Learn to Spend Money. You're probably wondering, 'Do I really need to learn how to spend money? If you don't know how, I can help you spend it.' Spending money is easy, but not everyone knows how to spend it wisely. Bill Gates once said that knowing how to spend money is as difficult as knowing how to earn it. In this world, the three questions you often ask yourself are: 'Who am I?', 'Where do I come from?', and 'Where did all my money go?' Regarding spending money, Mr. Noguchi Mahito, the author of this book, has a lot to tell you. He finds that most people have serious misconceptions about money matters.
We also often say that people must know how to spend money to know how to make money. Consider this phrase for a moment, and you'll understand. It means the more you spend, the more money you have. You're probably wondering how spending more money can lead to having more. If you don't understand yet, please read to this book until the end. To make it so that the more you spend, the more you have, you need to know three things. First, you must divide your money into three 'pockets' or portions. Second, you must know the principles of spending. And third, you must be careful about two things before you spend.
Let's get to the first point: putting money into three different pockets. Everyone has three different money pockets. Of course, it's not the left pocket or the right pocket. They are the spending pocket, the speculative/risk pocket, and the investment pocket. You probably think, 'My money is all the same, why do I need to divide it? I'll just put it in one pocket.' In reality, money in different pockets will be spent for different purposes. Let's look at the first pocket: the spending pocket. The money in this pocket is used to buy things you want, like clothes, watches, or jewelry. The second pocket is the risk or speculative pocket. We spend it on high-risk things. For example, some people use it to buy lottery tickets, gamble, or buy paintings or antiques to keep, hoping they will become more valuable later. The money spent from the third pocket is different. It's spent on investments, such as buying a house, stocks, or investing in a company.
This third pocket is called the investment pocket. Now that you know about these three types of pockets, what's the benefit? To become a master spender where the more you spend, the more money you have, you need to learn to spend frequently from the investment pocket, spend moderately from the spending pocket, and reduce spending from the risk pocket. Let's talk about the risk pocket first. It's a leaky pocket. It's easy to lose money because this pocket is for spending on high-risk things that we can't control. If you put the money you earn into the risk pocket, one day you will surely lose all your assets. But the investment pocket is different.
Every single cent you spend from this pocket will become your asset in the future. Spending here doesn't just refer to investing in a house, buying land, or buying stocks. Spending on investing in knowledge, buying books, buying courses, or getting a gym membership for health—these are all counted as investments. All of this spending brings good fortune and positive results later on. What about the spending pocket? The author advises us to spend at a moderate level. Of course, in daily life, you have to spend money no matter what you do. But overspending can affect our ability to earn money. These expenses cannot be completely eliminated. But before spending, remember one phrase: 'just enough.' Spend the right amount and get value. How do you spend to get value? For example, back in high school, with no income, we were careful with our money.
We'd buy four or five cheap outfits, thinking it was a good deal—spending little money but getting a lot of items. But thinking back, those four or five cheap, low-quality outfits are not equal to buying one good-quality outfit. The cost might be similar, but in terms of quality, usability, or how it makes you feel, you'll feel better in every way when you use expensive, high-quality items. This is what's called 'knowing how to spend money'. You don't need too many things, but they should have value in their use. And for items you use every day, you can spend a little more on them. Another technique for spending from this pocket is to take the money earned from the investment pocket and put it into the spending pocket. For example, you invest in opening a small coffee shop and make a profit of $1,000 a month. You can take $500 and put it in your spending pocket. Don't take more than you earn. By doing this, your spending won't affect your source of income.
It doesn't matter which pocket your money comes from. What's important is what you spend it on and what benefits that item can bring you. Spending on beauty or expensive clothes might seem like a useless expense, but sometimes it's also an investment. Let me give you an example. Three women who were friends hadn't seen each other for many years, so they got together to chat. The first one said, 'Last year I spent money on the lottery. This year I won over $5,000.' The second woman said, 'Last year I opened a coffee shop. In one year, I made a profit of over $20,000.' The third woman said, 'Hey, last year I didn't earn anything. In fact, I spent over $50,000 on plastic surgery. But today, I'm here to give you all my wedding invitation.' My husband is a wealthy businessman. In this example, the first woman probably spent money from the risk pocket. The second woman spent money from the investment pocket. The third woman spent money from the spending pocket, but her spending in this case was also an investment. So, whether it's a waste of money or not doesn't depend on what you buy or what you spend on.
It depends on what value it creates for you in the future. Of course, this is just a fictional example. We are not encouraging everyone to do this. We just want to distinguish the different definitions of these three pockets. Now we know that we should spend a lot from the investment pocket. But how should we spend it? This is what we need to talk about: following a principle. How to spend so that the more you spend, the more you have. This means you should buy things that can increase in value in the future. But the question is, how can you know which items will increase in value later? In fact, everything in this world has its own value. What's difficult is how to evaluate it. And some things can't even be measured with money. For example, there's a Chinese language course. It costs $300 for the regular class and $1,000 for a special class for business owners. If it were you, would you choose to spend $300 or $1,000? Most people think it depends on their situation.
