Trouble Sticking to Your Spending Plan? Try This

How Making Things Hard for Yourself Helps Keep Your Spending on Track

When it comes to mastering your finances, nearly everyone’s biggest challenge is sticking to your spending plan. Almost anywhere you look or listen, there is messaging designed to convince you to part with your money. How in the world are you going to mange your spending to be consistent with your financial goals?

There is a lot that goes into your spending habits, and much of it is psychological – hence the growing prevalence of research into behavioral finance, as recently seen with the awarding of this year’s Nobel Price in Economics to University of Chicago economist Richard Thaler for his work in this area.

Long-term, successfully spending in line with your plan requires a shift in your mindset and your habits. It’s not always something that can happen quickly. In the short-term, however, there are systems you can put in place to help you stick to your spending plan until you’ve developed the habits to keep your spending on auto-pilot.

One of the most effective short-term solutions is using artificial restraints. (more…)

The Best Way to Save More Money

Except from The Modern Day Millionaire

This week’s blog post is an excerpt from The Modern Day Millionaire, my guidebook on setting and achieving your financial goals in the modern, social-media age.

A Thin Blue LineYou can pick up your copy from Amazon, Barnes & Noble, and most other major retailers.

A Thin Blue Line

Save More Money

How to save more money? That is the question. It doesn’t take a nuclear physicist to realize that is a good idea. The difficulty lies in the details of making it happen.

Your first thought may be that you should focus on cutting expenses. Our culture has a history dating back to the Great Depression of holding frugality in high esteem. Sayings like “tightening your belt” and “waste not, want not” embody this mindset.

Spending modestly is often viewed as financial priority number one. For most people, this notion is primarily inherited from their parents, who often learned it from their parents, who may have actually lived through the Great Depression. All of these folks have carried that mindset of scarcity and frugality with them throughout their lives. These ideas get passed on through generations, not necessarily because they’re the most effective financial practices, but, rather, because of generational inertia.

Popular personal finance gurus also promote this mindset when they go on and on about how your profligate spending habits will ruin your financial future. Authors and speakers like Dave Ramsey, Suze Orman, and David Bach (author of The Automatic Millionaire, a personal finance guide to becoming a millionaire simply by cutting out $4 lattes) extol the virtues of frugality to their thousands of followers.

Don’t get me wrong, minimizing wasteful spending does rapidly accelerate your savings. It’s just not nearly as powerful as that other, frequently overlooked, savings lever: income.

Think about it: Would you rather save an extra $500 per month by spending $500 less or by earning $500 more?

The answer is obvious, right? All else being equal, spending $500 less per month would require a significant cut back in your lifestyle. You spend money on things you enjoy, so cutting back your spending means less of what you enjoy. Increasing your income allows you to save more without having to cut back spending. Yet 99% of popular personal finance advice focuses almost exclusively on the expense lever.

Why? Well, for one, cutting expenses is much easier to conceptualize than increasing one’s income.

Let’s say I want to save $200 more per month. If I do this by earning $200 more per month, I create difficult questions, the answers to which will be very individualized. Questions like:

Where will I earn that money?

Can I get a part time job?

Should I start a side business?

If I do, what product or service would I sell?

Where do I even begin? etc.

Keep in mind, I’ll need to earn more than $200 to actually save $200 because of taxes, but the same logic applies.

On the other hand, if you want to focus on the expense lever, the questions are much easier. Even if $200 is a huge cut to your budget, you understand easily enough that the process entails identifying $200 of expenses that you can cut out of your regular spending. The plan is simply to identify expenses you can reduce.

On top of that, once you do identify unnecessary expenses, you can see the impact immediately. If you decide to save $200 by canceling your gym membership and lowering your cable package, after two quick phone calls, you are done. Reducing expenses provides quick results. No need to worry about taking an extra job, sacrificing nights and weekends to build a business, or learning to negotiate a raise – things you’d need to do to make more money. We all know how much our society loves a good quick fix, so expense-focused planning is easy to “sell.”

