Top Investing Mistake #15: Not Managing your Spending
Did you know that Warren Buffett, currently worth $37 billion, lives in the same house he bought 50 years ago for $40,000? Or that Jeff Bezos, also one of the richest men in the world, drives a Honda Accord? Why would someone who can live in any kind of house, and drive any car, be so average? Could successful investing be linked to frugal spending habits?
What is the one habit that can undermine even the most successful investor?
Spending as much money as you make is that habit. 90% of Americans have this habit, and then spend a little more. It’s been a boon to the mortgage and credit card companies (until recently!), but it has been disastrous for the average American. No matter how hard people work, or how much money they make (even through investing), most people simply increase their spending to match their income.
So, Warren Buffett may seem a bit eccentric in his spending habits, but perhaps the underlying logic is sound. If we allow our spending to increase with our investment income, we will never get rich. In fact, we are just shooting ourselves in the foot. Because every dollar we refrain from spending is another dollar that we can invest. Those dollars do not necessarily amount to a large sum today, but for a successful investor they will grow exponentially.
A few dollars saved daily and invested at 20% annually will become a significant amount of money after 10 years. It’s not the dollars saved that make the money. It’s the interest on the interest that makes the difference. Without managing our spending, we can never let the miracle of compound interest flourish, and we are not likely to get rich through investing.
So what’s the solution? I think the best thing we can do is reward ourselves for successful investing and increasing our income. And, at the same time, only spending a small percentage of that increase to generate happiness. It doesn’t take a new car or house to make us feel good. Sometimes it’s just going for a short vacation or having a special meal. These rewards do not require a large sum of money, but we can make them represent a large measure of success.
Related posts:
- Top Investing Mistake #14: Not Managing your Effort
- Top Investing Mistake #13: Not Managing your Time
- Top Investing Mistake #5: Not Managing Risk
- Top Investing Mistake #2: Failure to Launch
- Top Investing Mistake #11: Not Deciding to be Rich
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is one of my favorite financial books of all time. It's an allegory about a guy who has a terrible job, and how he overcomes challenges to achieve his dreams.
