How To Spend Money And Build Wealth

One of the toughest parts of a financial education journey is learning how to spend money the right way; especially learning how to spend without losing overall value.

The goal of having money is to be able to spend and enjoy it, of course. But, the importance of financial education is precisely to help you know how to build wealth, hence how to save money, how to invest money, and how to deal with debt in the most effective way.

Couple enjoying shopping and spending money

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In this post, we discuss how to spend money in ways that actually benefit your bottom line, versus how not to spend your money frivolously and wastefully.

How To Spend Money And Give Yourself A Raise

For this, the first question you should ask yourself is what an expense is really worth to you. Since this can be very subjective, you want to rely on a minimum of methodology to get your “how to spend money” right as often as you can.

One interesting way to check it is to know whether you can get a tax deduction from making this purchase before you sink your precious cash into it. “And how do you do that?” you might ask.

First, it’s important to know that operating a business, a side business, any business, can be a way to reduce your tax load – something the rich have always known and used to their advantage. For instance, they often buy, resell or rent pricey assets to increase their wealth.

When you initiate economic stimulus through your business activity, you make Uncle Sam very happy because this increases the Federal tax base. So, Uncle Sam encourages it by giving you tax loopholes where you get to write off a lot of business-related expenses legally.

Often times, it becomes possible to justify the purchase you’re thinking about if you can align it with your business needs.  This gives you ways to get certain tax deductions on business-related purchases that can also give you personal benefits.

So again, you always want to know whether your purchase can lower your tax liability. If not, it’s costing you, relatively speaking, a whole lot more money. This is why it’s important to find out whether you can get a tax deduction for it or not.

Operating A Business

This point is especially important in your decision to whether operate a business or not. Keep in mind that "business" does not necessarily mean a big-name enterprise with a massive operation to run. Let’s discuss a simplistic side gig for illustration purposes.

So, if you mow your neighbors’ lawns on the weekend, that is potentially a side business. Let’s say you also happen to hold a job during the week. Depending on the tax code in effect, you could write off many expenses, in essence giving yourself a raise at tax-return time.

Here’s how that might look: To run or grow your small lawn-mowing operation, you may be interested in purchasing some equipment.

Now, let’s say the word gets out and a lot of seniors in the area want to hire you to mow their lawn. You may now be interested in a small truck to get around more easily and transport all your equipment.

You may even get a few cousins and buddies to help you meet the growing demand in exchange for some cash. As a matter of fact, you’re also buying everyone lunch each day while on the job to keep things moving along.

You could even decide to get insurance coverage in case of accidental damage or injury while in operation.

Well, guess what: all the above expense examples in our illustrative scenario qualify as tax deductions - not to mention your phone and Wi-Fi bills which you needed to pay regardless.

This is also an example of how the fancy phone you’ve been dying to get becomes a much cheaper option because you can claim it as a business-related expense.

Other Considerations

As you think of lines of business you may be interested in trying, take into account that these days all you have to do is ask an A.I. app for a list of items that can qualify as tax write-offs in your field. It’s usually a plethora.

You will just need to keep an eye on anything you happen to spend money on, and save your receipt or proof of purchase for tax deduction purposes.

A word of caution: tax deductions make it easier, especially for entrepreneurs, to justify a wide range of expenditures. So, you need to make sure that even with the availability of a tax deduction, expenses are going to produce more value than what they’re costing you.

A good illustration of this is a rule in the U.S. Federal tax code that allows a $25,000 deduction in tax filings on the purchase price of vehicles weighing between 6,000 and 14,000 pounds.

Predictably, people interested in luxury SUVs weighing over 6000 pounds see this as a boon and get their minds set on buying pricey vehicles over $100,000, when it’s pretty clear that in strictly business terms, the expense is most likely not profitable or justifiable.

While the tax code may allow it, ideally, a purchase with tax deduction should add value to your business, not put you in debt unnecessarily. So, it’s still important to explore what you can afford judiciously, and certainly not go into debt in the name of tax deductibles.

Not Operating A Business

Now, what if you're not a business owner or an entrepreneur and you don't qualify for these tax-write offs?  When is it okay to go out and splurge or buy things that you desire but don’t necessarily need?

First, how to spend money should always start with paying yourself first. You must start by building an emergency fund to bail you out in case of (what else?) an emergency.

If you have not done so, this is not yet the time to splurge or spend frivolously or superfluously.

Second, are you drowning in credit card debt that you can’t afford to repay? If so, pardon the language, but banks are sucking you dry daily as you carry credit card debt month after month.

This one is difficult for most to break from, but it’s crucial to know that our lovable credit cards are not our friends when they’re loaded with unpaid balances. They’re lovely but deadly to our financial future.

Unless your debt load - and especially revolving credit such as credit cards - is under control, you must be extremely careful not to be wasteful with your money. You may not yet splurge or engage in luxury spending.

Build Your Emergency Fund

Seal Credit Card Financial Leakage - Keep Saving To Invest

To start, as a rule of thumb, you are shooting for saving 3 months to one year’s worth of emergency funds - depending on your personal circumstances, risk tolerance, and so forth. Once your emergency fund is in place, continue to implement your savings strategy.

