Personal Finance

Are You a Slave to Your Spending?

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Which do you prefer – real wealth, or the appearance of wealth?

How do you know?

The answer is simple. Your daily financial decisions tell the truth with absolute certainty. Judge by results: often harsh, always fair.

Every day you make financial decisions that choose between lifestyle today and financial freedom tomorrow.

For most consumers, the clear preference is lifestyle today as proven by recent household debt figures. According to the New York Federal Reserve’s November 2013 report on household credit, aggregate consumer debt increased in the third quarter of 2013 by $127 billion. That’s in just one quarter. As of September 30, 2013, the New York Fed reports, total consumer indebtedness stood at $11.28 trillion. That number is even higher by now.

Most consumers use debt as a way to pay for lifestyles they view as desirable. Whether it’s an expensive car loan or new designer clothes bought with a credit card, an emphasis on lifestyle over financial freedom can lead to life-long financial bondage.

Spending Money Will Never Lead to Wealth

Nobody ever spent their way to wealth.

That’s why the first rule of personal finance is “live below your means.” People sneer at this well-worn financial advice and berate how obvious it is, but if you look at the numbers it’s clear how few people actually live by this rule.

To know and not do, is to not know at all.

Sure, it might be fun to drive a flashy car and live in a big house. Your ego will enjoy the quick boost resulting from spending money on the fine things of life. You might even be proud of the “good deals” you scored on dozens of unnecessary items.

The truth, though, is that as long as you are spending all of your money — and especially if you are going into debt and spending more than you have — you will never enjoy the wealth that leads to financial freedom. It is simple math.

The life-cycle of financial freedom requires you to focus on asset accumulation and savings in the early part of your career. If you want long-term financial success, you need to identify realistic savings goals, and work to meet them. It means putting your wealth goals before image and lifestyle goals.

Remember: Each dollar you save is a soldier on the battlefield of wealth. Each dollar you spend kills that soldier and all the soldiers he would have given birth to through compound interest.

Compound interest is powerful because your wealth soldiers multiply into a battalion of income-producing assets that can provide you with financial security and freedom for a lifetime. Spending kills those soldiers and all the generations of soldiers that would have followed.

Consumer Debt vs. Good Debt

Before you think all debt is bad, though, it’s important to understand the difference between consumer debt and “good” sources of debt.

Consumer debt is debt used for items that are consumed without providing any monetary return on the spending. Consumer debt levels continue to rise, and this is debt that often comes with a high interest rate, further keeping you enslaved.

Conversely, certain other types of debt can be productive. When you use debt for certain business expenses, positive cash flow real estate and other income-producing assets, then you can come out ahead.

This type of debt typically comes with lower interest rates, and it provides the potential for long-term returns. This stands in sharp contrast to the high-interest consumer debt for gadgets and clothes.

The point is that if you value your freedom, then it is smart to save your money and build assets. Do what most people won’t, so you can enjoy a future lifestyle they never will.

Think about your end-goal and organize your daily actions to contribute to that objective. Every spending choice is ultimately between lifestyle today and freedom tomorrow. You either allocate your financial soldiers to the wealth front, or you slaughter them on the battlefield of consumerism.

The choice is yours.

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Image: Jupiterimages

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