AVOIDING THE BIG MISTAKES IS MOST IMPORTANT.
What is your money philosophy? What is your belief system when it comes to finances? Consciously or subconsciously, each person has one. Whether you live paycheck to paycheck, or save almost everything for a rainy day, your philosophy about money helps determine how you live life. There are numerous resources out there for managing finances. And for many people (myself included), the information can be overwhelming. Taking a step back from it all, I propose two items to consider as a straightforward way to achieve financial success.
Overthinking Small Purchases and Missing Big Ones
Have you ever encountered the person who has the $800.00 per month luxury car payment but who budgets down to the last penny when it comes to buying a cup of coffee? I’m not saying that living this way is wrong, but it seems to me that it is very stressful. Budgeting for each and every $10.00 purchase in order to squeeze enough money to make a monthly car or mortgage payment takes a lot of effort. And it has never been easier to take on life-ruining levels of debt to finance the purchase of a house, car or education.
Unless you are fabulously wealthy, there will inevitably be trade-offs in terms of what products and services you can purchase at a given time. For me, I don’t like having to stress out about buying items such as groceries, gasoline, medication, a gym membership, occasional plane tickets, and restaurant dinners (to name a few). If I wish to enjoy time with family and friends, I want the financial flexibility to do so. Right now, I drive a 16 year old car and live in a safe, but not extravagant neighborhood. That way, I have cash left over each month to enjoy different experiences in life.
This may not be the lifestyle choice for everybody. And again, I’m not saying that my way is the right way. For many individuals, there is a high value in being able to drive a fancy car or live in a large house. Where you spend your money is really reflective of your personal values. But one money plan that does not make sense is budgeting down to the last cent for small purchases, but rushing in with little thought into major ones. And this is especially true for mortgages, car payments and student loans.
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The Three Elephants
Taking out a note to purchase an overpriced car can lead to repossession and financial difficulties. Taking out thousands of dollars in student loans to obtain a degree with few job prospects can lead to severe financial consequences. Taking out a mortgage to purchase an unaffordable house can lead to foreclosure and financial ruin. In all three cases, thousands, hundreds of thousands, or even millions of dollars are at stake.
Yet stories abound of individuals who get into serious financial trouble because they jumped headfirst into a major purchase of a car, house or college degree without a thought as to the long term costs. This is especially true in periods of “easy money”, where lenders flush with cash seek out borrowers to take on debt by any means.
For me, avoiding the “million dollar” mistakes (like buying too much house or car) has allowed me to free up cash for “ten dollar” mistakes without having to worry. If you do choose to invest in a large house, luxury car, or college degree, the primary takeaway is to really put a lot of thought into the decision. Buying these items is not a mistake if you think it through!
Reducing Lifestyle Inflation
The second item to consider is how your lifestyle changes as your income increases. Think back to life when you were 20 years old and compare the costs to what they are now. How has your lifestyle changed? For me, a certain amount of lifestyle inflation is good. If someone earns extra income and puts in the work to make more money, they absolutely deserve to enjoy the fruits of their labor.
But as with economic hyperinflation (on a nationwide scale), too much lifestyle inflation can put a serious dent into your budget. So the recommended course of action is to limit the rate of lifestyle inflation to a level below any income increase. With this strategy, as your income grows over time, your expenditures as a percentage of income will become less. This will enable you to save more money as your excess cash can be put aside.
Spend Less Than You Earn
We’ll aim to provide you many articles on money. Whether it’s learning about 401K retirement plans, Roth IRAs, rainy day funds, or a myriad of other financial knowledge, we hope to add value to you as a reader. But with all of that, there is one golden rule to financial well-being: spend less than you earn. That is the easiest strategy to remember, and one that will serve you well in the long term.
As is the case with your health and fitness, adopting a long term mentality of slow-and-steady with your money will increase your chances of getting and staying in good financial shape. Avoid hasty decisions, especially with large expenditures such as a house, car and student loans. This will serve you well.
SSGT NICHOLS: Serve Your Country.
