,000 every month, you might think that’s an acceptable expense. After all, you’d be spending less than 20% of your monthly budget, which is near the 15% mark recommended by financial experts.
But consider this from a conscious standpoint. You’re spending almost 20% of your budget on a car, an asset that depreciates over time and requires regular maintenance and servicing. On the other hand, you also have the option of buying a cheaper car for roughly $400. You could save nearly 10% of your monthly budget by choosing Option B. So analyze why you want to get that expensive car. Are you passionate about cars? Do you care how others will perceive you? Are you trying to convey a specific image by driving a luxury vehicle?
If you’re not a car lover pursuing your passion, you’ll need to weigh whether your purchase is worth the extra 10% of your monthly income. You could spend it on something else that really makes you happy, or you could save and invest it towards your dream of being financially free. Unless you’re already raking in too much money to count, your spending will always be limited by a budget large or small. It’s vital to understand that spending your income on one thing means not being able to spend on others. Or, you could put that money to work for you just like the rich.
How to be a savvy shopper while spending consciously
Another way to live comfortably while still building wealth is to shop selectively. You’ve chosen to spend consciously, thereby rebalancing your budget, but you can also save by taking advantage of smart habits and program perks to spend even less.
Many wealthy people actually practice frugality as a principal financial habit, allowing them to save and invest a much larger percentage of their incomes than the average person. This, in turn, helps them maintain financial independence.
According to the National Study of Millionaires, 81% of individuals with a net worth over $1 million spend less than $600 a month on groceries. In fact, in one survey, people with a net worth of $5 million or more preferentially shopped at big-box stores, like Walmart, Costco and Target.
By buying necessary items like food, everyday clothing basics and personal products in bulk and on sale, the wealthy can spend less overall on their regular budget items. It may cost more to buy in advance because the cost of those individual items aren’t spread over time, but the per item cost is often significantly lower. There’s even a name for the upfront cost of buying in bulk or advance: the poor man’s tax.
In addition to saving through bulk and discount shopping, you can also reduce costs on your splurges by taking advantage of perks and reward programs. Credit cards often offer points and miles that can be used to pay a plane ticket or hotel stay, and some brand loyalty programs send out exclusive discounts to frequent shoppers. One recent article by the New York Times showcased a retired couple who returned to part-time work at a hotel chain and airline, working just 15 hours a week each, in order to enjoy heavily-discounted trips to Europe that would otherwise be unaffordable.
Bottom line
Building wealth for a financially-free lifestyle doesn’t mean you have to skimp on living in the here and now. By spending consciously, you can enjoy the things you love while cutting down on the things you don’t. Shop like the wealthy and take advantage of bulk discounts and program perks, and where you feel most passionate, splurge properly. Make sure your “love it” expenses are good quality, useful and have staying power – thus maximizing the value of each dollar spent – and that way you save where it counts the most.
