What is the first thing you do when you get a promotion? Or only a raise?
What about special events? What is your first order of business when planning for holidays, a wedding, engagement, graduation…?
For many people a special event calls for spending money. A raise means you are required to buy a round. A home purchase requires a housewarming party. Holidays, weddings, and many other special events require gift giving, often times in two directions.
The knee jerk response is to spend money. Sometimes very large amounts of money.
Big events like weddings can be a major haul for the retailers and serious debt for the wedding couple, bridal party, and guests alike.
Christmas spending isn’t even limited to Christians in the Western world. Your religious faith will come with a list of spending that needs to happen at designated times of the year.
Then we have secular holidays. In the U.S. we have Labor Day, Memorial Day, Independence Day, Mother’s Day, Father’s Day, and on and on. And don’t forget to buy your sweetie something nice for Valentine’s Day. And an expensive meal out.
And isn’t there a rule somewhere requiring the family to have an annual vacation? It better be a good vacation, too, because the kids will compare at school and a tearful child after the first day of the school year is something you want to avoid.
No one is exempt from the relentless indoctrination of consumerism. It’s good for the economy, hence good for business and increases the taxes the government collects.
There are powerful interests interested in your pocketbook. If you don’t lay down the law you will end up deep in debt without a real plan for retirement. That is a prime recipe for unhappiness and burnout, along with great dissatisfaction with life. There has to be a better way.
Pay Yourself First
An old trick to limit spending is the pay-yourself-first model. The strategy is simple. Invest a certain percentage of all income that comes in before you get a chance to spend it. Put it into your retirement account or savings account away from the checkbook. Out of sight, out of mind.
There is only one problem with the pay-yourself-first model. In our modern world money is often out of sight all the time. We pay with a credit or debit card. If a credit card transaction clears your financial house must be in order. Right? A debit card can provide a hard stop when your account balance reaches zero, but the credit card allows you to dig a hole. A hole that can grow large fast. Before you know it you need mountain climbing gear just to get to sea level.
It is common for a household budget to have 10% go to the 401(k) and an even larger amount getting added to the credit card balance. Don’t worry if you max out a card. You can always get another one. At the end of the day your finances are still in disarray.
Banks have discovered the psychology of getting more of your money. They short-circuited the pay-yourself-first ideology and nearly all other solid plans for wealthy building.
If you want your life back and your finances firmly under your control you need to change the way you think. I can help with that.
Game Theory
How people think of money has to radically change. Money has become a battleground and investment bankers have become very good at understanding the psychology of money.
The idea of thrift from a century ago is gone. Ben Franklin would have had to rethink his strategy on thrift in today’s world.
The pain of spending is absent when you no longer see the supply of bills and coins in your pocket diminish. The gas gauge on the money you have is now hidden and it is easier than ever to run out of gas, I mean money. Modern banking has made thrift difficult to understand or quantify. The credit card balance is a vague number in most people’s minds; the checkbook balance, too, if you do most spending with a debit card. Convenience comes at a cost.
Enter game theory. Instead of focusing on mathematical models, we will focus on how our minds work when money is involved. There are two steps to game theory. The first involves getting out of debt. The second, on building a large liquid net worth.
How to Stop Spending Too Much
Thrift in the past was about putting coins in a piggy bank and eventually depositing the stash in a bank. This is a wonderful idea if we didn’t have so much debt.
Spending is a natural part of human psychology. We fear losing what we have if we don’t use it. Food can spoil. Your abode can be destroyed by weather. Insects can ruin your clothing. A thief in the night can take your stuff. We are evolved to have a use it or lose it mentality.
Modern society allows for the accumulation of large amounts of financial wealth. But it requires short circuiting our natural tendencies.
In martial arts you are taught to use the momentum of your opponent against them. You rarely force your opponent in a different direction. The risk of injury is great, and in the end the bigger and/or stronger guy tends to always win. The better strategy when your opponent throws a punch is to either guide his fist in a slightly different direction or to move to the side and pull your opponent in the direction he is already moving.
By using our natural tendencies we stand a better chance at success. A slight diversion of a punch can avoid a painful contact. But adding to your opponent’s momentum pulls him off balance, giving you the advantage.
The same applies with money. When you have debt you need to rewire your brain into thinking spending on debt payments is spending! It takes effort to build this mindset, but once it is in place you gain control over your finances. Instead of buying more stuff, along with all the costs of owning it, you now plow money into retiring debt.
Spending is an addiction. Taking the momentum of your natural inclinations and adding to that momentum in a slightly different direction is all it takes to turn the boat around. Spending on debt payments—by turning paying off debt into a game—you use the addiction to your advantage.
Eventually the debt is gone and you control your life and destiny. You now need to change the game from spending on debt payments to spending on wealth accumulation.
Spend Yourself Rich
Now that you’ve learned the skill of redirecting spending habits into something that serves you rather than enslaves you, it is time to build something big.
Once debt is paid off you need something new to spend on or you will still always be broke. Worse, old spending habits could put you back into debt.
It has to be fun. It has to be a game. An addicting game. Spending habits need to be satisfied so you need something new to spend on. Might I suggest an index fund?
Index funds are the easiest way to grow wealth. We want something automatic to assuage our desire to spend while growing our stash. Individual stocks require more work than most people have time for or even want to do. Broad-based index funds are the obvious solution.
Warren Buffett is a big fan of index funds, so you are in good company. My friend, Jim Collins, published what might be the best book ever on investing in index funds. It is a solid strategy. One I have talked about often in these pages.
The new game once debt is retired is to spend on index fund investments. The best way to turn this into a game is to ignore the account balance and instead focus on the number of shares you own.
This becomes an addiction fast. The first goal is to get to 100 shares. As you approach the goal you stretch your spending in new shares to reach your goal faster. Instead of pushing reluctantly into your investment vehicle, you are pulled into spending more on building your wealth machine.
And then the dividends start giving you a bigger and bigger free push by providing new shares.
Once you train your brain to accept spending on index fund shares you have the negative natural tendencies of spending what you have and more beaten. Each new goal pulls you into growing your net worth more while making it easier to say no to wasteful spending that provides small amounts of value to you, if it provides any lasting value at all.
Play the Game
Denying yourself rarely works. Spending is a desire everyone has. It’s natural!
By turning negative spending behaviors into a game with only positive results is the only way to win. Turning debt elimination into a game is the starting point for many. Design the game in a way that appeals to you. I didn’t tell you which debt to retire first. Do what works for you; what you will stick to! It has to be fun. It has to be a game. It must satiate spending desires for more stuff.
Once debt is in the history books it is time to turn the process into another game, this time one that serves you. No going back and re-digging the hole. This time the game you play will be with you the rest of your life. It is fun! You grow your net worth by accumulating shares in index funds. Setting goals for shares owned is the new game. Create the addiction of building a mountain of shares.
Once again I am not going to tell you how to design your game. Design a game that is addicting to you. You can always change the rules as you play! You are not wed to one strategy. If, as time moves along and your wealth grows, you discover your original plan is no longer motivating, change the rules so the game becomes engaging again.
If you don’t know where to start with index fund investing, consider the S&P 500 index fund at Vanguard or Fidelity. If you prefer buying shares that look more like an individual stock, consider buying shares in SPY.
No matter what, make spending on the right things (debt reduction and then wealth accumulation) a game. That way you will never quit. Life is better (and more fun) that way.
