Habit Spending

Habit spending occurs because you have ingrained spending behaviors that are habitual in nature, which you may not even be aware you have. These habits were created from your money beliefs, which have perpetuated your current financial situation.

Have you ever found yourself buying goods because they helped you cope with an emotional low? Are you buying certain brands just because they’re what you’re used to wearing, or are you shopping for bargains because that’s the only way you feel in control?

Habit spending can be as simple as buying a morning coffee at Starbucks or buying premium gas at the pump. Or your habit spending may be more complex, such as continuing to pay monthly fees for banking services or insurance premiums. Or you may have a smoking habit or maintain an organic food diet. You’ve accepted these expenses as is and don’t think to question them. However, it’s important to review them in order to change the habits that are not healthy and promote the habits that add value to your life.

I had a conversation with a colleague and friend of mine about spending. He shared how proud he was that he didn’t have a daily lunch habit like most of his coworkers, who ate out each and every workday.

“I don’t eat at the cafeteria every day or go out for lunch,” my friend stated.

“What do you eat, then?” I asked.

“Well, I don’t really have a set time for lunch, but I’ll eat when I’m hungry. I don’t spend as much as others,” he said.

“How much do you spend for food throughout a workday?” I asked.

“I don’t know exactly, but it’s probably less than $5 a day,” he replied.

“Let’s do an experiment,” I suggested.

I instructed him to continue his pattern for 30 days, but requested that he use a debit card during this period so we could monitor his spending habits. After the allotted time period ended, he was surprised to learn that he spent an average of $14.50 a day on food. That was almost three times higher than he believed he spent daily on food. During the first few days of the experiment his food expenses were under $8 a day, which can probably be attributed to the fact that he was more mindful of his spending early on. As the awareness of the experiment waned, he became less mindful and his existing spending habits reemerged. He may not have been eating lunch regularly, but he was habitual in spending on snacks and fast food at irregular times. What surprised him was how many times he bought snacks at the gas station’s convenience store every day—something that he didn’t even realize that he was doing.

Are you aware of how you spend? For example, do you drive to work instead of using public transportation? Do you consistently buy bottled water? Do you forget to turn off the lights when you leave a room? Do you keep the AC or heat on when you leave the house?

Retail Therapy

Are you surfing websites and making random online purchases when you feel sad, lonely, or depressed? Do you head out to the mall or the supermarket whenever you feel out of control?

Retail therapy is buying goods, services, and experiences to make you feel better. It’s mood enhancing. Retail therapy provides you with a temporary feeling of control.

I admit that I used retail therapy to combat some of my dissatisfaction with my life and to deal with my crumbling financial situation. I traveled often for work and I found myself killing time by walking around at shopping malls. I didn’t realize it at the time, but I was giving myself retail therapy because I was unhappy. I spent money to feel better, and I found myself buying things that I didn’t need or even want. It just gave me a feeling of control.

During a trip to Dallas, Texas, I felt especially lonely. I drove to the mall and spent a few hundred dollars on clothes and shoes. I recall telling myself that these were great finds because I got things I wanted on sale and at a discount. I bought so many things that I needed to buy another piece of luggage to bring them home.

Then came an eye-opening experience: I realized that I didn’t unpack the suitcase containing my new clothes and shoes for over a month. It had remained collecting dust in my walk-in closet.

Since I felt helpless and not in control of my situation, the one thing I could control was making a purchase. It was up to me to decide if I wanted or didn’t want something. Even though at times I didn’t have the money to make a purchase, I relied on credit to make it. As my financial situation deteriorated, I found myself using retail therapy once again to combat my feeling of helplessness. The more financial stress I felt, the more I spent, which compounded my financial troubles.

Do you find yourself spending because of an emotional need? If you find yourself using retail therapy to cope with your emotional roller coaster, you might try an experiment that worked for me. To get a sense of control and feel the instant gratification that I was looking for, I’d buy whatever it was I wanted, but I wouldn’t open it or use it. After a day or two, I’ll ask myself if the purchase I’d made was something I truly wanted. Oftentimes I found the act of purchasing something provided the retail therapy I desired, while the product itself was something I didn’t want. In those cases I returned the unopened packages.

