Start spending much less than you make and reinvest your money, change your lifestyle, your habits and start paying yourself first

– Warren Buffett

It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.

– Robert Kiyosaki

Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.

– James W. Frick


You must gain control over your money, or the lack of it will forever control you.

– Dave Ramsey

Your personal finances, like all good structures, should have strong foundations that can endure any quake. To achieve this, you need to look at your economics in-depth and know every detail of them. This will enable you to react to any unexpected event.

Would you say you are financially comfortable? In The Total Money Makeover, author Dave Ramsey explains that we often have a mistaken concept of our own financial security. Lots of people believe their personal economy is healthy, but many could not survive for three months without their paycheck or a government subsidy. We are living in an illusion, and we need to address that.

Many people feel comfortable with their finances. Maybe you’re among them. You probably have a job, a car, and maybe own a house. These things make financial difficulty seem far away. But no matter how safe you feel, financial insecurity could be closer than you think.

Let’s imagine you suddenly lose your job. What would you do? Could you pay all your bills? How long for? Financial security is more illusory than we often think.

Take our friend and student, Vicky. Shortly before we met her, the following things happened to her: she calculated that her annual income was more than $24,000. She wasn’t in a lot of debt. She felt comfortable with her income and her debts, so she took out a mortgage and bought a house.

That’s okay, right? She could afford it. But one day, Vicky lost her job. She couldn’t pay her debts and she was on the verge of losing her home. Thanks to helping from family members, she managed to hang on until she found a new job. During those hard times, she decided to seek help – and found us. She was lucky.

This is exactly what happened to a lot of people during the financial crisis of 2008 – except that many of them did end up losing their homes. Sudden financial setbacks can quickly land you in hot water. What can you do about it? One way to prevent this type of misfortune is to take measures in advance. Change things now!

It’s easy not to feel that sensation of urgency, but it’s totally irresponsible. Financial difficulties can overcome us all sometimes, and before we know it, we’re trapped. This could be happening to you right now. Your financial security could be slowly collapsing and you might not even know it. It’s time to wake up and change that.

There is a good method for finding out if your finances are as robust as you think. It consists of working out whether or not you would have enough cash available to survive at least three months, paying all your outgoings, without any income.

Available cash is the sum of your physical money plus the money available in any accounts you have. This indicator is known as the financial liquidity ratio. It is calculated by dividing your available cash by your average monthly spending.

If the answer is more than 3, your financial situation is acceptable, given that you could bear your outgoings for at least three more months.

If it’s less than 3, it’s insufficient, and you could be at risk in the event of a setback.

In order to consider your financial situation good, this ratio should be greater than six months. This would give you enough time to find new sources of income or tackle unforeseen circumstances.

In this book, we will be looking at the cases of Adri, Vicky, and Samu: three clients who have, over time, become friends. We helped them by showing them the steps they needed to take to improve their financial situations. Let’s look at what their profiles were like before they came to us:

Adri works at the checkout at a grocery store, his salary is $1,100 a month and his outgoings are around equal to that. He

lives hand to mouth since he can barely save a cent each month. Vicky is a pharmacist and makes $1,800 a month. Her

expenses are a little higher than Adri’s and she manages to put a little money aside every month.

Finally, Samu, a lawyer earning $3,800 a month, lives life to the full and enjoys every cent he makes.

Let’s look at their information and financial liquidity ratios in a table, so we can see the differences between them.

As you can see, Adri and Vicky have similar outgoings, but her financial liquidity ratio is much higher due to her prior savings. On the other hand, Samu has more savings but his expenditure is triple that of Vicky, so his ratio is much lower. This clearly shows us the importance of having a minimum level of savings and of careful spending so that our financial liquidity ratio is adequate.

Get to it!


Do the same exercise with your own information to calculate how long you could cover your expenses if you unexpectedly lost your job. This will give you a true idea of how your finances are doing.

The money you have calculated that you have available for an emergency is called your rainy-day fund. It’s a vitally important element of your finances as it enables you to stay out of debt in the event of a setback, as we’ll look at in the chapter on savings.

We have looked at the need to be realistic about your financial situation and at how important some basic knowledge is in understanding the

economic situation you’re really in. Now it’s time to look at the significance of financial education. What is it? Can it have an impact on our everyday lives? Is it really necessary or useful for you? We’ll look at these questions and some others that might occur to you with regard to financial principles, in this chapter.

Financial education is an individual’s capacity to understand how money works and how savings, investments, and debts affect their economic situation.

Put into practice, it shows us the right way to manage our finances so that we can enjoy full lives and reach retirement in the best possible situation without losing out on the quality of life while still maintaining the same level of income.

It’s easy to get along great with your finances, but in practice, it often falls down. The fact that we aren’t taught economics as children set us up to fail. If we lack such basic concepts in society as centered around consumption as ours is, we’ll find it almost impossible not to fritter our incomes away, running up debts and finding it difficult to save.