If they have money, they'll take the $1,000 course. But if they don't have much money, the $300 course is fine. Or you could say that most people also consider the school and the teacher. If the teacher is good and the school is famous, they are willing to spend more money accordingly. But according to the author's advice, you should choose the option that will have value in the future, regardless of whether it's expensive or cheap, famous or not. The same thing has different benefits for different people. If you are an entrepreneur right now, want to start a business, and intend to partner with Chinese people in the future, then investing $1,000 now to learn Chinese for business owners is one of the best choices you can make. But if you have no intention of doing business right now and just want to use it for normal communication with local Chinese people, then what you should choose is to invest $300 in learning regular Chinese. That's enough. This is just a simple comparison that can help you weigh which one to choose and how much money to spend.
But this straightforward fact isn't entirely correct. There are still some errors. Generally, people often misjudge the value of something. The problem is that we often forget to think about another important thing: time. Here's an easier example to understand: you lend someone $10,000. Three years later, they pay you back $10,000. Lending $10,000 and getting back $10,000 seems fair, but if we talk about principles, you've already lost money. Let's consider two points. First, if you put that $10,000 in a bank, you'll earn interest. For example, if the interest rate is 7%, you'd earn $700 a year. But now, three years have passed with no interest. Isn't that a loss? Second, you need to know that the longer you keep money, the less it's worth. Before, $1 could buy two coconuts. But now, $1 can only buy one coconut. As for your $10,000, after three years, its value is probably only equal to about $8,000. Because in three years, goods will become more expensive and money will be worth less. So when we spend money to invest in the future, we also have to consider time.
They say time is money. That's not wrong. We shouldn't compare the money earned later as being of equal value to the money we invest now. We have to discount future money at a reasonable rate. And that discount rate, in financial terms, is called the discount rate. Let me give an easier example to understand. Let's say you do a project for someone. They have to pay you $100,000 over a period of 4 years. They pay you that money in two different ways. The first way: The first year, you get $10,000. The second, $20,000. The third, $30,000. And the fourth year, $40,000, totaling $100,000. The second way is the reverse. The first year, you get $40,000. The second year, $30,000. The third year, $20,000. And the fourth year, $10,000. Which option would you choose? The correct choice is the second option. You should get more money sooner.
The faster, the better. Because your loss on the discount rate is smaller. This doesn't even include the profit, interest, and other benefits you could get when you use that money elsewhere. In summary, the author wants us to spend money from the investment pocket, meaning using money to make money. Because if you keep money at home, there's not only the risk of loss or theft, but as the example above mentioned, if you keep $100,000 at home without using it, in 5 years, its value won't be $100,000 anymore. It might only be worth a little over $80,000. Because everything is more expensive than it was 5 years ago. When analyzing the value of something, besides thinking about all those things, another important thing we should consider is to ask the question: 'How long will it take to get a return on this investment?' And at that time, when you reap the profits, will it still have the same value to you as you think it does now? For example, let's say you're 80 years old now. A young person comes and tells you, 'If you invest $10,000 in me today, in 20 years, you'll profit $100,000.' You would probably refuse. In 20 years, even if you profit $100,000, you'll have no opportunity to spend it. Because you're already 80 years old. Or you could say that the young person might make you so angry you'd drop dead on the spot, who knows.
Because at this age, you probably don't value those profits that much. You value time more. But if you're around 30 years old now, investing $10,000 to get $100,000 in 20 years, you might consider it. Because in 20 years, you'll only be 50, and you might still have the chance to spend that investment money. So, besides considering its value, you also need to think about your remaining time. You also need to think about your preferences and your own life situation. Because all things are constantly changing. Right now, you spend money on something and think it's very valuable, but when you get older, you might not think so anymore. For example, when you were young, you spent a lot of money on toys. But when you got a little older, you couldn't understand why you spent money on such silly things. You spend tens of thousands of dollars setting up a music studio because your dream right now is to become a famous singer.
You think this expense is very suitable for you. But when you change your mind and no longer want to be a singer, everything will become worthless to you. Those investments of yours probably won't be very valuable anymore. This is what the author of the book wants to guide you all towards: spend money on things that will create value for us in the future. At that point, the more you spend, the more you will have. But you might have a question: a moment ago, before spending money, you told us to evaluate an object or a matter based on its future value, how much it will be worth later, and to include the discount rate, our own time, and other factors. What if we calculate it wrong? If we calculate it wrong, won't we lose money? Often, your miscalculations are due to two reasons: emotions and misjudgment. There are still many people who make decisions based on emotion. In a book titled 'The Art of Procrastination,' which is also summarized , it says: If you make decisions based on your feelings and intuition, you will often make the wrong decision. Even though our brains are good at calculating numbers, they are not very good at analyzing numbers.