Eventually the frequent shopping and returning of unused items made me aware of my retail-therapy spending. That awareness allowed me to change my coping strategy during low emotional moments.

Brand-Loyalty Spending

As I continued on my path to awareness, I began questioning all my purchasing behaviors. I came to the conclusion that my brand loyalty was based on an emotional need to be desirable to others. I drove a BMW because it made me feel sexier. I wore expensive brand-name clothes because they made me feel better. I only used products from Apple because it supported a narrative I wanted to promote—that I was trendy and cool.

My brand-loyalty habit was how I defined myself. I was making my purchasing decisions not based on quality (although brand names can definitely be associated with high quality), but because these brands symbolized the person I believed I was.

I will admit I didn’t know who I was back then. I was living a lifestyle that I didn’t recognize. I didn’t know my values or what really mattered to me. I didn’t have a vision for my life. I had the financial means, and spending my hard-earned money on brand names helped me cope with my actual situation. I may not have felt successful inside, but I sure would promote the image of success with the clothes I wore and the products I used.

I learned something quite interesting. When we don’t know who we are, we use the names of others to express our identity to the world. This statement summarizes my current belief that a lack of self-awareness makes us more prone to use brand names and company logos to explain to others what we stand for and what we value.

Through self-awareness, I know what brands I like and what brands I don’t. The value I give them isn’t based on what has been marketed or socially promoted to me. I’ve learned that the value brands have is the value I give them. I am more mindful of the brands I buy that align with my values. And I make sure that I always have the money to purchase them.

Companies (and society) can say that brand X represents Y, but if you don’t believe it or don’t buy into the value being marketed, then the brand represents nothing. Don’t be fooled into believing that a brand makes you any more or any less of a person.

Ask yourself these questions when you’re buying brand names:

• Do you make purchases because you’re loyal to particular brands?
• What do those labels or company names mean to you?
• Is a higher price tag worth the expense?
• Can you define yourself by other means?

Bargain Hunting

A few years ago, when I was conducting a lecture on spending habits outside Raleigh, North Carolina, I was confronted by someone who disagreed with my thoughts on bargain shopping.

“If it’s a bargain, it would be foolish not to make the purchase. I may not need it now but I may need it later. Isn’t it better to buy it on sale so I have it when I do need it?” the man asked.

I nodded and replied, “What have you purchased recently that fits this scenario?”

“I bought a brand-new drivable lawnmower. It was 65 percent off, since it was last year’s model,” he said.

“Was your current lawnmower broken?” I asked.

“No, it isn’t; but it’s old, so it could go anytime,” he responded.

A year later, I went back to Raleigh to give a second lecture, and the same man approached me and said, “You know, I still have two lawnmowers in my garage. They both work fine. I’ve been using both because it bothered me that one was collecting dust.”

I asked, “So what do you plan to do with them?”

“I’m at the point where I want to get rid of the old one,” the man replied, “because I can’t even fit my car in the garage.”

Do you find yourself buying goods because you perceive a future need for them? How do you determine the probability that this need will arise?

There may also be times when you find yourself actively searching for a bargain. However, you may be proactively seeking discounts to validate a purchase that’s actually unnecessary. You may tell yourself that the purchase is excusable, because who wouldn’t buy something at a deep discount? Become aware of your bargain-hunting mindset.

My spending rule is quite simple: A bargain isn’t a bargain if you don’t actually need the item.

There may be a perceived value, but if you’re spending money because an item is on sale or discounted, you’re not spending on what matters. You’re spending on impulse. There is a financial benefit in buying goods that are on sale as long as they are things that have been identified as needed or valued.

Credit Score

There’s a lot of misinformation that persists about credit. I could write an entire book on this subject; however, I’ll focus my attention on the importance of knowing your credit score. I’ll start with a brief explanation of credit reports.

