Think About Your Finances in Terms of What You Are Not Buying
Many of us think of our money in terms of what it can bring us. When we earn X (or when we save X), we can buy Y. But if you are looking for long-term wealth — whether it’s financial security, financial independence, or retirement — it’s just as important to think about what you’re not buying.
Yes, I know it sounds like the old “spend less than you earn” cliché, and that’s part of it. But that’s not all.
The Psychology of Money by Morgan Housel is an 8,000-word deep dive on the emotional and logical fallacies that lead us to make irrational money decisions. This essay has a lot to consider, from “look for opportunities that involve risk but not ruin,” to “never interrupt a difficult asset unless it has achieved its goal or you are not in a real financial situation.”
But the section that instantly infiltrated my brain was part about how wealth is made up of things we don’t see:
If you see someone driving a $ 200,000 car, the only thing you have about their fortune is that they have $ 200,000 less than they had before buying the car. Or they lease the car, which doesn’t really indicate wealth.
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In fact, wealth is what you don’t see. These are not purchased cars. No diamonds purchased. The renovation was postponed, the clothes were abandoned and the first-class renovation was abandoned. These are assets in the bank that have not yet been converted to what you see.
But we don’t think so about wealth because you can’t contextualize what you can’t see.
I know you can’t just say “don’t buy anything” because you don’t. Also, “wealth” should not only reflect the number of your bank and investment accounts. For some people, wealth means having a car large enough to comfortably transport family, friends, pets, and equipment. Wealth can include a home with a dining room large enough for company, or the ability to travel multiple times a year.
But long-term wealth – that is, the kind of financial stability that can help you maintain the travel habit for the next decade – depends on what we can earn and what we choose not to buy.
So instead of thinking about your money in terms of what it might bring you in the near future, start thinking about it in terms of assets that you don’t need to convert into anything yet. Decide what you are not going to buy.
Then, decide how many of these assets you can afford to invest in complex financial accounts (CD ladders, index funds, etc.). You can assign each of these accounts a financial goal – down payment, future travel, retirement – or simply tell yourself that you are increasing your assets.
And once these assets start piling up, do not interrupt them if they have not reached their goal or if you are not in a real financial situation.