Liz Pulliam Weston that I cited earlier also has an insightful piece entitled “7 surefire ways to stay poor.” I will go through her seven points and see how they applied to me and my past.
- Getting the big stuff wrong. Penny pinching helps, but you can’t save the pennies and spend the dollars. The two biggest expenses a person is likely to have is their home and their vehicle. The question they should ask themselves is: could we get by with less? Perhaps the best way to avoid this is to take what you can afford in monthly mortgage payments (or rent) and car payments and subtract 30% from each. Yes, perhaps you can afford a McMansion with a $2000 a month mortgage, but you could just as easily live in a smaller home with a $1,400 mortgage and an extra $600 that you can salt away as savings. Likewise, rather than new car for $600 a month that you can afford, you would be better off finding one that would set you back $400 a month leaving you even more money at the end of the month.
- Confusing needs and wants. Yes, did this big time. I could always convince myself that I needed a car or that I needed a new coat.
- Considering only the monthly payments. Guilty as charged. She is right in that when buying a car or other large purchase on credit to compare the sale price and the amount you will really pay (monthly payments x number of months to pay off the loan). If you do the math, you realize how much extra you are paying. Also, you have to realistically add the other costs needed to maintain your purchase (insurance, licensing, etc.)
- Failing to keep track of where the money goes. This is certainly the biggest mistake I made. When you do not budget and do not keep track of what money is going to be coming out of your account, it is easy to spend too much, and you have to pay too much in extra fees whether it is the bank fees for bouncing a cheque or credit card fees for going over your limit. These add up really quickly.
- Carrying credit card debt. Credit cards are evil as they make spending too easy. As such, people end up buying more than they would otherwise buy without a credit card.
- Living close to the edge. The sad thing is that when you are hard up financially, you end up losing even more money. I had to rely on payday loans for much of a year, and lost hundreds of dollars in the process. You have to find some way of setting aside a cash cushion to help you through the difficult times. My regret is not having done this. Liz has another great piece as to why you need $500 in the bank.
- Squandering what you have. Here, Liz refers to dipping into retirement funds and other savings.
I would add one additional way of staying poor: budgeting using revenues that you have yet to earn and savings you have yet to achieve. Too often, I made the mistake of budgeting based on expected income. My ex-wife and I bought a piano with the hope that she would teach piano lessons (she earned an entire $10 and barely touched the $3,000 we spent on that damn piano); she left her job because of false expectations that she would go back to university; we rented a house that was too expensive for us on the expectation that I would be earning more the next year. In other words, I was not planning realistically and was not seriously evaluating both likely incomes and expenses.