My 7-year-old asked me if we were ever going to be millionaires.
I told him we would be by default because of our investing and savings patterns.
I told him anyone could be a millionaire eventually if they planned it out.
Then my 13-year-old chimed in and said, “yeah, it’s how you manage and spend your money.”
I couldn’t have been more proud.
Years ago, when it seemed like everyone started reading finance books, one of the main ideas woven through most popular books was how making small decisions could lead to huge financial success.
The idea came off like this: Stop buying that Starbucks! Brew your own coffee at home and save that $5 a day. Keep doing that and you’ll be a millionaire.
I know, it’s kind of a leap. But it’s not far off from what the books were saying.
It’s called “The Latte Factor,” popularized by David Bach, but others were saying the same thing. That idea lead to all kinds of articles, social media posts, and memes.
People made fun of it and plenty of bloggers still do.
And I get it. The idea sounds funny and obviously it’s not true that you’ll be a millionaire just by making one $5/day change.
This also led to finance writers with a different idea in mind. Namely, Ramit Sethi, in his book, I Will Teach You to Be Rich.
Don’t get me wrong. It’s a good book. But Ramit capitalized on the concept of all these books telling you how brewing your own coffee could make you a millionaire. Ramit suggested it’s not about saving a few bucks here and there; it’s about big wins. He teaches his readers to, “spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.”
Here’s a quote from I Will teach You to Be Rich to explain more of his mindset:
“This book isn’t about telling you to stop buying lattes. Instead, it’s about being able to actually spend more on the things you love by not spending money on all the knucklehead things you don’t care about. Look, it’s easy to want the best of everything: We want to go out all the time, live in a great apartment, buy new clothes, drive a new car, and travel any time we want. The truth is, you have to prioritize. My friend Jim once called to tell me that he’d gotten a raise at work. On the same day, he moved into a smaller apartment. Why? Because he doesn’t care very much about where he lives, but he loves spending money on camping and biking. That’s called conscious spending.”
He’s right about big wins being the key to true financial change.
But we can’t forget about the little purchases, because they do still at up, regardless of whether or not they’ll be the difference in you being poverty-stricken or millionaire-bound.
Shifting the Focus Away From Small Purchases
So we’ve shifted our focus from thinking the latte is the problem to thinking the new big screen and where we choose to live is the problem.
Often, they’re both a problem.
The more we think it’s only about big wins, the less we care about that candy and soda at the convenience store.
They key is to think about both. “Conscious spending” as Ramit says.
We need our kids to understand that our finances aren’t determined only by big wins or only by small buys. Our financial future is based on every single choice we make.
It’s this conscious-spending mindset that leads to financial freedom.
Fortunately, there is a way to make sure we’re focusing on the small and the big and as I always try to do, I’m going to bring in a practical solution to help…
Create Indulgence Categories in Your Budget
As ugly of a word as it is, a budget is the key to conscious spending.
This isn’t just another finance article ending by telling you that you need a budget. But… I guess that is kind of what I’m doing. Hear me out!
You don’t need a budget to make sure you track how you spent $2.21 on that soda, as opposed to only remembering the $2 you spent.
You simply need a budget to show you exactly where your money is going.
Even if you just track your spending and don’t necessarily categorize and budget, you’ll see huge results.
When you do start to budget, set categories for the things you indulge in.
If you’re a daily coffee buyer, create a category for those lattes. If you buy a bag of chips from the vending machine every day to go with your lunch at work, create a “bag of chips” category. A pack of cigarettes. A couple beers a day. Whatever it is, give it its own category.
At the end of the month, you’ll see how much you really spend on the small things you don’t think about. Multiply that by 12 to see how much you spend a year… and to scare yourself into changing your habits.
The same principle applies to large purchases. If you buy a new TV, don’t put that $1,200 TV in your entertainment category, create a “New TV” category for that month. Do the same with a new computer, bluetooth speaker, camera… choose your poison, but make a special category for it.
Then you can look back across the year and see all of the big purchases you’ve made and how they add up over the year.
Again, it’s all about being conscious of where your money is going. That’s the goal here.
Try it for a few months and see if you’re spending like you think you are.