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No one gets rich simply by cutting personal spending

The spending scolds always make the same errors about personal finance.

Managing your financial life requires following three rules:

No. 1. Spend less than you earn;

No. 2. Prioritise investing for your future;

No. 3. Figure out what matters and spend accordingly.

If you follow these simple rules, you can ignore the rest of this column. Heck, follow just the first one and you can pretty much ignore everything else.

The reason for bringing this up is yet another appearance by the spending scolds. These finger-wagging austerians love to warn of the dire consequences for anyone foolish enough to actually spend their money.

At almost every level, these complaints are absurd and the arguments marshalled in support are ridiculous.

One of the more recent entries contains this warning: “Buying new cars is like taking $40 000 and setting it on fire.” The 17.1 million people who purchased new cars in 2019 might disagree with that sentiment. After all, those who light their cash on fire have only a pile of ashes to show for their efforts; the new car buyers have, well, a new car and wonderfully reliable transportation. 

After working for three decades in finance I’ve reached this perhaps overly broad conclusion: People are weird about money. Never mind the countless anecdotes I could cite, the entire field of behavioural economics backs this up. Our weirdness is demonstrated by the foolish financial decisions we make each day, the unsupported beliefs we hold dear and the odd pronouncements made whenever the subject of spending comes up.

Some examples of this include:

  • You’re flushing money down the toilet if you drink a latte
  • It’s financial suicide to own a house
  • Never buy a boat or a sports car
  • Don’t send your kids to college

Underpinning all these warnings is a fundamental misunderstanding about the difference between a) spending and b) spending beyond your means. The former is how we acquire the goods and services we need to go about our daily lives, or the things we want because we get enjoyment from them; the latter is an error in judgment, a behaviour fraught with risk that really does have the potential to lead one down the path of financial ruin. 

Simply saying no to consumption is lazy and thoughtless. What should determine personal spending is the totality of the buyer’s financial circumstances. 

Aside from the fact that the spending scolds so often are wrong, they also tend to be tedious bores. Invariably, they cite some very wealthy person who lives frugally, implying that you too can acquire great sums of money just by being cheap. This is, of course, a deeply flawed argument that totally misunderstands the most basic issues of how household budgets work.

This is the message of some recent stories citing the thrift of National Basketball Association star Kawhi Leonard. Yes, he has a three-year $103 million contract with the Los Angeles Clippers, but at least until recently he drove a 20-year-old SUV. Yet here’s the thing: You could skip buying a new car for the rest of your life and you will still likely never be as rich as Leonard by virtue of the fact that you don’t have a $103 million contract.

By the way, he hasn’t really skimped on his housing. But so what? He can easily afford it based on his huge annual income. And he probably should buy a newer car with better safety features, reducing the odds of a catastrophic injury that prematurely ends his playing career.

This is the key that the spending nags all seem to fail to understand. It is all about living within your means, not living like a pauper whether you have to or not. The formula is simple: Spend less than you make. Make intelligent decisions. Don’t pretend to be something you are not by spending more than your income justifies. You do not need a business degree from Wharton or anywhere else to figure that out. 

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The less you spend the more is available to invest? It sounds like a car dealer wrote this article?

Investing can also be a ugly word when you constantly lose money on the JSE. The other stock markets have their bad days too.

If you buy a new car, house, furniture, clothes, holiday you live a good life and are generally a happier person, more likely to live longer and use your medical aid less.

What is the use of making money if you do not use it?

Your kids will thank you… 😉

That is definitely not what the writer of this article is saying or implying -read first.

Actually a great article. Some of the financial advice articles on moneyweb are really just advertorials.

This one only needs caveats.
1. Spend less than you earn.
2. Work hard at being happy with what you have. Then the urge to spend more goes away.

Nothing better than sleeping in a house without a bond

This article is 100% common sense. Unfortunately, common sense isn’t that common

There is one crucial aspect that has been ignored on this list: due to inflationary and other reasons, one must continually try to increase one’s income – even if only very gradually.

Continually tightening one’s belt will result in eventual ‘starvation’, and living within one’s means – while sage advice – does not actually improve the quality of one’s life. Increasing income will do that.

I would add to the above article and say that it’s extremely unlikely that you will ever get rich merely by earning a normal salary. Most people will find that, as they get older, their salary increases lag inflation, and that they just get poorer and poorer as time goes by, no matter how disciplined they are in terms of saving.

The only chance most people have to get rich, and it’s only a chance, is to run their own business or to be a really good investor. Most businesses fail but if you’re going to hit the big time, it will most likely be because you own a business. The other possible way is investing, but you need to be really savvy and also lucky. Here too you risk losing your money. But getting rich by earning a salary? Forget about it.

We have some extraordinarily wealthy public servants here in SA – and they live on a salary! Well, plus one or two bonsellas on the side, perhaps, but they come with the salary…

Incitatus:

I get what you mean, but unfortunately for the past two decades we have lived through an era where the hired help are paid obscene amounts at the higher end, with NO risk. I know many private company entrepreneurs that should be worth multiples of their neighbors that simply have to arrive at the office for their multi million packages, and not rock the boat. Breathing is sufficient.

When the book about capitalism gets written this will go down as one of the rotten pillars. The owners of capital abdicated their most basic responsibility

Maybe true for the privileged few, the senior public servants or employees of parastatals, but for an ordinary working guy who got the job on merit, mostly his increases, if any, lag inflation by 2% per year. Every 10 years such a guy gets 20% poorer in real terms.

One must not use the term ‘rich’. We must aim to get ‘wealthy’.

This is actually a great article.
@Incitatus – What do you mean when you say “rich”. It’s different for everyone.

The message is to know why you’re working and “making money”. Is it just to keep filling the pot and living like a pauper so that presumably when you die you leave a ton of cash behind while during your life having denied yourself ? That’s ludicrous but is how the majority of people think.

See above – whatever rich means to you, I guarantee you that most working people will find themselves getting poorer and poorer as time goes by, because of increases that lag inflation.

Of course you can become wealthy by earning a salary. As stated spend less than you earn then become debt free. If you can pay off a car in five years why not your home. If you have time on your side and be debt free, the surplus income used wisely could make you financially independent in a relative short time.

People are often down on cars as they depreciate quickly but it definitely makes sense to get a good one, and a fairly recent model. Reason being is you spend a lot of time in the things so you want to have a few creature comforts; automotive technology is always improving and older cars tend to spew a lot more carbon emissions and other toxic pollutants into the air and newer cars have better safety features. So look for a demo or one that is a year or so old. You’ll save a lot of dough and still have something good in your garage.

I would like to qualify my statement on cars by saying that I do think there’s a good argument to avoiding car ownership altogether, thanks to the advent of ride-hailing services like Uber, etc. Seems to me that economically it makes a lot of sense to rather use someone else’s car and avoid a lot of the extra expenses that come with owning a car altogether. I think this does depend a lot on the nature of your work and how far you live from work but its definitely worth giving serious consideration. The younger generation are definitely looking at car ownership differently, especially if they live in a big city with decent public transport (not something we enjoy here in SA unfortunately). I would love for someone to crunch the numbers and test my theory that it will work out cheaper to Uber it in the long run.

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