Category: behavioralfinance

Goal setting for your finances can seem overwhelming, given all the demands on your time, attention, and resources. However, much like selecting targets in other aspects of your life, identifying key financial goals requires self-reflection – to know what brought you to where you are now – coupled with a forward-thinking mindset.

Where you are in your financial journey will dictate whether you need to, for example, work to aggressively pay down debt or begin the process of saving for retirement. Assuming that your debt – excluding mortgage – is limited to non-existent, there is one financial goal that should be the cornerstone of your financial pursuits.

Accumulating assets.

Assets are things that put money in your pocket. A few examples of assets are:

• Index fund tracking the S&P 500
• Bonds that are outpacing inflation
• Rental property earning more than you spend on it
• Profitable Business you own

Why are assets such a financial criticality?

They begin as seeds that, once planted, will bear fruit for you in the right seasons.

After purchasing an Index fund, the fund may experience times of turmoil, but over the long-haul that fund will yield tremendously in terms of dividends and appreciation in value.

When you first bought that condo, you may have expended energy and money fixing it up. When it’s time, and you have placed a tenant paying consistent rent that more than covers the cost you incur to own it, you now have an extraordinary financial asset.

Assets are synonymous with the terms “financial security” and “wealth”. The more you have, the higher the level of freedom you have. For most, when they have acquired a certain threshold of assets, they then have the ability to retire. In other words, they can stop trading their time for money. For those fortunate enough to love their work or vocation, they may choose to continue with those endeavors, but they don’t have to.

The freedom of time provides for your freedom of choice.

People commonly remark that money is the root of all evil. Nothing could be further from the truth. Like a hammer or a drill, money is a tool… nothing more, and nothing less.

What those same people really mean to say is that money has the tendency to control. This is true. It controls the livelihood of many, where their vitality is dependent upon their ability to accumulate more money. Perhaps they put themselves in a position where they have too many sizeable recurring expenses. Or maybe their lust for cash is so great that it subordinates all other priorities, revealing a potential character flaw. Whatever the reason, it is easy to identify those exhibiting these characteristics.

We might even recognize some of them within ourselves, and that is normal.

The desire for money is not an inherently negative pursuit. To the contrary, wealth accumulation is something to strive for…an admirable goal. It is the purpose and circumstance surrounding its acquisition that leads to its control over us. Do we seek it to support a bloated lifestyle that is causing stress for our family, or do we seek to reach a new height of financial stability and prosperity?

It is a question that can only be answered through deep reflection, and through conversations with those who know us best.

Only when one finds a way to assert themselves over money, are they able to reverse their financial destiny and rise above their self-imposed circumstances.

This can be admittedly difficult, but as with any character-building exercise, practice makes perfect.

Steps to get Started

1. Assess your feeling and approach toward money. Do you have a negative or a positive relationship with it?
2. Decide what you want money — your tool — to do for you. What do you see its purpose being in your life?
3. Implement a plan to put what money you do have to work. Seek ways to accumulate more of it in pursuit of your stated purpose for it.

“I need more money”, is a common phrase we tell ourselves and others when we feel like life isn’t providing us everything we think we need. Wishing and complaining doesn’t solve problems or translate our desires into a fountain of prosperity.

What we need is Gratitude.

Gratitude is a transformative habit that allows one to go from a mindset of scarcity, to a mindset of abundance. It’s an acknowledgment of all that we have, so that we aren’t stuck on all that we don’t.

After all, if we never have enough, when would we be happy?

Here’s an example of how to implement gratitude.

Right when you wake up, sit in silence and think about as many things – small and large – that you are truly thankful for. It could be for your family’s safety and security, or for a nice gesture from a colleague. It doesn’t have to be for very long, and some people write them down in the form of a journal.

The key is to develop your mind to value the abundance in your life. Repeated over and over, day after day, it becomes a powerful habit.

For some, it will come quickly. But for others, it may seem forced for a while. Like a strong exercise and diet, repetition is key.

How Does This Help?

Prior to having tried this you may be wondering. “that’s great, but how does this actually help me, other than to make me feel good temporarily?”

The reason is because you can’t be fearful, angry, or discontent, and grateful at the same time.

If you harbor a consistent, negative emotion, it is next to impossible to cultivate satisfaction, much less, be productive in achieving a pursuit.

If more money is the goal, it won’t show up when you are wallowing in a lesser mental state. It shows up after the planting of many of the right kinds of seed…and one of those is gratitude.

A negative mind will never create a positive life.

A vacation to the Caribbean, your child’s summer sports camp, or a well-funded investment account all require resources.

How do you ensure that you have the resources to fund these endeavors?

Pay yourself first.

By paying yourself first you are ensuring that you have the funds to meet your future obligations, desires, or to simply achieve a high level of financial security.

Here is how you do it.

If you are compensated via direct deposit from your employer, add an additional savings or investment account so that a portion of your paycheck is automatically diverted there. If you receive physical checks, deposit the money into your primary bank account, but divert a portion of those funds to the separate account. This process can be automated as well.

In doing so, you are achieving two primary outcomes: (1) training yourself to live within your means, and (2) saving for a specific purpose…whatever that may be.

