After my obligatory fake show of offence at my car not being "nice," I gave them my basic philosophy on gathering wealth.
I told them that my car served its mission, an inexpensive mode of transport that gets me around the city. After receiving some blank looks about a car's "mission," I expanded my reasoning. Before I buy anything, I sit down and work out what the mission of the purchase is. Finding out the mission of the purchase frames what the purchase is for and fleshes out the reasons for why the purchase is needed. The concept of getting a reasoning behind why a purchase is needed is really an alien thought to most of the young guys. The only reason they need is "I want it." So, I needed to expand on my philosophy.
Earned money represents life. It is earned by the sacrifice of my time, my life, to another party, that compensates me with money. Thus, money equals life. I consider my life valuable, therefore money is valuable. Therefore, any wasted money is, in fact, wasted life. So, every purchase needs to be needed, and have a clear mission. Finding the mission is important, because that will determine how much of something is needed.
This explanation was good enough for most of the guys to shake their heads and walk away. For them, money is simply something that is spent. For the two guys that have been to my house, they wanted more. So, I set forth my philosophy on gathering wealth. It is a very simple philosophy:
- Spend less money than you make
- Create a budget and stick to it
- Savings are the first item in the budget, and is paid out FIRST. Any funds not spent at the end of the month are transferred to savings.
- An emergency fund of at least 3 months salary must be maintained at all times.
- Have the proper insurance.
- Map out major purchases so that the mission and reasons for purchase is clear and well defined.
- Recognize the difference between "Want" and "Need"
- Never make a purchase with only the Want defined.
- When making purchases, Quality of the product is the highest priority
The guys had a very hard time with the first few. They could understand that you should spend less money than you make, but why create a budget? Why are savings paid out first? Why have an emergency fund??
First, a budget is a map to how you spend your money. Without a budget, it is WAY too easy to simply spend money willy nilly. If you spend willy nilly, you never know if you will have money to pay your bills. How can you know what you can afford if you don't know how much you are spending right now??
A budget tells you how much money goes out and how much you should be spending. You will, therefore, know how much money you can additionally spend.
"But," they say, "you can't have any fun on a budget."
"Why?" I reply. "I have a budget, and I go out, go on long crazy vacations. I have fun. I simply add fun in to my budget."
The lack of "fun" is always what comes up in discussions about budgets. Why? Because the main reason people get on a budget in the first place is that their spending is so completely out of whack that they are in desperate straights. If you are in desperate straights, you don't get to have any fun, because there is no money for fun. If you get ahead of your spending, and you are not in desperate straights, you can easily add fun in to the budget.
Why are savings paid out first? If savings are put out first they are funds that are not used for anything else. They must be treated as a bill or a payment, because otherwise, "fun" and other stuff would suck up those funds very quickly. Why put any left over funds in to savings? Because it grows your savings. Saving money for when you need it is extremely important. You don't know what tomorrow will bring. You need to have a robust savings, otherwise, when the unexpected occurs, you will not be prepared. Also, savings earn money. An easy way to make more money is through compounded interest.
Why do I need an emergency fund? Emergencies happen. Your car needs a repair. Someone gets sick. Someone gets injured. The house has a problem. You have to relocate. You loose your job. The emergency fund is there to take care of things like these so that you don't have to go in to your savings.
Insurance. Nobody likes to buy insurance. Unless you need it, insurance seems to be a useless expense. Many young guys don't have the proper insurance. Insurance is absolutely essential. If something happens, insurance saves you ass. The biggest threat to your wealth is your health. Health care is very expensive. Not only that, but if you can't work, you loose income as you conveless. You may not have income, but you are still spending money. The proper insurance replaces your income, and pays for your medical care. It may be an annoying cost every month, but it is absolutely necessary.
I like to have a defined mission for my purchases. The mission is defined as the primary use for the purchase. My car is a good example. The major need for my car is to take me around the city for less than 20 mile runs. If this is the main purpose, what is the need for a large luxury car? It would use too much gas, and I wouldn't be in it long enough to take advantage of the luxury features... Except for maybe heated seats... If I would be traveling more miles a day, or if I had to frequently make long trips, a luxury car makes more sense, but as a commuter car? No.
The quality of the purchase is very important. Things that are made with good quality last longer, and breakdown less frequently. One of the things that guides my software development quality control is the phrase: "It is better to have nothing at all than something that sucks." This is absolutely true. Things that suck simply frustrate your life. Spend a little more on quality, and you will never regret it.