The Personal Kaizen team is sharing our 10 Rules for Life. Please watch all of our videos beginning with Rule 1.
RULE 7: To be rich, spend money on what you love.
There is a lot of advice being shared on the internet about budgeting, investing for the future, and the FIRE movement (Financial Independence Retire Early). I am a big fan of the idea of spending smartly but recommend you develop rules about spending focused on what you love.
First, understand that the key to a good life has little to do with money as long as you have enough to meet all of your basic needs.
It is very hard to study the relationship between money and happiness without controlling for other factors, but several studies (including this famous one by Daniel Kahneman) have shown that money is a huge factor in happiness only until you reach a level that provides for the basics and then drops off after that. In other words, the increase from earning $50,000 a year to $100,000 a year matters much more to an individual’s happiness than the increase from $250,000 to $500,000. Once you have enough to meet all your basic needs (currently about $90,000 per year in the USA), more money has only a small effect on happiness.
The Personal Kaizen Money Rules
With the above in mind, here are the Personal Kaizen rules for life surrounding money:
Earn enough money to meet your basic needs, plus a little more for giving back (discussed next week). If you follow Rule #1 and Maximize Your Natural Strengths you should be able to earn enough money.
- Simplify and automate your finances as much as possible. Have your paycheck directly deposited into your account and enable automated payments to cover your mortgage/rent, loan payments, credit card bills, and other bills. This will save you time every month and also eliminate costly late fees. Learn more about how to stop wasting money here.
- Invest money on a monthly basis. Either deduct your savings out of your paycheck or arrange for automated deposits to be sent to your investment account after your earnings become available. Again, do this automatically and before you spend on less important things.
- Use simple personal finance software (Steve uses the free Personal Capital app, but Quicken, Mint, and spreadsheets can work too) to understand the services you’re paying for and minimize whatever isn’t a priority.
- Decide what the things you love to do (or are on your bucket list) and expand your budget in these areas. As Ramit Sethi suggests, “Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.”
If you love to travel, ensure you save money every paycheck for this purpose. I know several business leaders who have decided they will never worry about the cost of a book. If one is recommended, they just buy it. I also work with a business owner who has attended the Super Bowl each of the past ten years. These are expensive tickets, but since it is an area of happiness for him I think he is smart to do this.
Ideas for Action
|Suggested Action: Automate your regular monthly spending and track it with a financial tool. Decide on one area of your life where spending money makes you happy and start spending more in that area.|
Please let us know what you think about this rule for life. Rule 8 is next and all about giving back.