One law of financial wealth is “spend less than you make.”
It sounds easy enough but every year, without fail, celebrities go bankrupt by ignoring this financial lesson.
Mike Tyson went bankrupt by spending millions of dollars on his birthday.
50 cent went bankrupt.
Will Smith spent the million dollars he made from his first song’s success, only to realize he owed a truckload in taxes.
And so did singing star Aaron Carter who was once worth $200 million.
How does this occur when you’re worth so much money, and how do you prevent it?
The first problem is lack of awareness and education. They don’t teach personal finance in most schools, which is a huge disservice to the world.
Second, on a mathematical level, it’s about not tracking any expenses. When you get rich, you can assume that the money doesn’t stop flowing no matter how much you spend.
You let too many expenses add up.
Here’s an example from my teenage years:
I went to a fast food restaurant every day for lunch since I was working every day at a retail job. It didn’t seem like a big deal until my mom accosted me with a bill at the end of the month for something north of $500.
I figured my work would make up for my expense but my mom went crazy because it was a large sum and it went way over the credit card limit! Fortunately, I was able to pay for it, but I wasn’t expecting such a large expense since I wasn’t tracking my expenses.
A $10 meal every day for 30 days equals $300. That’s $3,650 a year!
Let’s say you’re making a big six-figure salary, and you think you’re rich. Let’s say you go to an expensive but reasonable restaurant every day for lunch and dinner. Let’s say it costs somewhere around $30 a meal. That’s $21,900 a year! A good chunk of your salary. Add in clothes, entertainment, gym, rent, shoes, toilet paper, and cool Amazon.com impulse purchases, and your bank account starts to deplete!
At this point, some of you may be thinking “But I don’t want to track every tiny expense!” You don’t have to relegate yourself to tedious, precise tracking, especially if you have a lot of income coming in. At the least, have a solid understanding of how much each big expense group (food, rent, business expenses, for example) cost you each month and how much you have left after all expenses. And don’t just stay theoretic — actually, check that’s true in your bank account every once in a while.
And make at least some effort to keep your expenses at least somewhat lean. It’s so much more calming to know that you’re rich and you have a fat difference between your income and expenses than to know you’re rich and spend almost as much as your income.
It doesn’t take much to keep track nowadays with free apps and websites, like Mint.com, which integrates with all your credit cards and bank accounts and creates pie charts for you. (They’re not perfect though. Mint loses integration occasionally and miscategorizes stuff. Plus, do you feel comfortable giving someone all that high-security data? I’m open to Mint.com alternative suggestions if you have them.)
And of course, don’t swing to the other extreme and become too stingy. Being generous with people can sometimes come back to you many times ove.
Neil Patel, an entrepreneur, wrote a blog post that showed that paying for business dinners made him a 600%+ return. The post is titled How Spending $138,491.42 on Meals Made Me $992,000.
If you want further reading, one of my favorite books on this topic is The Millionaire Next Door. They did a ton of studies on thousands of millionaires across the country. They followed them and examined their habits and routines. What they found was surprising: millionaires were mostly very frugal, saving individuals. Many lived ordinary lives, had an ordinary upbringing, and most importantly, had ordinary possessions. The most common car of a millionaire was a pick-up truck. And they didn’t become millionaires until late into their life, from saving and investing their money.
The stereotypical image of a millionaire driving a Ferrari in front of a mansion is false. Most of these millionaires lived below their means and got there by being frugal. A small percentage of flashy millionaires, social media influencers, and rappers skew the picture.
In summary, spend less than you earn and invest (at least some of) the difference.
Thanks Will!
My pleasure