It’s a beautiful Friday morning. The sun is shining, the birds are chirping, my coffee is brewing, but most importantly… It’s PAYDAY!!! The thrill of payday is unmatched, I can now fund a fun-filled weekend with my friends at the bars, the mall, anywhere. The world is my oyster.
A spending excursion of a weekend is just what I need to get a mental release from my 8-5 job.
Then, Monday morning rolls around. The sun is shining, the birds are chirping, and the coffee is once again brewing. I decide to check my bank account, which I hadn’t done all weekend. The resulting feelings all hit at once:
Shock, dread, embarrassment, fear, and worst of all, regret. How did I spend over half of my paycheck in 3 days??
These all-too-familiar feelings were just a part of my biweekly routine, one characterized by uncontrollable spending and poor self awareness.
This ate up my life for years. It was an unhealthy cycle that drove me further and further into credit card debt, as I would spend hundreds of dollars the first weekend I got paid, and not have enough left in my checking account to make it to the next paycheck. I hated that lifestyle. Sure I had fun on the weekends, but I ultimately felt unhappy and stressed out due to my lack of money management skills.
I decided I was done living paycheck to paycheck, and I was done self-sabotaging my life. I knew that if I regained control over my financial life, I’d be a lot happier overall. So, after spending countless hours watching YouTube videos, listening to podcasts, and reading personal finance blogs like Think Save Retire. I was ready to convert my horrible spending habits into smart investing habits. This was the point where I “flipped the switch” and went from being a consumer to an investor.
What does it mean to “flip the switch” to go from being a consumer to an investor?
It’s the mental and behavioral shift from being someone that spends money and follows trends to being someone that puts capital to work and utilizes trends.
Chronic consumers often go broke, and chronic investors often get rich. So which one do you want to be?
How do you know if you’re a consumer or an investor?
Not sure where you fall—a consumer or investor? Maybe you weren’t even aware of these classifications. Some people fall into both categories but most people tend to be consumers who fall into the same lack of self-awareness I described above. This is one of the main characterizing qualities of consumer habits.
If some of the following qualities describes you, you’re most likely a consumer:
- You feel the need to reward yourself after a hard day of work by going out to an expensive restaurant or buying new clothes/accessories for yourself.
- Lifestyle creep controls your expenses. For example, when your income increases you might move into a more expensive house, buy a new car, or go out to fancier restaurants.
- You allow your credit card to take care of unexpected expenses instead of starting an emergency fund.
- You rationalize using a credit card to buy things you might not purchase with a debit card or cash because of the rewards.
- When something is on clearance, you feel the urge to buy it so you can “save” 20% on something you wouldn’t have otherwise bought.
- You follow social trends and allow peer pressure to convince you that you “need” the latest airpods or name-brand clothes.
- You believe investing isn’t for you because you don’t have the money or time for it.
If these qualities describe you, then I wouldn’t count on a salary increase to fix all of your financial problems. Consumers will remain consumers, regardless of income.
So what can being a chronic consumer lead to?
These negative spending habits can not only destroy your financial life, but also can take a serious toll on your mental health and relationships. Money problems are a major contributor to levels of stress and unhappiness in individuals, and is one of the leading reasons why marriages fail. It’s more than just credit card debt—it can unfortunately dictate the entire quality of your life. Financial security can provide you with a level of happiness that spending money on materialistic things will never give you.
So what are the qualities of an investor that you should aim to emulate?
Forming your own positive Investor Habits
While consumers are spending money and only “living in the moment”, investors are putting their money to work, and fighting for their future. They realize that the money they put aside today pays for itself later (and ultimately sets you up for financial freedom).
If these qualities describe you, you fall under the investor category:
- Any excess money you have goes towards investments that will earn you more capital.
- You value learning new skills and are always thinking of ways to utilize your skills to earn more money.
- When your income increases, you invest the difference instead of succumbing to lifestyle creep.
- You don’t use a credit card, and have an emergency fund built up to cover at least 6 months worth of expenses for anything unexpected.
