Personal Spending Rules

Commenter Trudodyr recently asked a good question:

Maybe an article about how tight you have to be in not spending money would make sense. Overall I would guess that many readers (myself included) do not fully realise how much aware you have to be about spending/saving/investing your money to get really good results. I assume that it is mostly about having a set of well thought money/budget rules and being very very strict about not breaking them? How precise/tight are those rules?

Warren Buffet is the world’s third richest man, with a net worth of about $90 billion. Every morning, he gets exactly $2.67, down to the exact penny and puts it in his car. This is exactly enough money to buy an Egg McMuffin at the McDonalds drive-thru, which is his breakfast every morning. I used to work with Phil Knight, another billionaire, founder of Nike. A super nice guy, so what I’m about to say is not a criticism, but he would often look and dress like a homeless person. Crappy jeans, crappy shirt, messed-up hair, scruffy beard. The only time he would wear nice stuff is when Nike would come out with some new piece of clothing he liked. (Back when I worked with him, Nike had just released some high-end sunglasses, so he would often wear those.) More importantly, he never had any money. He was notorious for bugging his fellow Nike employees for two quarters so he could buy a candy bar out of the candy machine. And again, this guy was worth around $4 billion at the time. Mark Zuckerberg, worth $56 billion, drives a damn Acura TSX, an ugly little spud car that costs about $30K new, which is $15K less than my Lexus. I’m not saying you need to be this frugal nor take things this far. I’m saying that these are important lessons and examples you need to learn from. Financially successful people generally don’t throw around a lot of money. They don’t spend a lot of money. They don’t like to. They don't want to. They want their money in their bank accounts and in their businesses, not necessarily in their lifestyle. The times you see rich guys throw a lot of money around is usually when they inherited it. Guys like Donald Trump or Dan Bilzerian, who live overly-lavish, gold-plated yachts lifestyles are guys who were born rich and who inherited the core of the wealth. But if you look at guys who started from zero and made it financially on their own (guys like me), you’ll notice that these guys generally dislike spending money and tend to be very frugal (like me), even once they start making a lot of money. This tells you something. It tells you that if you have no money but want to make a lot, you need to be frugal about your expenses. You need to spend money very, very carefully, and focus on saving money, paying down debt, and re-investing in your business rather than blowing it on fancy cars, hookers, drugs, boats, booze, fancy houses, giant trucks, and other guy-lifestyle crap. I’m not saying you can’t ever get something nice. Last month I bought myself a nice Italian suit that was well over $2,000. Pink Firefly and I are in the process of moving and we’re looking at some pretty nice houses (though still much cheaper than I could technically afford). Sometimes I drop several thousand dollars on a first class ticket when I travel internationally, or spend a few nights in a five-star hotel. Sometimes. Sometimes you can treat yourself. But that’s the key word: sometimes. Not constantly. Your money needs to be in your investments and in your business. That’s where it belongs if you want to be financially free. The way I control my expenses is to pre-plan every expense on paper before I actually spend the money. On a normal, regular basis, I operate on a strict monthly budget. Every type of expense I have on a regular basis is in there, including things you wouldn't expect like eating out, travel, sugar babies, giving to charity, real estate upkeep, and so on. If I want to purchase something outside of the usual budget, like a new bed, new car, or upgrade my living conditions, then I create a new spreadsheet and list out the likely costs, where this money is going to come from, how exactly I’m going to pay for it, and how this expenditure will affect my financial position. My financial priority, at this point in my life, is to grow my net worth every year, so if any financial expense damages that goal, I refrain from doing it, or at least delay the expense until such time it won’t hurt my investing goals. That’s all you need to do. Start spending money on paper before you spend in real life. Dave Ramsey calls this “giving every dollar a name.” Every penny I spend in my life is spent based on a pre-existing budget or plan. Even frivolous fun stuff as a line item in my budget (called "Luxuries"). Yeah, it takes a little effort, but once you get into the habit you won’t even think about it. And it’s worth it. I went from a guy who couldn’t even afford to pay his electric bill to a six-figure income just a few years later, to a big six-figure international income a few years after that. I went from a five-figure negative net worth to a very healthy net worth today. A big part of all this success is how I control my spending. You should control your spending too, if you want to be financially free.

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