We’ve all heard the saying “you’ve got to spend money to make money”. And while that’s not true in all circumstances, it’s commonly true in the world of personal finance. It’s pretty much impossible to become wealthy through frugality alone. In reality, most people have to spend money if they want to maximize their long term wealth potential. There are many examples of how this works. Here are just a few.
- Investing. In many ways, investment can seem like the ultimate indulgent expense. After all, how do regular people have the interest or extra money to buy pieces of companies? And isn’t the stock market just a big casino? In reality, investing in stocks, mutual funds, and other securities is the most reliable way to grow wealth faster than value is lost through inflation. Tax-protected accounts like IRAs will also save you money on your taxes. Invested money can’t be easily liquidated or spent, but even out of reach it’s an allocation that will create greater wealth in the long run.
- Life Insurance. Life insurance may seem like another indulgence. After all, you are young so you’re probably not going to die, right? Well, everybody thinks this way, and sometimes people die by accident. That’s reality. If you or a partner were to die, this would create a huge financial crisis for you and your household. Term life insurance quotes can show you how affordable it is to preserve wealth and lifestyle spending, even if a wage earner in your household were to die.
- Home Ownership. Home ownership seems well out of reach for many people. But traditionally home ownership is the way families build wealth. Without it, you’ll always be losing money through renting. Home equity is the amount of your house you actually own, not the amount still owned by the bank. By paying off your house, you essentially have a large bank account that can be used many different ways.
- Education. Education is hard and expensive. But you know what? It’s really hard to make a lot of money without an education. Even if you are educated in a skilled trade, this is still internal knowledge you possess that can guarantee income in the future. Some people avoid education because it’s expensive, but in this way cheat themselves out of excellent long term prospects.
- Buy Things That Don’t Break. Buying nice tools, appliances, and clothes may seem senselessly expensive, but if these items last longer than many cheap ones, you’ll save money over the years. Investing in great stuff keeps you from having to rebuy and replace over and over. It’s a hard habit to learn, but one which will serve you well for the rest of your life. It’s a great way to learn good decision making skills too.
There are loads of examples that we don’t have room for in this post. Suffice to say, you’ll have to be courageous with your money if you want to build wealth. You won’t be wasteful, you’ll just learn to allocate your money for the wisest purposes.