A credit report includes personal information and a history of credit use. It includes the credit or loans you’ve held or have outstanding, the balances and limits for your credit cards, your payment history, credit inquiries, and any public judgments or records. It is from this information that your credit score is generated.

Your credit score is calculated by a credit reporting agency and is based on a variety of factors that come from different organizations. Your credit score can and will vary depending on the credit reporting agency doing the calculating. What is more important is to know where you fall within the credit score range. There are different scoring methodologies and ranges, but a simple search online can help you determine what those methods and score ranges are.

A credit score can impact your ability to obtain additional credit, but as I’ve stated throughout the book, credit is a tool. Credit can help you along the road to financial wellness, or it can derail your efforts to reach your destination. A higher credit score will help you get more favorable credit terms with lower interest rates and lower payments. It’s important to manage your credit wisely so that you remain an ideal applicant when you’re seeking a mortgage, refinancing a student loan, or applying for a debt-consolidation loan.

Verify the information found in your credit report. Make sure the information found in your credit report is accurate. You can request a free copy of your credit report from the three major credit reporting agencies—Experian, Equifax, and TransUnion—through AnnualCreditReport.com. This is the only government-mandated and authorized website for requesting your free copy of your credit report, which you can do once every 12 months. Review your credit report information and verify its accuracy. If you find a discrepancy or an error, correct the issue directly with the credit reporting agency in question.

You will not get a credit score through AnnualCreditReport.com. To obtain your credit score you must request it from one of the credit reporting agencies and pay a fee. However, a growing number of banks, credit card companies, credit unions, and apps offer access to free credit scores.

I won’t go into many more specifics about credit scores, aside from stressing the importance of knowing your score and what it represents: It is an indicator of your credit health. It does not tell you much of anything else.

Your Net Worth

Your net worth is an overlooked—yet important—figure to know. Knowing your net worth not only helps you to see where you are today, but it also helps you to envision where you want to be. Your net worth is a snapshot that enables you to easily determine what area of your finances must take priority: paying down debt, increasing savings, cutting expenses, or investing in appreciating assets.

Your net worth helps you understand your financial wealth at a specific point in time. It is the amount by which your assets exceed your liabilities—the difference between what you own and what you owe. Things you own that have value could be your savings and investments, your home, and your car—and anything else that can be sold for a price. Liabilities are things you owe, such as mortgages, loans, and any other type of debt.

Net Worth = What You Own (Assets) − What You Owe (Liabilities)

If the total value of what you own exceeds the total value of what you owe, then you have a positive net worth. You’re financially healthy. This number helps you determine if you’re on track with your financial wellness or need to make adjustments. If you have a negative net worth it doesn’t necessarily mean you’re financially unhealthy, but you do owe more than you own. Knowing this should increase your awareness about increasing your assets or lowering your liabilities.

Track your net worth over time. It will help you to see your progress and to remain mindful about what needs to be done to continue on your road to financial wellness.

Liquid Assets

How much do you have available in case of emergencies? Liquid assets are cash or assets that can easily be converted to cash without substantial penalties or fees. Liquid assets could be cash in the bank or stocks, but your retirement funds are not liquid assets.

Think of your liquid assets as an easily accessible safety net—a spare tire—on the road to financial wellness. It’s a tool that can help you through difficult financial periods without impacting your long-term investment strategy. If too much of your assets is in real estate or business ventures, which are more difficult to convert to cash, you may be ill equipped to weather a financial setback if it happens.

Calculate how much you have in available savings—including cash, emergency funds, CDs (certificates of deposit), money markets, stocks in your brokerage accounts, and other assets you can access if an emergency or an unplanned investment opportunity arises.

Knowing your total liquid assets can help you plan a diversified savings and investment strategy that takes into account your changing life and financial situations. If you discover you do not have much in terms of liquid assets, then you may want to budget to build up your emergency fund or keep more of your cash in accessible accounts.

