It's incredibly obvious, but usually neglected -- you need to spend less than you take in to accumulate cash.
Most people do not give this much (any?) thought, or at least don't take action on it. So, they tread water. Or worse, accumulate debt.
If you're able to spend less than you earn and bank the difference, your cash position goes up. This puts you ahead of the vast majority of people already.
But, then you can wind up in a tricky position.
Especially once you become good with money, you realize you can turn it into working capital at a pretty good rate. Someone who has spent some time learning the in's and out's of a few marketing channels, or technology, or throwing great events, or... whatever... can then turn free cash into useful production, which turns back into cash, at a good clip.
While someone saving money without any active development activities is lucky to make a 15% return, it's not at all crazy that someone with 5 to 10 years of experience in profitable business can turn cash into a 50%, 100%, 500%, or higher annual return when mixing the cash with their own labor, by seizing opportunities, and so on.
This is not all good, though. Once you reach the point where you're making very good business decisions with money and regularly seeing your deployed cash turn into more capital and cash, it can be very easy to get neurotic about spending.
For someone who just earns income and spends it to enjoy themselves right away, that's it, there's no need to think any further and they can have a good time.
For someone who knows they can turn every dollar into many dollars more -- and enjoy the process -- then you're not just spending what you're spending. If you go to a fancy restaurant and an amazing dessert is $25, that's not just $25 any more. That could alternatively be $25 of capital that you use to build more stuff with.
Worse yet is if you're good at math. With any semi-regular purchase, you do this:
"Hmm, this is $4. But I do this every weekday. Hmm, 5 weekdays x 52 weeks x $4 = $1040. That's $1040 of capital I could use. Hmm."
This is an awful place to be. Every single decision you make gets self-scrutinized. To one extent, this is good because you'll wind up banking more cash and have more working capital. But it's very, very bad in a particular sense --
Thought cycles, mental energy, and focus account for far more value than cash can. While banking a lot of cash can do wonders for your life, doing so haphazardly and constantly thinking about preserving money can be disastrous for creativity and productivity.
There might be exceptions to the above. If your craft, trade, profession, or business is basically on autopilot and you have a ton of free thought cycles to burn, you can obsess over every decision.
But if a single set of great decisions and actions can skyrocket your income, productivity, and reaching what you want to reach in the world, then you can't be burning thought cycles over every individual purchase.
The answer is probably to set up spending rules, and live comfortably within them.
This would "satisfice" your cash-banking and spending, as opposed to constantly locally trying to maximize it. You might choose to put 10%, 40%, or even 90% of what you earn into an investment account to deploy for business activities, and divide the rest of the cash between your various activities.
Budgeting works extremely well, even though they're hard to stick with. But starting further upstream, and taking your investment/capital cash off the top before you start spending is key. Creating a framework that you trust and like operating in means your thought cycles can go towards more creative and productive activities, and also to activities you enjoy and to your family and social life.
Thinking over every individual purchase and running the math is incredibly mentally taxing. Set some rules that work for you, live those rules, and you'll be ahead of the vast majority of people in terms of deploying income well, and you'll still have your thought cycles intact for doing what you love and what you're best at.
I'm not rich (yet) but I'd probably determine what I'd spend in a month if I didn't have to worry about money, then double that. I would then make sure I had that (ie double-my-most-carefree-spending) available every month, and sock away everything else in a form where I couldn't touch it easily (eg have to go through financial advisor).
For me, this would be a relatively low figure actually, probably laughable to a lot of people.
That way I could still invest in cool stuff but there would be some checks and balances. And my daily spending would be bounded. If I wanted to do something crazy with my personal spending I'd have to save up for a few months. This would then keep the hedonic treadmill in check.
Although, the point I'm making here is kind of the opposite of Sebastian's. He's worried about over-frugality with personal spending, whereas I'm more worried about over-laxity with personal spending. But I guess it's a perspective thing, I may very well arrive at Seb's position too when I have more wealth.
Have I mentioned how much I like being married? I mostly just bring the cash home and my wife makes budgets. I have a specific personal budget which it is specifically no problem to "waste" on stuff I like. It doesn't generally increase as our income does, though next big raise I'll probably suggest it (and my wife's) should go up by a portion of that increase-after-tax -- we're making noticeably more money than we did when we initially set it up.
One simple practice I like is to make a priority list of spending. As a simple example, I might write:
1. Pay off credit card.
2. Save $X fund for X.
3. Get coffee every day.
I can put coffee at #1 or #2 if I want or put weekly coffee at #2 and daily at #4, but giving everything an order helps me think about what I want to accomplish.of course there is still a threshold below which an expense is trivial/necessary and need not be written down.
If you were going to build an empire, how would you do it?
I've been thinking on this lately. I want to choose the imperial path first, last, and always. Every decision I make ought to be to the end of building. We can get into the "why" of it and philosophy another time, but I think pretty much the meaning of life is to expand, the mid-term goal of humanity ought to be to spread outside of Planet Earth and diversity our habitats a little bit, and I'd like to participate in doing that.
That's a really long discussion though, so we'll save that for another time. Yesterday I was in a really nice cafe and I was thinking, "You know, I want to always be choosing the empire-building way. When choosing between options, when prioritizing, when picking activities, when picking projects - I want to choose expansion and empire."
I thought about that and I don't have any really good heuristics for what's conducive to expansion and what isn't. So today I went to a cool little Vietnamese restaurant where the owner is friendly, got some coffee and tea and bread, and started brainstorming a little bit.
Focus is the act of putting all of your attention and concentration towards a single act. It’s staying away from distractions like email and Twitter to finally get some real work done. It’s doing the hard work and putting your all into it. Focus is a cycle of abundance which takes less time than your normal, easy routine. Focusing leaves you with more time to recuperate your energy, which ultimately allows you to focus harder tomorrow.
When assessing your progress on producing things of real value (the best path to building a rewarding and well-rewarded life), consider your own capacity for hard focus. Most important accomplishments boil down to this single, often overlooked ability.
This quote is from Cal Newport, who believes that the ability to sustain focus for long periods of time is the key to success.
Let’s say you and your best friend run against one another. Your best friend runs for three hours a day, listening to his pumping workout music and looking on as the sun sets under the ocean. You, however, simply run in your neighborhood for an hour every day. But you’re different. You’re not the staring at the sights or the people, you’re focusing on your running form and your breathing, every single day. After a month, who do you think will be the better runner? You will, because you were focusing.