Changing Your Money Mindset
by Mike Peterson

Never spend your money before you have it. –Thomas Jefferson

---

In order to secure your financial future, sometimes you need to change your money mindset. The road to financial security can be daunting, but with just a few simple rules to help you get started, you can change the way to think about money and get yourself on the path to financial independence.

Rule #1: Think in Years, Not Months

You probably like to think of your budget (when you think of it at all) in terms of months. You make X amount per month, therefore you can spend X amount per month.

So, then you think about what you can afford, you think in terms of payments and sales prices, but not what things will cost you once you’ve finished with 30 or 60 or 90 or 1000 monthly payments. You have to start thinking about your income and expenses over the long haul. Why is that so important? Because. . .

Rule #2: Paying Interest is Bad.

Let me give you an example: you decide to buy a stereo. You scour the sales, read the consumer reports, even visit several stores. You find the best deal on a system you know you’re going to love.

You can’t believe the bargain you’ve found! The $4,000 system you want is reduced a full grand, and you can put it on the store credit card for a minimum payment starting at only $60.00 a month. You don’t like to think in years, so you never bother to figure out how much that stereo will actually cost you. Out comes the credit card and home goes the stereo system. No big deal, right?

Now let’s see what that stereo system is actually costing you. Paying the monthly minimum, at 18% interest—not bad for store credit—you would pay over $7,900 in interest over the next 37 years. That’s a total of over $10,900 for that $3,000 stereo system. Of course, by that time, you would have needed several new stereo systems, which you would also be paying for.

Well, who cares, right? So you pay a ton more, but that’s what credit is all about. You pay them extra money so you don’t have to pay all of that money upfront. But did you ever think about what else you could do with that money? That is, did you ever think about what that money could do for you if you were making interest on it instead of paying interest with it?

Those minimum payments every month may not seem like much, but if you took the money you spend on interest and spent it in investments instead, you could easily have made over $12,000 during the time you paid out well over $7,000!

So how do you avoid paying interest? By following. . .

Rule #3: Control the Consumer in You.

Learn to distinguish between wants and needs. Cutting a little bit here and there can make a big difference to the amount of financial freedom you are able to enjoy. You need the milk on your grocery list. You want the People Magazine in the impulse aisle. You need to pay the phone bill. You want call waiting and caller ID and voicemail. Does that mean you should turn off you caller ID and that you can’t ever buy a magazine from the checkout aisle? No. What it means is that it’s important to recognize those things for what they are: small luxuries. Enjoy your small luxuries, but deny yourself every once in a while as well. It will make an amazing difference to the bottom line—to the amount of money you have for big purchases at the end of every year. And you’ll appreciate your small luxuries that much more when you indulge.

There’s another bad habit that most of us have when making purchases, and that’s the natural human tendency to do optimistic. Yes! In this, even pessimists are optimistic. We all think we’ll have more money tomorrow than we have today. Which leads us to. . .

Rule #4: Don’t Count Your Chickens Before They Hatch.

It’s one of the most common (and the worst) money managing habits out there: buying things based on future income—and salesmen bend over backwards trying to get you to do it. How many promotions have you seen in the last month: 0 down, 0% financing until next year. What’s your impulse? “Sounds great! Buy now. Pay later. What could possibly go wrong?”

Well, there are, of course, the catastrophes: you lose your job, you become ill, or your house burns down; but barring those, these are still plenty of reasons you should think twice about taking advantage of one of those deals.

Putting off payments is not necessarily a good thing. It just means that you’re doubling up on payments later. After all, if you wait until next Christmas to start paying off stuff that you buy this Christmas, does that mean you’re going to skip Christmas next year? No. You’ll buy more stuff next Christmas and your payments will start piling up. Pretty soon you’ll find that your debt is out of control, and trust me, when you’re still paying for that entertainment system you bought five years ago, those pure tones that the salesman raved about won’t sound so sweet.

Here’s another common scenario, “The Promotion You’re Sure About.”

You’ve been promised a promotion in January, so you decide to celebrate with a hip new ride. But all the sales on this year’s models are in December, and you don’t want to miss out. The Lexus dealership is offering $0 down and 0% interest for six months. The payments are a little bit more than you can really afford on the year’s salary, but after the promotion and the fat pay raise, you won’t have any problems with them at all. Right?

What happens? The office upstart gets the promotion instead, leaving you no choice but to trade in your new car for an older model when the payments come due. To make matters worse, when you go to trade it in, you discover that you’re upside-down on the car (having never make a payment, but having put plenty of miles on it), and you’ve got to shell out a couple of grand just to get rid of the thing. Why didn’t anyone tell you that your car would lose 20% of its resale value in the first year?

The moral of the story is that you can have hope and positive expectations, but you cannot risk making assumptions about things you simply aren’t sure of, especially when it comes to your finances.

Rule #5: Being Wealthy is About What You Save, Not What You Have.

It’s a natural tendency to want to appear wealthier than you are. But what most people don’t realize is that being wealthy is about what’s in the bank, not about how much stuff you have. A fancy car and a big stereo may make you look wealthy, but when your bank balance is zero, you’re actually one step away from poverty.

What’s the definition of rich? Is it having a big house? No. It’s having money, which means cash. If you are always maxing out your monthly living expenses trying to appear rich, then you’ll always be nothing more than a member of the economy assembly line—working, making money, and passing it down, without ever keeping any for yourself. And what do you get at the end of the road? A big fat zero in the bank account.

Let’s recap:

• When you think about how much things are costing, add them up in cost per year or cost per decade, not cost per month.
• More of your money goes to interest than you realize. Paying interest is the number one reason most Americans will never become financially successful.
• Learning to distinguish needs from wants and avoiding impulse purchases will go a long way towards helping you save enough money to meet your life goals.
• Never purchase based on future income.
• In order to be wealthy, you must have money in the bank or in investments. Simply appearing wealthy does not make one wealthy.

---

Mike Peterson is a senior certified counselor and co-founded the American Credit Foundation, a non-profit credit counseling organization. He is the author of Reality Millionaire, from which this article is excerpted.

Comments on this article	ADD COMMENT
letter Posted by Adam from nigerain yes
The gift Posted by Waynette from Northern Nevada This article is very timely .... as most of the buying U.S.public learns to "rethink" spending. Our dollar buying less these days has made a spend thrift out of most of us.