Rock star / Sport star / Movie star/ Prominent Businessman announces “I’m broke!”
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Media headlines like these leave the rest of us wondering how this could possibly happen. But the truth is that making money is not the same as keeping it.
Rich is a relative term, and most people will never be really rich. However, the majority of people would like to accumulate enough money to cover their immediate needs, to afford to do some of the things that they really enjoy, send money to friends, families or charities, and to create some sense of financial security for the future.
Avoiding the rags-to-riches-to-rags story
Who doesn’t dream of receiving a large sum of money in a lottery, in a casino, or through an inheritance? Imaginations run wild when people think of all the different ways in which they could spend new-found wealth. In the unlikely event of this actually happening, what should they buy first? The answer is: nothing!
When people are not used to large sums of money, it is easy to believe that the dollars won’t run out. It is so tempting to make dramatic changes to the way they live, by buying fancy cars, moving house, wearing designer gear, throwing extravagant parties, going on expensive holidays, eating in the most expensive restaurants, and so on. Pretty soon, they are on a roller-coaster ride to financial disaster, and they probably end up being worse off than they were before.
Much better ways to use a sudden injection of cash are
- to pay off debt;
- to take sound financial advice and invest the money in long-term investments such as mutual funds and stocks and shares;
- to invest in children’s education;
- to boost retirement savings.
It is worth remembering that Warren Buffet, one of the world’s richest men, still lives in the house he bought more than fifty years ago. Granted, it is a big house, but still!
Building financial security
Most people build a reserve of money by being careful with what they spend. They learn to say “No!” to the temptation of spending money on desires rather than needs. How do they do this?
- They live according to a budget that encourages them to save, rather than to spend.
- They choose their investments carefully, by finding out as much as possible about an opportunity before they commit their money.
- They reinvest the profit on their investments. Even small amounts of money steadily accumulate, but once money is spent, it is gone. It can’t work for them.
- They focus on their long-term investment goals.
This may sound rather unexciting, but if people look after their money carefully, the day will come when it will look after them.
Keeping your money
Let’s assume that you have managed to accumulate a reasonable amount of money. How do you keep it working for you? The problem with having money is that the world is full of schemes that encourage you to spend it. Advertisements continually tell you that if you buy this or that, you will be smarter, fitter, better looking or happier, and the envy of your friends and neighbors, when the truth is that you will simply be poorer.
Look around you at the people you know who seem to manage their money successfully, and take some tips from the way in which they live.
- They are not stingy, and they may live well, but they still take advantage of freebies, special offers, rewards schemes and other ways of stretching their dollars.
- They don’t feel the need to display their money in order to gain status or recognition.
- They understand the difference between comfort and extravagance.
- They are often generous, but not foolish, with their money.
People who appear to be wealthy are sometimes deeply in debt, so be careful whom you listen to when money matters come up. Avoid get-rich-quick schemes and only take advice from reputable financial advisors who have been recommended to you by people you really trust.
Warren Buffet sums up the issue of getting and keeping money in these words: Do not save what is left after spending; instead, spend what is left after saving.