How your spending habits can change your financial future

Graeme Fowler is a property investor and author of 20 Rental Properties in One Year.

OPINION: Warren Buffett (one of the wealthiest people in the world) was out playing golf with a few of his friends many years ago and one of his friends said to Warren “if you give me $10 and you can get this next hole in one (a par three), I will give you $100,000.”

For Warren, $10 or even $100 would be like 10c or less to most people, so worth next to nothing to him. He sure wouldn’t miss the $10 if he took the bet from his friend, and may have had a one-in-100 chance of getting $100,000. Pretty good odds really for most people.

His friend asked him: “So Warren, what do you think, are you going to take the bet?”

He said no. His friend asked: “Why ever not?”

Warren then said to him: “Stupid in small things, stupid in big things.”

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What he meant by that was if he was silly enough to take a bet like that, even though it was such a small amount of money, and fairly reasonable odds compared to a lot of alternatives; it was no different to gambling a much bigger amount. The principle is exactly the same.

It’s a similar type of thing we see in NZ with about 60% of the population buying Lotto tickets every week and 80% of people in NZ having bought a ticket within the last 12 months. That’s a huge percentage of people spending $10 to $20 a week, all with the hope of winning a much bigger amount.

The odds are stacked against Lotto buyers hoping for the big win, far greater than the Warren Buffett example above, but still people take that gamble. Why? Usually they say something like – “well it’s only $10 a week and I like to live in the hope that I will win one day. It makes my week more exciting knowing I could win a lot of money.”

Often it’s the $10 to $20 they spend every week that could be saved up for emergency situations, unforeseen circumstances or just to buy something in bulk at the supermarket that’s on special.

For the very few that do win big in Lotto, several studies have been done to look at the financial outcomes of these winners. One study in the United States found that within just three years of winning the lottery, 70% of winners had already spent all of their winnings. Some were even in debt owing large amounts of money. This could be due to many factors such as a lack of financial literacy and planning, overspending on luxuries and non-essential items, and often the inability to say no to friends and family who asked for money.

You will often hear people say things like: “Well, it takes money to make money; give me $200,000 and I will turn it into much more money and become rich. It would be so easy.”

However, the above study shows this is simply not the case. And as Buffett says in a round about way – “do the small things well financially and as you scale up in accumulating more money, use the exact same principles to accumulate even more.”

I personally don’t believe it takes money to make money. For example, if you brought 10 billionaires to NZ and took away all their money and networking contacts, I believe within five years most if not all of them would be wealthy again and at the very least millionaires. It’s their financial intelligence they possess, which means they can start with nothing and still create something new that will make them rich. A different way of saying it is if you have a low financial intelligence, it takes a lot of money to possibly make more money. If you have a high financial intelligence, it takes a lot less money and possibly even “no money” to make a lot of money. The higher your financial intelligence, the less money you need to make money.

I started off investing (buying a rental property) over 30 years ago with very low financial intelligence and lost all of my savings on that first property. But I did learn a lot from that experience. As time went by, I gained more and more financial intelligence and eventually started to make money, rather than losing it. Within five years after that I was a millionaire.

Here are a few simple tips that Warren Buffett also suggests to help you with your own finances and day to day living.

1. Buy a modest home, not the most expensive home you can buy – with your borrowing capacity. Unless that is, you can buy something that you may be able to derive an income from as well, such as an Airbnb. We live on an orchard and have four income streams from our own place of residence, with the potential to add more.Often when people are looking for their first or second home, rather than look for something easily affordable within their budget, they go to the bank or mortgage broker and ask “how much can we borrow?” This may be well in excess of what they had originally thought they could afford, and so they start looking at more expensive properties.
2. Don’t be afraid to use coupons and vouchers etc in front of your friends. Always be looking for a good deal. But it must be something you are really wanting, not just a spur of the moment decision because something is on special. Russell Sage (1816 – 1906) once said “I buy my straw hats in the winter”.
3. Don’t smoke or drink (or limit it as much as you can). This requires steady outlays of cash, and neither is particularly good for you.
4. Don’t gamble. The house always wins. Buffett had a slot machine in his house and paid his kids their allowance in dimes, knowing they couldn’t resist trying to win more in the slot machine. They soon got the lesson, and learnt that gambling doesn’t pay.
5. Don’t upgrade possessions unless you really need to.
6. Don’t buy expensive fancy food or eat at fancy restaurants if you can’t afford it.
7. Don’t waste your money on an expensive wedding. I had tenants in one of my first rental properties about 30 years ago that had recently got married and had put $25,000 on their credit cards to pay for it. They had a great day, but were still paying for it several years later, and it ended up costing them more than double what they had originally put on their cards.
8. Drive the same car for as long as you can. If you can’t afford to buy a car outright, don’t buy it and especially don’t borrow money to buy a vehicle. You will be paying a lot higher interest, and it’s on a depreciating item which makes it even worse.
9. Pick inexpensive hobbies. We play pickleball (similar to tennis and is the fastest growing sport in the US, with over 5 million people who play it now) all year around which keeps us fit, healthy and is a relatively inexpensive.
10. Forget about expensive fancy labelled clothing and shoes, or shopping simply for the sake of it. A lot of people shop just to make themselves feel better, not needing most of what they buy. Someone once said: “If you buy a lot of stuff, you will end up with stuff all.”

One other point to think about is this. Good money management is vital if you want to get by, and eventually do well financially today.

All of our spending can be put into one of three categories: Past, present and future.

1. The past category is things like hire purchases, credit cards, computers, TV’s, vehicles etc. These are items that either depreciate in value quickly or cost you more money than is necessary. People will often buy something new and put it on hire purchase and therefore pay a lot more for it. If they had just saved the same money they would use for paying it off for a few weeks, they could have bought something secondhand that is almost like new, but at less than half the new price. It’s really just a habit of getting used to delayed gratification. By not being able to wait until the money is saved so they can buy something with cash, people will likely pay way too much. After a while this has a compounding effect and then it’s very difficult to get ahead. They end up with lots of depreciating items they’re paying off (with very high interest rates), that very rapidly become worth next to nothing.
2. Present is items such as food, power, mortgage, rent, phone bill, petrol, etc that we need to spend money on every day. In other words, our daily living expenses.
3. Some examples of future spending are cash, savings, KiwiSaver, your own business, rental properties (residential or commercial), shares, mutual funds, syndicates etc.

So, whenever you’re going to buy or invest in something, ask yourself – “is this money going into my past, my present or my future?” Most people only spend in the present and the past categories, not ever putting much, or even anything into the ‘future’ category. This makes it extremely difficult going forward to have any type of successful financial future. Maybe this is why so many buy Lotto tickets, it’s just easier to leave it to chance rather than being proactive, and learning some basic helpful financial skills and of course being disciplined.