Remember, saving must become a habit, better yet, an automated routine that allows you to “pay yourself first” before your hard-earned money goes in the pocket of other people.

Keep in mind, your savings are not a temporary reserve to purchase the things you desire. As the saying goes, “there’s an app for that”.

Your savings should be budgeted in distinct categories to preclude a collapse between your plans for an emergency fund, your investment savings, and your discretionary spending.

You don’t want to dip into a different category of savings to satisfy your urge for purchasing an item. This will prematurely cause a breakdown in your process.

Once your routine and emergency fund are in place, you want to follow your wealth building blueprint diligently. Done correctly, your savings will progressively allow you to invest in yourself, in properties, in businesses, in retirement funds, etc.

Remember: You cannot build wealth without a plan and without accumulating savings to work with. You also cannot spend all your income - or more than you earn - and hope to build wealth at the same time.

You’re going to have to either spend less than you earn, figure out how to earn more – or both: that is, you’ll have to progress faster in your wealth building journey by managing to spend less of your income and earning more of it.

Is this easy? No. Is it necessary? Absolutely. A popular protocol, the 75-15-10 budget rule professes that you allocate a maximum of 75% of your total income to your spending and 25% of it to your wealth building strategy of Saving and Investing.

The implications of this wealth building plan could require that you get a new skillset, or a different job, or a lucrative side gig to earn more.

Also remember that you want to start paying down debt as well, especially the type that depletes your cash without bringing in cash or value in return. Revolving debt is the prime example of that, but there could be other culprits to watch and squash in your debt mix.

But How Long Will This Take?

There is no point in trying to sugar coat this. It’s a sacrifice that will take time. It could take anywhere from a couple of years to, in some cases, a couple of decades depending on individual circumstances.

So, it’s probably best to look at this as a paradigm shift rather than a measured or timed effort. It’s really about doing things differently long term if you want this change.

Let’s compare it to a diet. Crash diets are short-lived and don’t work because once they stop, you go back to square one or even worse. On the other hand, a conscious shift in effective eating habits is what goes the distance and proves successful in the long run.

The good news is that you won’t have to wait till the very last day of the program to see a plus. Somewhere along the way, you may progressively start to enjoy some of the fruit of your labor.

So, this is less about pinpointing a final destination than it is managing the fixtures of the journey. That said, 10 years is often observed as a benchmark by which individuals who stay disciplined can see outstanding change in their and their family’s financial status.

So, at some point, we all have this individual decision to make. What is more important? Instant gratification with an unsecure financial future, or delayed gratification for a secure financial future?

One thing is for certain, rags to riches and generational wealth stories are typically not built on a model of instant gratification. Wealth-bracket and lifestyle upgrades generally require discipline and sacrifices at least over a period of time.

Progress and Results

This is what growth looks like: You’ve been saving, paying down debt and investing diligently, and your returns are getting to the point where they can pay for your expenses.

Positive cash flow from your asset properties, stock dividends or side hustles are now significantly adding to your bottom line and extra cash is being reinvested in your ventures.

Continuously growing cash flow is enabling you to cover all your expenses and is even allowing you to invest a smaller percentage of your income if you wish, without missing a beat.

This is the point where you can buy non-essential things that your heart desires and splurge guilt-free. Luxury expenses are no longer coming out of your safe financial zone and keeping you poor.

Instead, they are covered by the supplemental cash flow that your investments are generating in stocks, real estate, business ventures and so forth.

Patience Is A Virtue

In all things, wealth building included, playing the long game and exercising patience is a proverbial virtue. As we should all know by now, get-rich-quick schemes are notoriously useless.

Yes, wealth building takes time, but you have to keep aggressively reinvesting your cash flow until first it covers your emergency fund, then your basic expenses and it gradually begins to generate supplemental income.

Once you’ve reached that threshold, how to spend money gets easier. You can start loosening up and spending money on financially unproductive expenses if you so desire.

By the way, waiting decades does not have to be your dreadful fate. Gradual rewards can start happening sooner than you think. So, don’t fret. Make a change today.

Grab a free budgeting app like Goodbudget, CreditKarma, etc. There are many others that can help you get started on your journey.

In Closing

The biggest takeaway of this entire process is to embrace a shift in how you manage your money. To do so successfully, it is absolutely out of the question that you continue to spend all your income each and every month.

Remember to “pay yourself first” before you let banks, brands and everyone else profit from your hard-earned money.

You may splurge only after you’ve managed to turn a positive cash flow to cover all your basic needs and then creates a surplus.

You have to continue to invest diligently and keep increasing the returns you reap from reinvesting your supplemental earnings.

Indulge in luxury spending only when you see that your extra income is growing steadily and continuously and that there are no longer any threats to your financial soundness.

Lastly, be wary of easy traps such as financing purchases that you cannot (yet) afford. The marketing industry is expert at seducing the consumer, and creditors can’t wait to see you commit to giving them many more years of first dibs on your money.

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