Money & Personal Finances

The Latte Factor

As I have written about in Spend Less Than You Earn, one of the keys to getting rich is to take control of your spending. In The Automatic Millionaire, author David Bach explains how the Latte Factor may be holding you back from getting rich. The big idea behind the Latte Factor is that most people don’t really think about how they spend their money – and if they do, it is usually for expensive items rather than the small daily expenses (eg a Latte!).Small daily expenses can add up to a fortune. Don’t believe me? Consider the following illustration:

Why You Should Spend Less Than You Earn

spend less

One of the most important principles to becoming wealthy is to spend less than you earn. This sounds easy enough, but in practice it can be hard to do. This article looks at the challenges to spending less than you earn and offers some tips to overcome these.

First I want to look at those who spend more than they earn. It stands to reason that if someone is spending more than what they earn they are either being given money or are borrowing it. In this age of worldwide economic growth and prosperity it has never been easier to borrow money. Temptation to borrow is everywhere, whether is be for a new TV, a new car or a new house. In Australia personal debt levels are at record highs. I also read that the US Federal Reserve calculated that more than 40% of US families spend more than they earn.

Is That Lottery Ticket Keeping You Poor?

I overheard a conversation at work today where two people were discussing their wish to win the lottery and thereby never have to work again. Sure, this is a great dream , but is it keeping them poor?

I think there are 2 quite different points to consider here:

Pay Yourself First: Then What?

In my previous post on this subject I wrote about one of the most important habits to building wealth, paying yourself first. In short, you want to make sure that 10 to 20% of your income is going to a separate savings account as soon as you get paid. Is this enough though to make you rich?

Probably not. Paying yourself first is just the beginning. I have paid myself first for sometime now, and yes for such a simple idea it works amazingly well. The trap I used to fall into though is that once I had built up a sizeable sum, I would spend it on something such as a holiday. Now I would never suggest not taking holidays (in fact I plan to write about why you should be taking regular holidays) but spending your entire savings on such things as a holiday, car, plasma tv, etc will not make you rich.

Pay Yourself First

I first came across this idea in The Richest Man in Babylon by George S. Clason. Since then I have come across the idea in numberous personal finance books, such as Rich Dad, Poor Dad. If you haven’t heard of this idea before, read on because this is a simple but brilliant idea that can make you very wealthy. And if you have previously heard of the idea of Pay Yourself First, ask yourself this: am I practising it? Millions of people have heard of this idea, but few actually follow it.

The idea works like this: most people like the idea of saving part of their pay for some future goal such as a vacation or deposit to purchase a house. The problem is that when they get paid the first thing they do is pay their bills, purchase that item of clothing they’ve had their eye on, etc. Saving is basically what is left at the end of the pay cycle. And guess what? This is usually very little. People naturally spend until all their money is gone.

Change the Way You View Money

The first book on money I read was the classic Rich Dad, Poor Dad by Robert Kiyosaki. There is some controversy surrounding Robert Kiyosaki, but that does not change the fact that this book radically changed the way I looked at money. For this reason, I think it the perfect book to start with.

I was raised to see money as something you worked hard for. My parents always struggled financially, but they worked hard and were able to send me to one of the best private schools in my city. I believe that seeing my parents struggle financially, whilst at the same time attending a school with a lot of wealthy kids, was what gave me my interest in money and finance (I have a Commerce degree and currently work in Business Banking).

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