People who want to achieve financial independence and retire early know that money is just a tool. People that are living above their means and without a financial budget either are not aware of that fact or they choose to ignore it. Its true that money does not make people happy, but mismanaging it can sure make you unhappy. Using a budget or just paying more attention to the inflows and outflows of cash is really the key to taking control of your financial life. There is often times a lot of emotion around money. One of the tenets of financial independence is realizing that having money saved opens up choices that you didn’t have before. Taking the emotions out of the equation let’s you make more sound financial decisions that are more long term based instead of short term (wants, sales, impulse buys, etc).
I have worked with a lot of people that really are somewhat naïve or even ignorant about money management. I’m not talking about which investment to choose. I am referring to a much more basic concept of income needing to exceed expenses. Using a credit card to bridge that gap is a sure sign that people are not managing their money (and probably not using a budget). Paying tons of interest charges is actually the easy way out! Some other examples of those that might not be ready are the ones that think that budgets are to restrictive or take too much time. The answer is that its your budget to change as needed, no one else is keeping score. The time it takes to look at your finances on a daily, weekly, or even monthly basis are very minimal compared to the potential benefit. For those that want to take control and face their financial challenges head on, I say you came to the right place.
What is Lifestyle Inflation?
There are lots of how to do a budget articles and guides out there that include lists of things to consider. My point is, again, more basic than that. Until you want to make changes or have some financial goals to achieve, making a budget is really a futile exercise. Getting married or having kids are two events that sometimes shake people enough to start thinking about the future and what they really want out of life. Sometimes car accidents or medical costs are the trigger. I wish I could say that I have seen lots of positive reasons that people have wanted to make a financial lifestyle change like an unexpected raise, an inheritance, or a new job or position with better pay. I see lifestyle inflation as one of the main inhibitors to increasing your savings. Lifestyle inflation is when you increase your spending to match your income. For example, lifestyle inflation is when you get a 3% annual raise at work and start eating out more as a result. To prevent it from occurring, put your savings and investment deposits on auto pilot by making them automatic. That single action can help prevent overspending as when you look at your checking account the paycheck and the outgoing investment transactions occur on almost the same day so you never miss the money.
I lost count of how many young professionals I have tried to talk to about with regards to starting to save in a 401k or 403b. Promoting the company match that is usually worth thousands of dollars a year is often wasted on them. I am glad that companies have now shifted to having employees opt out instead of opt in to retirement plans. Maybe once they wake up they will at least have a good start instead of being at ground zero. Sometimes they listen, but are convinced that they don’t make enough to save anything. The problem isn’t the income, it’s that they usually don’t know where all the money is going. If they realized how much they spent eating out, on clothes, or whatever category the spending might be in, then they would probably make some changes. For many people it just takes time to attain maturity when it comes to money.
This piece was meant to provoke some thought and maybe help you to gain some insight into your current financial frame of mind. If you haven’t ever done a budget, start tracking your expenses for a month or so. A budget doesn’t have to be a huge ordeal. Once you see where the money goes, try to reduce spending in areas you think you can live without and putting that money towards high interest credit card debt, student loans, or retirement accounts. That doesn’t sound too hard, does it?
What changes have you made to improve your finances lately? What changes do you want to make?