How to be a Millionaire for Pennies

The most frequent question we get asked by the media is, “how do people end up in financial trouble?”  The response they’re looking for is: crazy spending; ridiculous holidays, jewelry, booze, etc, but the reality is very different.  Most of our clients are normal Mums and Dads who work hard and want the best for their kids.  Others are young professionals trying to get a start in life. Both tell a similar story. When you look at their bank records there’s no ridiculous spending. They’re just engaging in what would be regarded as “normal spending.”

So why are they in trouble? When you look a little more deeply, most have spent just a little more than they earned, maybe 2 or 3%.  If they earned $800 per week, they spent an extra $16.00, the equivalent of two large McDonald’s meals, or a DVD rental.  They also do one crucial thing.  They pay for it with credit.  2-3% isn’t a lot but over years it adds up. This is because when something is financed with credit, they have to repay more later for something that they couldn’t afford before. This continued spending of slightly more than they earned, combined with the compounding effect of interest, leads to an inevitable breaking point.  Spending $16 week on a credit card would result in $26,460.78 worth of debt after only 10 years.  All this occurs because of spending the equivalent of one McDonald’s meal and a DVD per week.

If they are spending 2-3% more than earned, they aren’t saving anything.  When unexpected expenses come up there is no choice but to fall back onto the credit cards.   If there was $832.00/year (an extra $16/week) worth of unexpected expenses (car repairs, doctor, etc) financed on their credit cards they would have $52,832.80 owing on their credit cards after 10 years.  The minimum repayment on this would be $1,056/month or 30% of their income!  Things can quickly get out of control spending just a little ($32/week) more than they earn.

$32/week is the difference between financial ruin and being fine. $14/day is the difference between financial ruin and being a millionaire; that’s why budgeting is so important.  $14 saved every day and invested over 30 years will give you $1,000,000.00.  Budgeting isn’t about deprivation; $14/day isn’t going to cause that much of a difference to your quality of life.  The difference between financial ruin and being a millionaire is two large McDonald’s meal per day.  That’s money you could find down the back of the couch!