Cheap people and frugal people are two very different types. Cheap people focus on price first when it comes to spending their money. Frugal people focus on quality first when it comes to spending their money. But one common denominator they both share is that they control how much money they spend.
However, most people are neither cheap nor frugal. They are therefore not careful with their expenses. If you don’t make a lot of money, this character trait can lead to credit card debt and poverty.
But there is a solution.
In my research into frugal self-made millionairesI found a strategy they used to limit how much money they could spend. I call it the Invisible Money Strategy. The Invisible Money strategy involves just three simple steps:
Step #1 Determine your monthly nuts
This step requires you to track your expenses for a few months to determine exactly how much money you spend on your needs and how much money you spend on your wants. Your needs are the things you have to spend money on to survive.
Your needs include housing costs, food, car costs, etc. Your wants include entertainment expenses such as going to restaurants and bars, going on vacation, buying jewelry, or purchasing other items that you don’t really need.
Your wishes also include super-sizing to your needs. You go super big if you buy a house in a fancy neighborhood or if you buy a bigger house just to give others the impression that you are doing well. You’re being super big if you buy a more expensive car just to impress others. You are super big if you buy a more expensive wedding ring, watch or something else that matches latest craze category. The latest fad releases include clothing, mobile phones, computers, etc.
Once you define your monthly nut, you will know exactly how much money you need to survive.
Step 2 Calculate your excess cash
Subtract your monthly note from your total monthly take-home pay. This is equal to your excess money.
Step #3 Make that excess money invisible
Open a separate savings account. Every time you get paid, immediately put the excess money into the savings account. This forces you to only spend what you have in your main checking account. This has three psychological effects. The first is that the simple act of moving your excess money into a savings account makes you feel good about yourself. Feeling good about yourself makes you happy. The second effect is that you are forced to limit your spending to what is available in your main checking account. This forces discipline, which also makes you feel good about yourself. The third effect is the psychological impact of giving in to your wishes. Every time you transfer money from your savings account to your main checking account to spend money on something you want, you feel like you’re cheating. This makes you feel bad about yourself, which leads to unhappiness.
People naturally gravitate towards things that make them feel happy and avoid things that make them feel unhappy. The Invisible Money strategy plays on that natural human tendency. Over time, you will develop the habit of spending money only on your needs, thus avoiding the unhappiness that comes from giving in to your wants.
Try it for at least four months. It takes about four months to develop good money habits.
#money #invisible