First, you will need to determine a realistic percentage of your income you are willing to live without…because you are. Once you divert the funds to savings, you are not tapping those resources other than to fulfill their intended purpose. If you have established an investment account and are planning to invest for the long-term, you won’t be withdrawing at all.

That percentage may be 5 or 10 percent to start, or it may be higher. It depends on your unique situation, and you can adjust the percentage after developing comfortability with your new budget. You may find that you don’t require nearly as much, and that you have more wiggle room to save than you have trained yourself to believe.

Once you have selected your savings rate and you have implemented the change to your direct deposit, sit back and watch your money tree bear fruit!

You’ve seen the story before…a famous athlete who earned millions each year suddenly finds that they are filing for bankruptcy in retirement, and each time it occurs it seems so puzzling. How could someone who made such a significant amount of money, year after year, end up with nothing?

There is one reason. They spent more than they made.

A new car here, a new house there…and quickly, their assets have evaporated. To put it another way, their finances took a back seat to their behavior.

Bankruptcy is not an outcome reserved for the lower and middle classes.

But if professional athletes aren’t immune to financial collapse, how can the everyday American avoid such a fate?

Sound financial decision making.

Let’s look at an example.

Fresh Out of College

A student (we will call him Nick) fresh out of college lands his first entry-level job. Seeking to capitalize on his newfound stream of income, Nick begins the search for a brand-new car. After a couple of weeks of searching, he decides on a new Ford F-150, with a sticker price of $28,000.

Now, this may not be such a bad choice, so let’s take a look under the hood of Nick’s financial situation.

Details:

• Salary — $50,000
• Student Loan Debt — $29,500
• Credit Card Debt — $1,500
• Savings — $1500

*Current Car – 7-year old Honda Accord with 85k miles (in great condition)

Earning $50k in salary and carrying nearly $30k in student loan debt – both standard figures for a recent grad – Nick is ready to assume $19,500 in auto loans (assuming Nick chooses not to empty his savings account and is able to trade in the Accord at fair market value for $8,500).

After adding it all up, Nick is looking at a new debt load of $50,500 – slightly more than his annual salary! Now, for those that may not see this as an issue at first glance, let’s break it apart.

Fixed Rent/Debt Payments:

• Rent — $1100/month
• Student Loan Payment — $328/ month (assuming 6% interest on loan; 10-year payment plan)
• New Car Payment – $351/ month (5-year loan)
• Minimum Credit Card Payment — $30/month (assuming 2% minimum payment)

Prior to spending any money for the month, $1809 is already earmarked to service debt and cover rent- more than half of the approximately $3400 he expects to take in after taxes. Now factor in the costs for health insurance, car insurance, gas, food, phone, internet and clothing. Nick may quickly find that he is overextended.

What if Nick’s best friend has a destination wedding in the coming year? How would he cover that cost?

Shopping, travel, and entertainment become unrealistic luxuries.  Retirement and other savings…yeah, right.

Expenses add up quickly and keeping up becomes far more difficult when more than 50% of the income is already spoken for. All too often the solution to not having enough funds to cover the lifestyle becomes…more debt.

Choices

Instead, Nick could very well choose to forego the new car for a while, and free up $351 of cash flow each month. By establishing a buffer, Nick would be better positioned to set aside some savings (for an emergency or unexpected expense, like a health bill or car repair) or to pay more toward his student loan (you know, the debt he accumulated prior to entering the workplace). He may even be able to save up for that wedding.

With one decision, he could relieve a great deal of the stress and anxiety that comes from being backed into a corner financially each month…it just requires a choice.

While this may seem like a far cry from an athlete splurging on one too many luxury cars, or an outsized house, the premise is the same.

Spend more than you earn, and you will find yourself in a hole…incredibly quickly. With more debt used to maintain a lifestyle, the problem compounds itself. The amount you owe others grows, and grows, and grows, until it is too much to handle.

Choose wisely.

Have you ever arrived at the end of the month, only to realize that you spent more than you made? You went to pay the balance of your credit card statement(s) only to find that the balance exceeded the funds in your checking account.

Whoops.

Scrambling to cover the cost, you eat into the small savings you had set aside, and just like that, you are at square one again…near zero in your checking, no savings, and the uncomfortable realization that you can’t afford – emotionally or financially — the same thing to happen next month. Because, well, you don’t have any savings left to serve as your life raft!

We’ve all been there at some point in time, in one way or another. Life happens and sometimes it is unavoidable. As with any setback or shortcoming, value the lesson and ensure that it doesn’t become a recurring habit. Habits are tricky things, they are either constructive or destructive, and bad ones can be difficult to break…

Understanding and controlling the money coming in, and the money going out – the cash flow – is the starting line of the financial journey. Like a policeman directing traffic, you must guide and facilitate the flow of your money.

Master your behavior…and you master your cash flow.

Establish the habit of mastering cash flow, and that journey towards escaping student loan or credit card debt, saving for a house, or sending kids through college has officially begun.

For those so inclined, achieving financial freedom is no longer a wishful daydream. It is a potential reality.

Whatever the aim, there is one universal, inescapable truth.

Master your behavior, and you master your finances…master your finances, and you master your future.

Welcome to The Budget Brainiac.