Budgeting advice is also popular because it’s universal. If I’m someone like Suze Orman, and have a financial advice radio or TV show, I can easily spout advice on cutting expenses that applies to anyone: bring your lunch, use coupons, don’t buy new cars, etc. This advice draws the largest audience because it’s so generic and universal. I’m going to draw a larger audience – and more money from advertisers – if I focus on advice that won’t be irrelevant to large segments of the population.

If, instead, I focus as a financial personality on increasing income, I run into marketing problems. Take the advice: “Earn $500 more per month by negotiating a raise.” This advice doesn’t apply to self-employed business owners; they earn more by growing their business or improving its profitability. It doesn’t apply to commissioned salespeople; they earn more by selling more. Even though advice to increase your income may be more beneficial in the long-term, compared to reducing expenses, advice about increasing income will simply not appeal to as broad an audience or draw as large a following.

Or take the advice: “Earn $500 more each month by starting an online business.” Again, this only applies to a subset of people, in this case, entrepreneurial-minded individuals. If I’m a big shot financial guru with my own weekly TV show, I want my advice to speak to everyone, so I can cash those big-time advertiser checks.

Although it may seem like it from reading financial advice websites and magazines, cutting expenses is not the be-all-end-all of financial advice. It’s just that expense-cutting advice speaks to a larger cross section of potential consumers.

More Income is Not a License to Spend Freely

I’m not suggesting you can spend money indiscriminately and everything will be fine because you can simply earn more money. There are substantial benefits to be gained from minimizing wasteful spending, and, a financial plan would not be complete without making that effort. I’m saying to cut back on wasteful spending after getting your “income lever” moving. Make increasing your income first priority for improving your financial plan.

Making more money is not a cure-all fix for every financial problem, however. As I mentioned earlier, it’s a more complicated process than cutting expenses. It also has its own drawbacks.

One such issue is the significantly longer lead time before your efforts produce meaningful results. Again, this is a major reason that a focus on “budgeting” is the more popular financial counsel: cutting expenses as part of a budget generates measurable results immediately. Tomorrow you can simply skip going out for lunch and BAM, you’ve saved money, whereas working to get a raise or promotion – or on landing that big client – may take months of sustained effort before showing results.

Now, nobody likes a good “quick fix” more than me, but, as is the case with most quick fixes, a long-term effort to increase your income will be more beneficial than the quick fix of cutting your budget. This requires thought up front in order to develop a plan for increasing your income, followed by a determined and sustained effort to carry out that plan.

More involved than reducing expenses for sure, but ultimately much more rewarding.

Making more money improves your financial situation exponentially – and without having to give up the simple joys of Starbucks, Chipotle, or your gym membership. In fact, your gym membership probably saves you money in the long run by keeping your body from atrophying into a decaying husk that requires thousands of dollars in medical bills each year to keep functioning – assuming, of course, you actually use it.

That’s why, when it comes to the Modern Day Millionaire approach, the focus is on increasing income first before worrying about cutting expenses.

Want to hear more? Join The Modern Day Millionaire newsletter for weekly emails when new blog posts are up, news about current events and how they impact your finances, and special offers. I promise, no spam ever and you can opt out any time!

Warren Buffett’s 3-Step Plan to Success

Advice for Your Money from The Oracle of Omaha

Warren Buffett, considered by many to be the most successful investor of our modern world, is also famous for his conveniently packaged words of wisdom. One of my favorites of his many quotes is this:

“The difference between successful people and very successful people is that very successful people say no to almost everything.”

This seems contradictory to how we commonly conceptualize highly successful people. We often think that the more successful you are, the more “stuff” you are doing, the more tasks you accomplish, the more projects you can tackle. But, in reality, the most successful people are those who focus almost exclusively on their highest priorities, often by ignoring other, tempting, but ultimately less valuable activities.

Here’s a quote from Steve Jobs, another famously focused person, echoing that message:

“People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully. I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1,000 things.”

What Does This Mean for Your Money?

Personal finance is ultimately about choosing between competing priorities. There is effectively no limit to the amount of financial pursuits we can undertake. It’s certainly not a lack of stuff on which to spend money that keeps us from having every single thing we want; the limit comes from how much money we have available to spend. (more…)

“It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy.”