- Instead of following trends, you’re able to identify trends that will last, then find ways to utilize them by investing through the stock market or operating a startup.
- Your focus is on Return on Investment (ROI) to drive your decisions.
- You understand how to use compound interest to build wealth for the long-term.
As you would expect, these qualities are far more desirable for financial security. The biggest difference between investors and consumers is the level of understanding when it comes to opportunity cost, which is a term you’re probably familiar with if you’ve ever taken a class on economics.
Opportunity Cost is “the loss of potential gain from other alternatives when one alternative is chosen.”
Investors and the Opportunity Cost Mindset
How does one apply opportunity cost to every day financial decisions? Essentially, every time you make a decision to buy something, you’re missing the opportunity to invest that money. Therefore, you’re not only losing the direct value of the money spent, but also the future value of that money if it were allocated to an investment.
For example, if you buy a brand new car that you don’t need for $30,000, you’re missing out on the opportunity to invest that much money into the stock market, which, at an 8% rate of return, could end up being worth $64,768 in 10 years. At the same rate, in 20 years, that $30k could have been worth $139,829. That is the power of compound interest.
Investors think long-term with their money, and always evaluate their options when buying something. This means no impulse buying! Every dollar counts.
Ask yourselves these questions every time you’re about to make a purchase: Am I about to spend money on something I need? Will this product bring me true happiness? How much would this money be worth in 10 years, or 20 years if I invested it instead?
Think of your money in terms of future value, 10 years down the road.
Once you’re consistently thinking like this, you’re at the stage where you’re ready to take control over your financial life, and “flip the switch.”
5 Steps To “Flip The Switch” from consumer to investor
Breaking bad spending habits can be very difficult for some people. There are individuals who have had these habits ingrained in them throughout their entire life, so “flipping the switch” will take much more effort and self-discipline.
First of all, you have to know that you are completely capable of this. Envision a better version of yourself, and trust that you have what it takes to “flip the switch.” It’s okay to take baby steps to work your way to becoming an investor. If you’re aware of your spending patterns and truly want to make a change, here are 5 steps that you can start doing today to “flip the switch.”
1. Become a consumer of knowledge instead of products
You’ll often hear lines like “investing in yourself is the best investment you can make”. This is certainly true, and will pay the greatest dividends in the long run. The stock market is volatile—you can lose money—but nobody can take away knowledge or a skill-set from you once you learn it. Marketable skills make you valuable, and the amount of money you make is in direct relation with how much value you can provide.
When I made the decision to “flip the switch”, I started listening to Dave Ramsey’s podcast every day on my way to and from work. Before bed, I watched Youtube videos about investing, side hustles, and entrepreneurship. Here are some good personal finance channels, blogs, and podcasts to check out:
There’s of course a lot more personal finance content out there, but these are some of the ones that inspired me to “flip the switch.” I would also highly recommend investing in a notebook to write down information that sticks-out to you.
Investors put heavy focus on investing in themselves and increasing their intrinsic value.
2. Start tracking your expenses so you can create an effective budget
Before you can make an accurate budget, you’re going to need to know how much you spend in various categories every month. Luckily, we have technology to help us do just that!
I recommend using Mint or Personal Capital to track your expenses. You connect your financial accounts to them and they will automatically track how much you spend in each category, such as food, utilities, gas, clothes, etc. This allows you to know exactly how much you need to budget for in each of those categories every month. More importantly, it lets you see exactly where you need to start cutting expenses.
After tracking your expenses for a month, make an effective budget that reflects what you’ve learned. Your budget should focus heavily on getting out of debt and investing/saving at least 20% of your income.
Investors are fully aware of all the money going in and out of their accounts at any given time. Consumers fly by the seat of their pants and spend money without much regard to how it affects their overall financial picture.
3. Identify and improve your spending weaknesses
The biggest weakness I had in my budget?: Eating out. To fix it, I started meal planning every week. Utilizing this one simple strategy started saving me hundreds of dollars a month since I stopped going out to restaurants multiple times a week. I went from budgeting $800 a month for food to $200 a month just by planning out my meals and cooking from home; Once you get in the routine of going to the grocery store, it makes it much easier to avoid eating out.
