People who accumulate wealth are often scrupulous when it comes to budgeting and finding ways to save money.
Whether that means taking time to reflect before making a purchase or paying cash up front rather than using credit, here are eight rules that will help you manage your money like the wealthy do.
1. The 24-hour rule and 72-hour rule
The 24-hour rule is based on the principle ‘to sleep on it’ before making an important decision. Instead of being lured into an impulsive buying decision, wait 24 hours before locking in expensive purchases.
This will give you time to decide whether it’s a ‘want or need’ and make sure it’s not an emotional and unnecessary indulgence.
The 72-hour rule takes this a step further, which suggests waiting even longer.
Austrian neurologist Viktor Frankl writes in his book Man’s Search For Meaning, “Between stimulus and response there is a space. In that space is our power to choose our response”.
This space between our desire to buy and actual buying can hold the power to change our decisions, The NY Times says.
2. An all-cash mindset
One habit the wealthy live by is avoiding debt and interest costs by paying for everything up-front.
American talk show host Jay Leno has been quoted saying he barely uses credit cards, doesn’t write cheques and doesn’t carry debt.
“I don’t write cheques at the end of the month for anything. When you own something and you don’t have to write cheques every month, you’re just better off,” he told CNBC.
Save the cash you need for each purchase, and you won’t need to take on debt. This will also make you more frugal with your buying decisions because you’ll be budgeting with the cash in your bank account, rather than what credit loan is available to you.
If you’re buying a large purchase as an investment such as property, taking on debt as a mortgage can be a good debt, but having a cash mindset for smaller purchases will save you money.
3. Set the goal of saving 10 to 20% of your income
Thomas C. Corely, a certified public accountant and certified financial planner, studied millionaires for five years for his book, Change Your Habits, Change Your Life.
Out of the 233 people he interviewed with at least $160,000 USD gross income annually and $3.2 million USD in net assets, 177 of them were self-made.
“The self-made millionaires in my study all set a goal of saving 10 to 20% of their income during their pre-millionaire years,” Corey wrote.
What is encouraging about his study is that 80% of the self-made millionaires he studied didn’t fully accumulate that wealth until after the age of 50.
4. Use the 50/30/20 rule for budgeting
Harvard bankruptcy expert and US Senator Elizabeth Warren coined the 50/30/20 budget rule for Americans, but the same philosophy might prove note-worthy for New Zealanders too.
The rule outlines that one’s income after tax should be divided between spending 50% on needs, 30% on wants and 20% on savings.
Needs consist of your non-negotiable monthly payments such as rent or mortgage repayments, grocery bills, utility bills, health insurance and car payments.
Your wants would be made up of disposable income that can be spent on entertainment, shopping for non-necessities and any planned vacations.
This would leave your final 20% for a savings account or debt repayment.
This rule comes back to the theory that most self-made millionaires save 20% of their income.
5. Spend on items that have earning potential
Buy the things that will be an investment into your future, such as a decent laptop and working from home workstation.
Stanford University economist Nicholas Bloom says working from home is likely to continue long after the pandemic ends - so investing in home office equipment will likely increase your earning potential.
“Work from home employees now accounts for more than two-thirds of the U.S. economic activity,” Bloom told Stanford News.
This is a global trend that has also changed the way we work in New Zealand. More than 40% of Kiwi employees worked from home during lockdown in 2020 according to Stats NZ and it’s a trend that has continued into flexible working at many corporate companies.
6. Time is money – so pay for services that save it
"Time is the only asset you can’t get any more of, so be extremely selective when handing it out,” Warren Buffet said.
Following the advice of one of the best investors of all time, spending money on services that save you time and stress are worth it. Whether that’s a delivery service or renting or buying accommodation closer to where you work, it could be worth the extra cost.
Creating a lifestyle that gives you more time to do the things you enjoy, will add to your personal fulfillment.
7. Experiential spending is an investment into your happiness
Experiences that enrich your life and add to your happiness are worth the cost and millionaires are always embracing these.
Business Insider asked 100 millionaires what they spent their money on and 60% spent their money on travel.
Experiences are found to provide a higher level of satisfaction compared to using material possessions, according to a study at the University of Texas.
8. Streamline your wardrobe to save on outfits
Many successful people wear similar outfits every day, from Mark Zuckerberg to Steve Jobs.
This minimises the decisions you have to make on what you’ll wear – saving brain power for better financial decisions, plus saving you money on shopping.
If something can be repaired instead of replacing it, this will also save you more money in the long term.
Having a capsule wardrobe is another way of saving – this means having a small number of items that can all be mixed and matched together to create more outfits overall.
For more tips on managing your money, Westpac runs online tutorials to help you make smarter spending decisions.