George Horace Lorimer

What My Abs Mean For Your Money

"Walking" Your Way to Financial Success

Only once in my life have I possessed anything resembling six-pack abs. I’ve always been relatively fit: playing sports for as long as I can remember, exercising regularly, and, from my mid-20s, eating healthily. But it wasn’t until I was 31 that you might have seen me without a shirt and thought to yourself, “That guy has a six-pack.” (Granted, we’re not talking fitness-model abs here, but, still, I was proud of them.)

I’m sure the first question in your mind is, “What was your secret?” Well, if you don’t know me, your first question may be, “Why is he talking about his abs in a blog on financial advice?” Don’t worry: both questions will be answered shortly.

I bring up six-pack abs because the secret to my abs was really the same concept I’ve used to achieve everything of significant value in my life – professional, personal, financial, and otherwise.

This idea is something you can easily use to reach your own goals as well, in all areas of your life. (more…)

Projecting Your Savings

See where you're headed, quickly

Ever wonder how much money that monthly savings of yours will be in the future?

Here’s a three-second financial tip to find out.

Do you ever struggle with sticking to a savings plan? Or try to cut an expense out of your budget then relapse after a few weeks? Frequently this happens because the future seems so far off and saving money now for the future can feel like throwing money into a hole – a hole that you hope money will come back out of down the road, but a hole nonetheless.

One thing that can help you stay motivated is actually estimating how much money you’ll have in the future from what you’re saving today. This makes the future seem more tangible. You can actually see how big of an impact increasing your savings a little bit today can have. (more…)

Watch Out: IRS Phishing Scams

Beware of suspicious phone calls

IRS phishing scammers are also on the prowl, even though we’re still months away from tax filing season.

If you’re like most people, the thought of the IRS coming after you scares the bejeesus out of you. Here you are, a lonely little taxpayer, with the full force of the IRS and it’s estimated $11 billion annual budget coming after you.

You hear about people going to jail for failure to pay taxes – which is possible…but requires much more than just missing some payments or miscalculating taxes owed – and it’s entirely reasonable to drop everything and respond when the big bad IRS comes a calling.

This is just what many scam artists count on when they reach out to you under the guise of the IRS, in fact. (more…)

Pokemon Go and Your Money

Lessons in how NOT to invest

Unless you’ve been living under a rock for the past few weeks you’ve heard about Pokemon Go. Hell, even if you’ve been living under a rock I’ll bet you’ve still heard about it – and maybe caught a Pikachu while you were down there.

Pikachu “Invest wisely” -Pikachu*
While you’ve surely heard about the explosive popularity of the game, unless you enjoy following the stock market, you may not be familiar with the corresponding burst in the price of Nintendo stock. As you’re probably aware, Nintendo created the original Pokemon games and was involved with many of the related properties – like the cartoon and merchandising.

So when the game exploded in popularity – soaring to #1 on Android and iPhones – investors naturally wanted to get in on the inevitable profits. (The game is free to download but offers items for purchase inside the app, often called a “freemium” game.)

Nintendo’s stock price rose nearly 40% overnight on July 11, shortly after the game was released.

However, today the stock crumbled nearly 20% overnight as Nintendo released a statement reminding everyone they don’t actually make or own Pokemon Go.

Now, they do own a partial stake in the maker of Pokemon Go and will therefore share in some of the game’s profits, so it’s not a total loss. But it should serve as a reminder not to blindly throw money into any investment – be it a stock, real estate property, business, etc – without first thoroughly understanding it.

Sure, some of the “investors” that blindly threw money into Nintendo will make money, though I’d wager most of those who had no idea lost money. In either case, simply coming out ahead doesn’t mean it was a wise investment; it was just a shot in the dark that may have paid off – a gamble.

If you have extra money that you’re willing to gamble on stocks, go for it. That can be fun. But  money for your financial goals – whether that be financial freedom, buying a home, college education, or whatever your goal may be – should be invested, not gambled. This means actually educating yourself on the prospective investment – or finding a professional that can help you understand it.

I’d be happy to help of course, although not right now – I’m about to go into the bushes in search of a Tauros.

*Little known fact: Pikachu is a fastidious investor