It’s recommended that you have at least six months of expenses saved in an emergency fund. Depending on other factors, you may want additional available cash to take advantage of business or investment opportunities that may arise. The amount of liquid assets you’ll need for those opportunities may vary. This is an important strategy to ensure financial well-being.

Cash Flow

Experts often say to live within your means. Some people may even use this principle to chastise others who are in debt for not living within their means. But what does this phrase actually mean?

Are you living paycheck to paycheck? Do you have extra cash on hand after all your expenses are paid? Understanding your cash flow will help you to figure out if you’re living within your means. Your cash flow won’t tell you when you can retire; however, it can tell you if you’re on the right path. Cash flow is how much money is coming in and how much is going out. Analyzing it will reveal surpluses and deficits, and you can use this information to create the necessary strategies to improve your financial wealth.

As you figure out your cash flow, the process may seem similar to creating a budget; however, you won’t be too concerned with the total savings or the total debt you have. Instead, you’ll just be mindful of the flow of income and expenses within a given period of time—in this case, a month.

To calculate your cash flow, you’ll need to gather your total net income from all sources and your total expenses for the month. Count income from all sources that provide you with money to spend (for example, your paycheck, interest income, and investment income). Expenses should include all payments occurring regularly and irregularly (such as your mortgage or rent, car payments, groceries, utilities, and spending money).

Cash Flow = Total Monthly Net Income − Total Monthly Expenses

Having a positive cash flow means you’re spending less than you earn, and that surplus can be used to save, invest, and pay off debt. On the other hand, if you have a negative cash flow, it means you’re living beyond your means. This can lead to increased credit use and debt. The result of this calculation can help you determine which course of action to take, including cutting expenses, increasing income, and prioritizing debt repayment. It’s important to know your cash flow on a monthly basis because this is a more reliable number to determine what you can afford and how much you can spend. This is the true indicator of your means.

Retirement Age

I can’t wait to retire.

I’ve said this quite often and previously believed it would be at an age that was decades away. I thought about retirement, but I wasn’t mindfully planning for it. I grew up believing that we work as much as we can until the date our bodies are physically unable to because of old age—which also happens to be the time in our lives when we have plenty of free time. Many of us see retirement as that ideal period when we get to have fun and do all the things we’ve dreamed about—freely able to check off items on our bucket list—and I saw it the same way.

That was until I realized I could retire sooner rather than later. Your retirement age can vary, and it doesn’t need to be dictated by your employer or the government. Retirement isn’t just an age in our 70s but a lifestyle. Retirement is a state of living in which your income to pay for living expenses doesn’t come from the time-for-money work exchange. A state in which you have enough in savings or income-generating investments to cover your living expenses. This income allows you to use your time to pursue work, hobbies, and interests that matter to you.

With effective planning, retirement can happen at any age—or even multiple times in your lifetime. I consider myself retired from my previous career, and I lived for two years solely on my savings.

By 2011 I had been able to save around $35,000, which I used to backpack around the world and pay for living expenses from 2012 to 2014. My expenses at the time were quite low, and I made sure not to spend mindlessly. Everything I purchased had a purpose, and I was mindful to not take on additional expenses that required fixed monthly payments.

For example, if your fixed monthly expenses are $1,500 per month, it would require $18,000 in savings to afford your current lifestyle for a year ($1,500 × 12 months). If you save $18,000 and stay within a $1,500-per-month budget, then you would be able to afford to live without a job for one year. That would give you time to pursue more purposeful work within that time frame. However, spending above your budget would decrease the number of months you’d get to work on your chosen projects.

Set a date right now for your retirement. Be mindful of the lifestyle you want to live and the importance of consciously saving and spending. Be mindful of lifestyle inflation and your spending habits, which could derail your efforts to retire.

Currently I am working on projects I am passionate about that generate income. I earn income through writing and speaking engagements, which is quite different from the paycheck I earned working in financial services. I do consider myself to be living a retirement lifestyle. I describe lifestyle budgeting in further detail in Part III, “Creating a Plan.”