So, to answer the question of whether financial education can impact on our everyday lives, the answer is yes – sometimes directly, sometimes less so, but it does. Every day, we make countless decisions without realizing they are linked to our finances. We have to learn to identify them and analyze every outlay so that it can have a positive impact.

The aim is for every investment we make to have a value – whether that’s in the form of satisfaction or via some future benefit. We shouldn’t waste money on things that only make us happy in the short term.

Obviously, this doesn’t refer to necessary costs, but rather to investments made in products or services that bring us well-being. We will always have luxuries or treats that might not benefit us but which do make us happy, but we should learn to limit those.

The real question to ask about these expenses is: is the happiness it brings us fleeting? Is the cost worth the value it brings us?

Will it provide us with some kind of benefit? And…can we really afford it? Or is this investment going to lead to problems down the road? These are essentially the questions we should ask ourselves when we are about to buy something or sign up for

an activity or service. You have to think about it before handing over money, so you can be sure you’re making good use of it.

Spending on training, for example, won’t generate direct financial profit. This doesn’t mean it has no value; on the contrary, that knowledge can help you get better at your job, or get one you like more, or simply make better investments in the future. It shouldn’t be considered an expense, but an investment. As such, we aren’t just referring to solely monetary benefits. Every decision we make should bring value to our lives.

Get to it!


Look at the transactions on your bank account and credit card over the past month. Class each one of your outgoings as:

Necessary expense: your mortgage or rent, groceries or utilities.

Investment: if the expense is buying an asset that will bring you more money in the future or is spent on training.

Want: spending on restaurants, clothes, fast food, and so on.

Now, add up the total for each category for each month. Then, divide this number by your total outgoings per month. The result multiplied by 100% will be the percentage of your monthly outgoings that you spend on wants.

Let’s talk about unnecessary spending using the following formula:

Spending on wants / total spending x 100 = % of spending on wants

If your percentage is higher than 30, you should reduce your spending on wants accordingly, as this means it makes up at least a third of your total expenditure. On the other hand, if your percentage sits somewhere between 15 and 30, your spending is adequately allocated, although it is always advisable to reduce it to below 15%. Finally, if your result is lower than 15%, you can feel proud of yourself, as you’re making good use of your money.

Now, let’s look at some everyday examples of ways we waste our money without realizing it. Imagine you wanted to spend some money you’ve saved

up on a fashionable designer watch. You will have to assess the value it will bring you, on top of telling the time as any other watch would. A better option could be to buy a simple one, invest the remaining money, and wait for the profits of that investment to give you enough money to buy five watches like the one you wanted.

Now for another example. Have you ever walked by a store window and seen something that caught your eye, like the latest model of computer? You don’t need it, but it’s on sale – just $1,499! With an original price of $1,999, it’s a steal! But you can’t afford it – then, when you look more closely at the price ticket, it says “from just $60 a month”. And you start to think “Well, I can afford that.” Wrong!

What you didn’t notice was that the repayments are over 36 months. Or maybe you did notice, but you didn’t think about what impact that would have on your finances. You will end up paying more than $2,100 for the computer due to interest, which is even more than its original price. These are the kinds of things we need to learn to identify. Doing so will help you detect the pitfalls around us every day so that you don’t fall into them.

In their book The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko illustrate these ideas. They tell us that successful investors, contrary to what everyone thinks, don’t live a high life. The majority of self-made millionaires have modest roots and made their fortunes by putting away some of their income every month and avoiding spending on things they didn’t need. This simple rule tells you that you too can become a millionaire without earning a million dollars a year.

These authors insist that people become millionaires by controlling their budgets and maintaining their wealth through long-term thinking and planning for the future. A survey detailed in their book reveals that for every 100 millionaires who don’t budget their finances, there are 120 millionaires who do. In the long term, it is those 120 who manage to maintain or increase their wealth.

In short, before thinking about investing or getting rich, it’s vital to develop some good financial habits. Reduce your spending on leisure – settling for just the things that you value most – and on treating yourself – limiting your spending and keeping it for achieving your goals – and, above

all, reduce your vices as much as you can or cut them out, since they’re dangerous, addictive, and have no benefits for your health or your finances.

All of this is fundamental to maximizing your savings, eliminating your debts, creating your rainy-day fund, and ultimately investing in assets and getting you closer to financial freedom.

What about you – where are you in terms of spending? Let’s read on and take a look.


  • To analyze and understand your economic situation, you need to acquire some basic financial knowledge.
  • For peace of mind with regard to your financial situation, you should calculate your liquidity ratio. If it’s less than three months, you should increase the amount in your rainy-day fund.
  • Make sure you’re not spending too much on wants by performing the exercise we looked at.
  • Be realistic about your finances. Admit if they are not good enough. This is the first step toward changing things before it’s too late.

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