The million dollar question
Your answer to this question determines how you spend your money, your chances of financial success, and even how happy you can be.
So what is money for?
- Is it for buying things?
- Is it for providing security?
- Is it to make more money?
In personal finance, I believe that attitudes towards money are more important than habits, and habits are more important than knowledge.
I used to believe money was for buying things
It’s not that I thought about it like that, but when you look at my behaviour you would see a cycle of lusting after things, buying them, and then finding new things to think about and ultimately buy.
Breaking that cycle was essential to allow us to start saving.
The way I did it was to focus on two things: opportunity cost and reframing investing as shopping.
Opportunity cost
This is one of my favourite concepts from economics. It’s really simple, but really profound and really useful in everyday life.
Opportunity cost is basically looking at any expenditure (of money, time, effort, goodwill, etc.) and asking ‘what else could have I have done instead?’
So we could imagine buying a new computer for 100,000 yen (something I used to do all the time, even when I didn’t need a new computer).
The opportunity cost of buying the computer would be not going on a family trip, or not saving the money instead. You could argue that the opportunity cost was not having 400,000 yen twenty years later because you didn’t invest the money.
Starting to be more conscious of opportunity cost made a big difference and allowed me to get control of my spending.
Investing as shopping
This was a huge breakthrough for me, and I still have this mindset to this day.
Rather than thinking of investing as a passive, boring thing like saving money, I instead chose to think of it as going shopping.
Instead of buying gadgets (my frivolous spending of choice) I was buying future income.
I use the 4% rule of thumb to help me with my financial planning, so for every 10,000 yen I invested I visualised myself buying 1,600 yen’s worth of income in the future*
This was far more motivating than trying to guilt trip myself into doing the right thing.
* this is assuming I invest the money for 20 years, at which point it should have quadrupled to 40,000 yen, 4% of which would be 1,600 yen a year
Your money beliefs
Personal finance is not just about the numbers (in fact, I might argue that the numbers are one of the less important aspects of it).
We also need to understand our beliefs and attitudes towards money.
Starting small and building new habits is one way to change.
Another is to surround yourself with people who are doing the thing that you want to do.
And of course many people are forced to reexamine their financial habits when something changes in their life. Maybe they start working, or get married. Maybe they have a child or lose their job (that was my one). Maybe a family member dies.
If you need support to get started on your finances, then reading this blog, joining the forum, or checking out our video course might help.
How about you? Are you happy with your financial beliefs and habits? What was your trigger to try and change them?