Have you ever considered that being an investor should cause you to spend differently? After all, as an investor you’re naturally oriented towards preparing for the future. This should have a big impact on how you spend money. In the opposite direction, non-investors tend to live in the present, and this has an effect on how they spend money as well.
As an investor you already know about the importance of diversifying within your portfolio, but have you ever considered lifestyle diversification as well?
Or rather, spreading out the spending of your money in different ways? How exactly does spending money affect our investing?
Rearrange Your Financial Priorities
Many would-be investors never get out of the starting gate to begin investing in the first place. The most common reasons are a lack of cash for the initial investment, or the inability to create enough room in the household budget to allow for periodic contributions to an investment portfolio.
How you spend money is the critical “other half” of the investment effort. In order to invest, you have to have the money to begin. Not everyone gets periodic bonuses or an inheritance to enable them to get started. They have to come up with the capital needed, and this requires rearranging some budgetary priorities.
In this way, we can begin to realize how we spend money affects how we invest, or even whether or not we invest at all. The less money you spend, the more you have to invest.
While many investors overemphasize buying the right investments, or the right combination of investments, they need to give at least equal attention to increasing the amount of cash they have to add to their investment portfolio. This starts with spending priorities.
There are two times when this is more important than ever:
- When you first begin investing. The more you save early on, the more you’ll have to invest and the better your results will be in the long-term.
- When the stock market is declining or going sideways. When the stock market is rising, investment contributions don’t matter as much. When the market is flat or declining, contributing to your portfolio is the best — and often the only — way to make it grow.
This makes a strong case for limiting your spending to free up cash for your investment portfolio at all times. This way, if the stock market declines or goes horizontal, you will still have a method for increasing your portfolio. Being able to grow it in the lean years is one of the better kept secrets.
Emphasize Value in Your Spending Decisions
One of the most basic keys to successful investing is learning to identify and invest in value. This means investing in stocks with strong fundamentals, a solid track record of earnings growth, an advantageous position in their market, and strong management, among other factors.
As an investor, you need to extend the value concept to your spending decisions.
This means major purchases should be made with an emphasis on acquiring an item that represents the best quality for the money.
This doesn’t mean buying “the best money can afford” — which is exactly what some successful investors do when their investment portfolios are riding on a high note. But it also doesn’t mean buying on the cheap, like a miser who tries to keep his last dollar.
If you buy premium all the time, you may be getting top-of-the-line (but not always), but you’re also guaranteeing you will always pay more for everything. If you always buy on the cheap, you may find yourself perpetually replacing whatever it is that you recently bought.
Like all things financial, there’s a balance when it comes to spending. Buy somewhere in the middle, like a high-quality item that goes on sale. You’ll not only avoid paying top dollar, but you’ll also avoid having to replace the product every six months.
Either end of the spending spectrum — top-quality or cheap — will be spending more money than you need to. And every dollar you spend is one less dollar you have available to invest.
Reduce the Need to Spend Money
It’s no secret a certain amount of spendthrift behavior is tied to a lack of financial substance. That’s when people buy consumer goods as a way of offsetting their lack of financial wealth. They can do this either to convince themselves or others they’re doing better than they actually are. They surround themselves with the trappings of success, even if they don’t have the substance of success.
As an investor, your spending priorities should be different. Your goal should be to put as much money into your investment portfolio as your budget will allow. And the growth of the portfolio should eliminate the need to buy expensive toys to impress yourself or others. In truth, real wealth (which comes from a growing and well -managed investment portfolio) should reduce your need for toys and comfort buying.
The Ultimate Investor Goal: Live on Your Investment Portfolio
Let’s cut to the chase, the ultimate goal of investing is to create a portfolio large enough so you won’t have to work for a living anymore. That’s the basic idea behind retirement investing, and especially investing for early retirement.
As time goes by, you should become less dependent upon your earned income, and more able to rely on your investments to provide for your financial needs. It doesn’t necessarily mean you’ll begin tapping your investment portfolio as soon as you are able. But just knowing you could if you wanted to could be the very definition of financial independence.
This level of financial independence is achieved in two ways — by building up your investment portfolio, and by learning to live on less money. Most people can see the wisdom of building up an investment portfolio. Lowering living expenses isn’t always as obvious, even though it’s at least equally important.
The less money you need to live on, the sooner financial independence will be a reality in your life. It not only reduces the amount of money you need for living expenses, but also frees up more for investing.
Think of spending less money as an integral part of your overall investment portfolio. In truth, it’s nothing less.