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Financial defense is all about maximizing the value you get from your money.

How to play great financial defense? "Pinch each penny until it squeals!". You do this by becoming mindful about your spending. You have to start tracking how money flows through your life. You have to understand what benefit each penny of expenditure brings to you. In fact, your friendly neighborhood millionaire does exactly that!

I have to clarify something here. This is not about creating an artificial scarcity mentality. This is not about denying yourself pleasures. Great financial defense is about cutting out expenses that do not bring you any pleasures! In this world of abundance that we live in, it is easy to become mindless about your spending and lose track of where your money goes. Becoming more mindful is the only solution. (In fact I would argue that becoming more mindful is the solution to everything good in life. That will be a whole another website!)

I highly recommend the book Your Money or Your Life: 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence: Revised and Updated for the 21st Century. This book clarified my thinking about how money flows through my life.

Here is an analogy: if you are thinking of installing solar photovoltaic panels on your house, what should you do first? The first thing to do is to maximize the efficiency of your appliances and your usage. This is because it is much cheaper to reduce your usage of electricity than it is to install photovoltaic panels. Likewise, before you think of increasing your earning power, perhaps it might be worth your while to take a long hard look at how you are spending the money you are earning right now.

Some Ideas

Here are a few general ways to improve your money defense:

develop a keener awareness of your finances, starting with creating and reviewing your personal Balance Sheet regularly
track how money flows through your household by using a monthly Cashflow Statement. Presh Talwalkar makes a great point about the necessity of tracking your expenses here.
automate all your finances. I know having to pay bills sucks, but having to pay late fees sucks a lot more!
use the Jars System to manage your cash flow
save energy and money by insulating your house
maintain your possessions better so that you spend less time and money on repairs
use "Lifecycle Accounting" for purchases. For example, a $30 kitchen knife is a better buy over your lifetime than a junky $5 knife that you have keep replacing!

The Millionaire Next Door

Another book that has influenced me regarding money is the New York Times bestseller The Millionaire Next Door. The authors Thomas J. Stanley and William D. Danko did an in-depth study of how "ordinary" people become millionaires. What they found was that your typical "millionaire next door" got there by playing excellent financial offense and excellent financial defense. Blogger Len Penzo offers many tips for financial defense and offense from his millionaire neighbor.

Although our goal is not necessarily to become a millionaire, the methods - and more importantly the mindset! - your millionaire next door uses are most suited for our purposes.

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