For example, you buy a two-digit lottery ticket with numbers from 0 to 99. There are 100 numbers in total. If you bet on any number, your chance of winning is 1%. But if you win, you will only be paid 1 times 70. Your chance of losing is as high as 99%. But you don't think about the losing rate; you only think about the winning rate. There are millions of people playing this game, as you all know, it's betting on the last two digits of the lottery. And most people still think they might be the luckiest person, that they will win the lottery. But in reality, it's not as easy as you think. Another point that can make you spend on an investment and end up losing is misjudgment. You could say that you know something shouldn't be done, but you still want to try it. The Nobel Prize-winning Israeli philosopher, Daniel Kahneman, has a famous quote that says: People overreact to rare events but don't react much to frequent events. Statistics show that the risk of an accident when traveling by plane is 1 in 11 million. This means that out of 11 million flights, only one encounters a problem. But when traveling by car, there is one accident for every 5,000 trips.
These figures show that traveling by plane is up to 2,200 times safer than traveling by car. But whenever there is news about a plane crash, the rate of air travel decreases. People still choose to travel by car, even though they know that traveling by car is more dangerous. After the September 11th events in the United States, the number of deaths from traffic accidents increased by up to 1,000 cases. In a study program, there is a lesson called Behavioral Economics. which is a combination of economics and psychology. In this lesson, there is a theory that says people feel the fear of losing money more than the joy of gaining money. For example, your family is not very well-off. But your child won a 50% scholarship to study abroad. It's a golden opportunity to send your child to study abroad to receive a higher education. But this 50% scholarship requires you to spend $10,000. Such a good opportunity and conditions, everyone wants it. You get knowledge, good social connections, and 50% of the tuition is covered. No matter how you look at it, it's a gain. Even though life is a bit difficult, you have the ability to earn this $10,000. In such a situation, would you be willing to spend $10,000?
According to experiments, most parents don't spend this money. This is a decision to give up a good investment because of the reason of maintaining financial security in his family. It's not that it's the wrong decision, but this decision has abandoned an investment opportunity that everyone desires. This is the common habit of judgment for most people, causing us to misanalyze the value of our spending on investments. In everyday life, there are many more examples related to decision-making. You can find another book titled 'The Art of Procrastination' that might help you make the right decision. Even when we make a decision to invest in something and we misunderstand it due to our emotions and misjudgment, are there any other ways to reduce the risk in investment decisions? The author has recommended two strategies. The first strategy: don't put all your eggs in one basket. When doing something, you must know how to diversify risk.
Don't let all the risks concentrate in one place. If one thing fails, there's another that can help compensate. Doing this can reduce the loss that comes from your wrong decisions to a certain extent. If you put all your money into one investment, for example, buying a piece of land, when there's a problem, you'll lose everything. Warren Buffett's investment principles also mention this. The second strategy is to use money to buy the right to use something for a certain period of time. To put it more simply, use a deposit. For example, you rent a house for $3,000. You haven't decided yet, but you want to put a deposit on it first. The landlord requires you to pay a deposit of 10% for one month, which is $300. This deposit is the money you spend to buy the right to use it in the near future. Even though you can't use it, the landlord can't rent this house to anyone else. If within this month, you can find another house that is cheaper, for example, you find another house with a rent of $2,000, you can forfeit that deposit. You have the right to cancel the agreement with the first landlord and choose the house that costs $2,000 instead. In summary, when you're afraid of investment failure, you can spend money to insure against your wrong decisions to minimize your losses.
This point is very important. When you don't know if an investment is right or not, you can use a small amount of money to test it first. If, in this short period, you realize this opportunity is not good, or you find a better opportunity during that time, you can forfeit the portion of the deposit you paid and go for the better option. The case of a deposit is just one practical example that is often used, especially in making investment decisions regarding buying or renting real estate. This principle is used a lot, and you will get many benefits if you know how to use it. For example, you work in a company. Recently, you have been thinking of quitting to start your own business. You can sign a contract with the company to hold your position or request a leave of absence. In case you fail in your business, you still have the opportunity to come back to work. You almost spent nothing, but you have bought insurance for when your business fails. If your business fails, you can still have a job. The above is the main content in this book. Let's briefly summarize it again. This book tells us to divide the money we spend into three different parts.
First is spending on general use, which we call the spending pocket. Second is spending on high-risk items, like buying lottery tickets, which we call the risk pocket. And third is spending on various investments, like buying stocks, land, or shares, which we call the investment pocket. The author advises not to take too much money from the risk pocket. Put money into the investment pocket, and when you make a profit from the investment, take a portion of that profit and put it in the spending pocket for daily expenses. The second point is how to learn to spend money beneficially. Then we have to analyze first what we spend on, how much money it can return to us in the future, and what value it can bring us in the future. Another important point is not to forget the time factor. For money that will be received in the future, you must consider the discount rate. If you invest $10,000 in something today, and in 10 years you receive $15,000, don't think you've profited $5,000, because $15,000 in 10 years is probably equal to about $10,000 today. You need to know that the value of any object changes over time. You need to consider this point and analyze it in your investments, so it won't be biased and will have objectivity.
Finally, we talked about how investment decisions can be wrong due to two things: emotional factors and judgment factors. To invest successfully, you must learn from these two mistakes. If you have no experience, don't trust your feelings too much, and always make judgments based on logical principles. To avoid risk, don't put all your eggs in one basket. And if you're not sure if the investment is right or not, you can use a small amount of money as a deposit and test it first. If there's a better option, choose the best one.