Thinking differently about money

It’s an easy statement for someone to make that as an accountant, I spend way too much time thinking about money.

But money itself does need to be thought about.

As the common method of exchange in our lives, money is literally how we acquire food, essential services and shelter. Without this method of exchange, we’d be back to the dark ages of barter.

Not only do we exchange money for goods and services, we also exchange our time for money.

That’s time you could have spent with your family, working on your hobbies or a million other possibilities.

In reality, most of us will spend the majority of our lives working in exchange for money. So it literally pays to spend some time thinking about it.

In this post, we are going to detail different thought processes that I have used in the past.

These are the types of ideas I’ve used to help myself save more, by putting into perspective the actual cost of purchases. Towards the end, we also discuss money ideas I’m still trying to master.

Thinking about money in terms of hours

Over the course of my life, when faced with the prospect of a purchase, I ask myself how many hours of work it took me to earn my savings.

Putting it in this perspective makes me ask the question, is this purchase going to be worth the hours I worked to be able to afford this?

It’s easy to say you’ve got $2,000 saved, so you can spend the money. But changing the thinking to the amount of hours or life energy you’ve given up to purchase this item puts things into a different perspective.

You can do this on a simplistic basis such as this costs $100 and I earn $50 an hour, so it’s only two hours of my time.

Not a big commitment for something that will hopefully bring you enjoyment.

However, at the minimum you should be thinking in after tax dollars. So that $50 per hour you earn is really only $35 after tax.

The easiest way to work out your after-tax earnings is to open your most recent pay slip and divide your take home pay by the number of hours you worked.

This is where I use to draw the line in the past, and it worked well for me for years.

I value my time, and knowing that I’d have to work all those hours to buy something, makes me really think about how much joy it will bring to me.

Is that new surfboard really worth an extra week of work when I already have two that I don’t use anymore?

Do I really need a commuter bike and a mountain bike, or can I get one mountain bike that you can commute on?

When thinking about money, I now go a step further. Having a mortgage means that I have an automatic amount withdrawn from my account each fortnight.

So say you earn $3,000 a fortnight, and your mortgage repayment is $1,000. That leaves $2,000 left over.

How many hours did you have to work to earn $2,000? A lot more than when you were just calculating everything on an after tax basis.

I really think about things like this when it comes to bigger purchases, as it makes you think about how long you have to work just to buy a luxury item.

Even with simple things like eating out, realising that you went to work for two hours that day just to buy yourself dinner really makes you think about where you are spending your money.

Thinking about money in terms of opportunity cost

By now we have well and truly detailed the power of compounding.

However a brief recap is that for every dollar we invest, it will be worth approximately 10 times this amount in 30 years. This assumes a pretty conservative 8% return per year.

So that hamburger with chips and fries for $16 looks pretty tempting right now. But the opportunity cost is $160 if you invested that money instead.

It probably doesn’t seem that much, but apply the concept to bigger purchases and you’ll see the opportunity cost of say buying a new car for $25,000 instead of $55,000. That $30,000 saving now could be worth $300,000 when you retire.

And let’s be honest, most people are buying a new car every 3-5 years! These things add up.

If you have a retirement number in mind, remember that those savings that are invested now will help you get there. If you put off the saving and investing until later in life, you may find you’ve left your run too late.

It’s using this knowledge to our advantage, because for every dollar we spend, we miss out on the opportunity to invest this amount, decreasing our overall net wealth now and in the future.

Think about it as robbing your future self rather than rewarding yourself now.

Thinking about net worth based on your age (average net wealth accumulation per year).

Thinking about your net worth based on your age is an interesting concept.

I started working at 18, and have a net wealth of around $650,000 at age 34. I’ve been doing it for 17 years now, so I’ve accumulated around $38,000 in wealth per year on average.

If I accumulated the same for the next 15 years, would I be happy with my progress?

Definitely not!

I plan on accumulating much more on average over the rest of my life.

There are plenty of flaws to this approach, because I probably earned under $20,000 per year for my first two years of work.

However what this approach does is make you think about whether you are happy with your net wealth accumulation over the course of your life so far.

It may prompt you to reduce your expenses, take more chances or invest more.

Hopefully the biggest take away is that if you have been working for half your life and you’ve got little or nothing to show for it, you better be making some big changes straight away, because you only have so much time to be ready for retirement.

Most of us will find it easier to accumulate wealth as we age due to higher income, more assets generating their own revenue and the power of compounding starting to pay off.

But don’t forget it’s later in life that you might have kids at private schools, international holidays and an expensive house that leaves not much in the way of disposable income.

Most people tend to wait until they are 50 before they start really thinking about their retirement. This is way too late.

Money can be made without going to work

This thought process is one I need to try more for myself.

It’s about identifying opportunities to make money where the opportunity doesn’t require me trading time for money.

What we are talking about here is identifying opportunities to make money such as from investing or front loaded work, where an investment of time upfront makes you money again and again without having to work on the product anymore.

A good example might be a tutor who teaches people how to write. They get paid $50 an hour and earn a decent wage from it.

Could they however create and market an online course, create an eBook and video tutorials?

Yes the work is done upfront, but once it’s done it’s really a process of keeping it up to date and marketing the product to earn more income.

Because the product is scalable, you aren’t limited to just your current location, you can sell online and internationally, significantly broadening your audience.

Compare that with working 40 hours a week for a year and I know which one I’d prefer.

Another concept is identifying money making opportunities that aren’t time intensive.

An example might be identifying an under-valued piece of land, subdividing it and selling two parcels for a profit. This is the type of thing where you could outsource much of the work and one good decision could make you $100,000.

This is all about training your mind to identify and execute opportunities.

Your wealth doesn’t have to be connected to the amount of hours you work.

This is really one of the key ways the rich get richer - they leverage their wealth and other peoples’ time to earn money for themselves.

Making money work for you

You work for money right?

You know the process…you go to work, get paid, you spend and repeat.

But wouldn’t it be better if you didn’t have to go to work and instead your money gave you constant payments without having to go to work? Of course it would!

The best part of having your money work for you is that your money can be working 24/7 and doesn’t need a break, annual leave or take sick days. It can even work for you while you sleep.

There’s the obvious way money can work for you - passive income in the form of interest income, dividend income, rental income and the like.

But boost your financial intelligence and the ability to identify investment opportunities, and potentially you can make money without even putting your own money down.

For example, say you have paid off your home. You have access to equity of $500,000, and identify an investment property that you purchase for $450,000. Because you bought a property that rents well, its rental yield covers the expenses. You keep the loan on interest only because you don’t want to pay any principal out of your own pocket. 5 years later, the market has increased and you sell the property for $500,000. Not only did you pick up some rental income along the way, you’ve made a $50,000 profit without spending 1 cent of your own dollars.

This is making your money work for you. If you can do this, you’ll barely need to work again.

These are examples of how over time, my thinking about money has evolved.

First it was simply a different perspective that encouraged me to save more.

But there is a limit on how much expenses can be reduced, and eventually you’ve got to look to the other side of the equation, which is boosting your income and assets, both of which are a key to achieving your financial goals more quickly.

These are my ways of thinking about money differently, what are yours?