When our children were babies, my wife and I were “living paycheck to paycheck.” We once were a couple days away from our paycheck and were out of money, which was somewhat normal at that time of life. However, this particular time, our son developed major stomach discomfort and we found ourselves struggling to make the small purchases of medication and groceries that would make him more comfortable. It was then that we decided to create a “cushion” of $100, which was not to be touched unless it was a true emergency. Over the years, the amount of the “cushion” has grown to include the ability to weather the many storms that are likely to occur at some point. But it was that first $100 cushion that gave birth to our belief in principle #1: Save for a Rainy Day.
After the time of the “sour stomach situation,” we started to build up some rainy-day savings. This was made easier by the fact that at this time of life, we were no longer creating consumer debt. A few years earlier, during college, I maxed out my credit card and it took me years to pay off the principal and the interest. Back then, I’d gotten into the habit of looking at my “available credit” as my “available funds,” and this was a major and expensive mistake. We learned during that time to avoid consumer debt. Don’t get me wrong, I think credit cards have one very important purpose: fraud and identity-theft protection! I don’t believe in handing over my debit card for purchases, because if someone does steal my identity, they now will have access to my bank account. So I believe in using credit cards to build a “moat” between my financial transactions, identity thieves and my bank account. But even while we were living paycheck-to-paycheck, we were helped in controlling our spending and building up our savings by principle #2: Avoid Consumer Debt.
The avoidance of consumer debt is the most powerful tool, of which I am aware to implement principle #3: Spend Less Than Your Income, Consistently! Spending less than your income is the most important principle and all the other principles support it. A friend recently remarked to me that he was surprised that spending less than your income would be a “principle” at all. He felt that it was so obvious and was surprised that people need to be told to do it. Of all the principles, it was the most challenging for me to practice. This was not because I didn’t know that it was the right thing to do; I didn’t know exactly how to do it. Spending less than our income involves developing some kind of system that enables us to manage our cash flow. If the system works well, it’s likely we will find spending less than our income to be relatively easy.
My favorite principle is principle #4: Buy What You Value! Whether or not we are aware, we are being marketed to constantly each and every day. As a result, many of us spend on things and experiences we don’t need, don’t really want and don’t even truly like. I like the quote that Dave Ramsey uses: “We buy things we don’t need with money we don’t have to impress people we don’t like.” There is a much better alternative. Buy what you value! Spend your money.. and your time.. and your energy.. and in some cases, your calories on what you truly appreciate. I love luxury travel, live jazz and walking. I’m not into fashion and as much as I like luxury cars, they don’t bring me enough joy to be worth my money. Also, as my wife and I enter our fourth decade of marriage, our value for “eating out” has fallen off a cliff. Understanding what we value and directing our money accordingly makes financial decisions much easier and also, more enjoyable. Doing this will gives us a sense of satisfaction that often quiets the advertising noise, so we end up spending less and enjoying more; a phenomenal bargain!
I’ve developed these principles through error and trial. I made mistakes and tried to figure out ways to avoid repeating them. My wife and I will never forget the “sour stomach situation,” nor will we forget how it felt to be harassed by the credit card companies because we’d accrued debt we were not prepared to repay. While we were in these early years of our adult life and experiencing the bumps and bruises, I was given a tool that I’ve found invaluable. At this time of life, I was reading Black Enterprise magazine, looking to learn a bit more about how to manage money. In each monthly issue, they’d profile a young (or young-ish) adult or couple and describe their financial life, alongside a clear objective financial “snapshot”: their financial net worth statement. I created my own financial net worth statement over 25 years ago and have kept it updated ever since. Doing so helped me to see the impact of my behavior very clearly. If you want to lose weight, a scale is an essential tool. If you want to experience financial peace and develop wealth, a financial net worth statement is just as essential.
If you don’t know where you are, good luck getting to where you want to go. There is no better metric for determining where you are financially, than your financial net worth. More importantly, analyzing your financial net worth over two periods of time provides clarity about your financial decisions. As such, principle #5: Track and Grow Your Financial Net Worth is very important. Financial Net Worth is a wholistic, judgment-free, objective data point. It quiets all the noise and tells it like it is.
I have a complicated relationship with the final principle: #6: Develop a Marketable Skill. For the first 20 years of my professional life, my career and income felt fairly “predicable.” I worked in hospitality real estate and finance and the career path was relatively narrow. I developed skill during this time by accepting more responsibility and trying new things along the way, so that I would be qualified for roles with more responsibility. The first five principles are easier to implement if there is more income. More income comes from contributing to the marketplace and being compensated. Highly developed skills in a robust market often leads to greater demand and thus, more income. While, most of us can’t control the market, we do have the ability to study the market to gain understanding and to develop our skills so that our income can grow alongside our expertise. As costs continue to increase at astonishing rates, it is critical that we get in the driver seat with respect to our income.
These principles are not sequential. They are all ideally being implemented by all responsible adults to some degree at all times. Principles #1 (save), # 2 (avoid consumer debt), #4 (buy what you value) and #6 (skill → income) support principle #3, which is to spend < our income. Principle #3 (spend<income) leads to the creation of wealth. Principle #5 (measure Financial Net Worth) provides an accurate measurement of that wealth. Putting these principles into practice is not easy, but it can be made easier by using a handful of tools. You can read more about those tools here.
Cheers, to your wealth
wellbeingGrant