If I did happen to go out to eat, I made a rule where I wouldn’t buy drinks on weekdays. Getting drinks with my meal is what made the difference between a $30 bill and a $60 bill for two people.
This habit was the biggest game changer for me when I “flipped the switch”, and allowed me to put an extra $300 a month towards my student loan payments.
So, closely follow your expenses, and identify your weaknesses. Be real with yourself. Which one of your spending categories is significantly higher than the rest? What small adjustments can you make in your lifestyle to improve that spending category on a day-to-day basis? Even the smallest changes can make big differences.
Being an investor means spending time analyzing budgets and finding areas where you can improve spending habits. Consumers are often blind to their spending weaknesses and don’t make much effort to change poor habits.
4. Get all bad debt out of your life for good
If you spend more than you earn, you are a consumer. Period.
“Bad” debt is when you go into debt for a depreciating asset. The two main forms of bad debt are using credit cards and taking out car loans—especially for brand new vehicles. Some examples of good debt are investments that will offer a greater return than what you put in, such as a college education, small business ownership, or real estate/homeownership.
If you need to make a large purchase and are thinking about taking out a loan, stop and ask yourself these questions: Will the value of this asset decrease after I buy it? What is the interest rate and will there be options to lower it? Is this something that I need right now, or can I save up to pay for it with cash?
If you’re in debt right now, it is your top priority to get out of debt. Now that you have a budget, you know exactly how much you can put into your loans/credit cards every month while still having enough to cover your basic expenses. Once you’re debt free, you need to do everything you can to stay away from debt in the future. Cut up your credit card and build your emergency fund.
Cash rewards are not an excuse to use a credit card.
Consumers go into bad debt, and let compound interest work against them. Investors, on the other hand, have the patience to save up cash for large expenses, and know how to use compound interest to their advantage. Which side of that do you want to be on?
5. Automate your savings, invest your excess income
The easiest way to save is to make deposits before the money ever even hits your checking account. By automating your savings, you’re setting it aside before you ever have the chance to touch it. If it’s out of sight and out of mind, you’re far less likely to spend it. This can be done for most accounts; you can often automate your savings account, 401k, IRA, money market account, or whatever else you want to save your money in.
Every time you get paid, your priority should be your tax-advantaged accounts. Focus on maxing out your yearly 401k contribution if you can, and open up a Roth IRA if you don’t already have one. These accounts offer the best long-term results since they’re tax-advantaged and can offer a high annual return. Some other tax-advantaged accounts include Health Savings Accounts (HSA), 529 Plans (college fund), and a flexible spending account (FSA). Utilize these to the fullest extent to keep more money in your pockets.
After your tax-advantaged accounts are taken care of, you have the option to invest in an taxable brokerage account or real estate.
For your investment accounts, it’s best practice to turn on dividend reinvestments, meaning that whenever dividends hit your account, the money automatically goes right back into that security. This is one strategy for how investors take advantage of compound interest. Keep on reinvesting your gains to build massive wealth over time.
That being said, it’s just as important to make yourself happy. Once you’re debt free and maxing out your retirement accounts, you can focus on your dream goals. If you want to buy your dream car or go on your dream vacation, you should absolutely save up for it. Just don’t go overboard with it and drive yourself into debt again. Ideally, you pay for these things from the capital you earn from your investments.
As Warren Buffett says, “Do not save what is left after spending; instead spend what is left after saving.”
The Choice Is Yours
You should now be fully aware of which category you fall under and what you need to do to “flip the switch.” This transformation to having an investor mindset may not happen overnight, but the more you focus on it over a certain period of time, the more it will turn into habitual thinking.
You have the tools you need to “flip the switch” so it’s up to you whether or not you want to start building wealth for your future and do what will bring you true happiness. Earn the ability to comfortably afford your dream car or travel around the world. Envision a better future for yourself.
If you know someone that’s a chronic consumer, share this with them!
Have you already “flipped the switch”? Let me know in the comments what helped you go from a consumer mindset to the investor mindset!