Finance Friday: Everyone Wants You To Spend!

This past weekend saw me venturing out into my community to experience a wonderful, educational and free (well…paid for with tax dollars…) source of entertainment – I went to my local library!

Looking to feed my appetite for personal finance, I went over to Dewey Decimal System section 332 and, after browsing the section for roughly fifteen minutes, pulled out David Chilton’s The Wealthy Barber Returns (the sequel to The Wealthy Barber, which sadly I have not yet read…), and proceeded to devour the pages with my brain.

At two million copies sold in Canada, The Wealthy Barber is among the best-selling personal finance books ever published in this country’s history. Unfortunately, the library didn’t have the book in its collection. Based on the sequel though, I can tell you that Chilton possesses a light and personable writing style that makes it easy to interpret his teachings and approach to personal finance. This blog post, however, isn’t a book review!

Although I didn’t finish the book during my roughly two hour sitting, I got through enough of the content to get my head wrapped around a logical, but easy-to-overlook financial fact of our 21st century life: everyone wants you to spend money, borrow money, and spend again!

And when I say everyone, I mean everyone! Governments (notice how slow they are to crack down on the housing bubble we’re facing in a bunch of regional markets here in Canada?), your peers (often indirectly and sometimes unintentionally) and of course your local banker (that’s how he/she makes his/her paycheque…) are often all looking for you to make one of two choices with your money – they’d rather you spend it than save it!

These social forces aren’t inherently evil entities, but they can sometimes get totally in the way of what is really advisable for our own personal financial situations.

As stated in the book, governments want to see increasing consumer spending because that boosts overall consumption, which boosts economic growth. Governments love leading growing economies!

Our peers often influence us in subtle ways, such as when one of them flashes a sweet new gadget or drives by in an amazing new ride. This can set off emotional responses in our brain that make us seek out our own joy triggers, which are often accompanied by some shrinkage of our bank accounts.

Speaking of banks, although I’m not fundamentally anti-banking, it is important to keep in mind that a bank is a for-profit business. Its job is to make money, and one of its main product lines is its selection of various lending vehicles (mortgages, credit cards, lines of credit, etc.). All of these offerings can lead to the bank coming out way ahead of you in the transaction. The more money you borrow from them, the better their bottom lines become.

Coincidentally, I received a letter in the mail this week from my primary bank with an offer to…drum roll please…double my credit limit! I’ve already been asked over the phone once fairly recently if I wanted an increase in my credit limit. I don’t. I don’t need more credit. And I don’t buy their pitch that a credit card is a great solution “in case of an emergency.” That’s what an emergency fund is for!

BMO Credit Card Letter 2Using debt in the case of an emergency only expands the scope of the problem; it’s like jumping off of a sinking ship, only to discover that you’re in the middle of the open ocean and can’t swim ashore. Maybe you should have never left fresh water…or built a lifeboat.

One of the best anecdotes from The Wealthy Barber Returns (affiliate link) comes right at the beginning of the book. It uses the example of a household that is saving only 4% of its net income, and asks this hypothetical family if they could push their savings rate to 10%…in other words, David is suggesting they more than double their savings rate. Their response: “impossible!!”

Although that may sound challenging to execute, he then flips the question around: “what if you were to cut back on your spending by 6.25%?” That seems much more feasible, the family agrees. Of course, this nets the same result as the 150% increase on the 4% savings rate, as a 6.25% reduction on a 96% spending rate would leave 10% leftover for saving. Try the math – it works!

The book certainly proves how emotionally- and psychologically-challenging money management can be. A simple shift in perspective can lead to powerful change, and ultimately a lot more cash in your pocket at the end of the day/week/month/year/decade.

This book is definitely worth checking out and is an easy and fun read. It makes building your financial literacy a lot more engaging as well!

Happy increased saving/decreased spending!

 

-MB

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