Saturday, July 20, 2013

Getting past bad money habits

Getting past bad money habits

Last year, a Filipino named Dionie Reyes made big news when he won P14M from the PCSO jackpot draw back in April 2008—and lost it all in just three months. He apparently spent all his money on an expensive house, an SUV, vices, and lavish cash gifts to friends and family. In the end, he was in debt for P500,000.

This story is not common—many people all over the world who experience a windfall of cash wind up losing all their money. Could it just be bad luck? Or does it have something to do with their habits around money?

Lifestyle inflation

Take time to ask yourself these questions. One: when you make a lot of money, do you immediately come up with ways to spend it all? Two: are you trying to keep up with someone else’s lifestyle, or the lifestyle that media portrays “you should be living right NOW?” Three: is what you buy never enough and must you continually catch up with the latest model/fashion/trend?  Four: Are you living from one paycheck to the other, with little to no savings in between?

If you answered yes to most of these questions, it’s likely you’ve fallen under the habit of lifestyle inflation. And you’re not alone. So many people subscribe to this bad habit because it’s celebrated everywhere in media and our consumerist society.

This pervasive attitude makes us burn through our income very quickly, because no matter how much money we make, we spend exactly as much as we earn.

It’s not wrong to spend on necessary things. But the excessive spending caused by lifestyle inflation effectively kills wealth. It robs you of future income and keeps you hunting for jobs that can support your lifestyle. And when the day comes when you are either unable or unwilling to work, you’ll find there’s no more income to be had and you’ll still have the nagging urge to spend money.

Get past it: Cultivate the habit of paying yourself first: Whenever you make money, set aside a regular amount for savings. You may be tired of hearing that, but there’s a reason why people keep repeating it.

Why is saving paying yourself first? Imagine this: every time we get paid a wage, we don’t so much as make money as earmark it for other people. The government gets a cut from taxes. Then the electric, water, and cable companies get paid, followed swiftly by the telecoms, internet, transportation, supermarkets, even the tobacco and liquor companies. By the end you end up with nothing, or close to it.

So invert the equation. Pay yourself first by saving before you spend on anything else. This money you save will buy your future. Even if you are capable of setting aside only a few pesos a day, what you’re aiming for is to build the habit of saving and doing away with any unnecessary spending. Understand that when you do make a windfall of cash later on, you are NOT going to magically grow the habit of paying yourself first. Both good and bad habits are created over a period of time. So while your income is small, cultivate this practice. If you can be responsible for the small things, you can handle the big things as well. 

Negative view of money


There’s a saying that people are funny about money, and it’s true. For example, there’s this belief we have in our culture that it’s bad to have a lot of money. We may not say it out loud but we often think it. We pick up this concept from our schools, from church, probably even from our parents: “Money is the root of all evil.” “It’s easier for a camel to enter through the eye of a needle than a rich man to enter the Kingdom of Heaven.” “Having too much money will inevitably you make suffer.”

It’s no wonder that people who subscribe to this belief wind up poor for the rest of their lives. They either consciously or subconsciously rid themselves of their own wealth, either by spending it or denying themselves opportunities to make money. The term “galit sa pera” really does mean something.

Get past it: Instead of subscribing to the belief that money will somehow corrupt you, think of all the good you can do if you just had the resources. Not only can you can look out for yourself and your loved ones, you can give back to society as well. Think of charities you can support, the orphans you can send to school, the people you can employ.

Money is simply a tool you can use to make things happen. Think only of the good things you can do, and do it.

Mañana habit

“Why save now? I can always do it later.” “Why prepare for retirement? I’m still young and it’s years away.” “Why worry about investing? I’ll let my future take care of itself.” 

The mañana habit, or procrastination, takes away an important element of building wealth: time. Money can’t grow overnight. Every kind of investment, whether it’s a bank account or a stock portfolio, needs time in order to grow. Often it takes years to build a fortune and more years to preserve it.  

Get past it: Simply put, the earlier you start investing, the greater the money you make. Putting it off carries the price of lost possible income. 

Here’s the proof: Say there’s a bond fund that earns an average 8% annual return. If at age 20 you save P1,000 a month for just 10 years, you will end up P1,749,272 by the time you reach age 60. Meanwhile, if your 30-year old friend decides to use the same fund and saves 1,000 a month all the way until age 60, he will only have P1,359,398 even after 30 years of saving! 

So start now. Begin with educating yourself about personal finance and get your house in order. As you grow your savings, learn about investing and start using it as leverage. And treat your time as a precious commodity. 

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