Life is change. How will you spend it?

(9 min read)

What experiences are you likely to remember fondly in your old age? Will you be proud to say that you always had the newest iPhone? Or do you want to leave a legacy that will make a lasting impact for the better even after you’ve moved on? Will you be satisfied always doing work on someone else’s watch? Maybe you don’t mind as long as you have your weekends. There’s something to be said for the security that comes with stable employment with an established business. But for some this is not ultimately satisfying. If you want to work on your own time you need to foster the conditions now to make that possible. Your dream job probably won’t fall from the sky and into your lap. And if you wait until everything feels perfect before going out on your own you will likely never start. There’s nothing wrong with keeping a job while you work on getting a new project off the ground. In fact the more income streams you have the better. Eventually you have to be able to shoulder the risk and uncertainty that accompanies self-employment. This means having a cushion or safety net that allows you to focus on the important things and not whether the bills will get paid. I am quite aware that money can be intimidating having incurred several thousands in student loans right out of high school in order to embark on higher education. Just getting above water seems like a daunting task. That’s why I’m here to share with others what I wish I knew when I was 18. The following is my attempt to pave the way for myself and others to start enjoying more financial freedom today.

Firstly, you need to get realistic about your spending. Don’t kid yourself; be honest. Figure out how to optimize the essentials and nix the rest. Be ruthless when it comes to cutting spending, and be proud of yourself for saving money. By saying no to frivolous spending, you’re actually saying yes to more financial freedom. This doesn’t make you “cheap;” it makes you efficient. Your job is to give every dollar a mission. No penny goes unaccounted for. A common rebuttal to this goes, “Given that tomorrow is not guaranteed, don’t I want to get the most out of life today?” To that I say in order to move forward in life you need to give yourself the means to do so. At the end of the day you don’t want to be in the same place you were when you started, and if you’re not moving forward, you’re moving backward.

We’ve heard phrases like “It takes money to make money” and “The rich get richer.” Why is this so? The answer, in my view, lies largely in the role that debt plays in our lives. Whether there’s a difference between good debt and bad debt is topic of debate. In any case, we know intuitively that the less debt looming over us the better. With every day that interest accrues on your loans, time is moving against you. Time is money, and once it passes it’s gone forever. There are no bailouts for lost time. Being free of debt means that all the compensation and revenue you accumulate are no longer subject to an immediate haircut by your creditors; it’s yours. Suddenly your dollar has more purchasing power than it did before. It can finally begin to grow of its own volition. If you’re a risk taker, you would say it takes money to make money. But if you’re a natural saver you could say it takes money to save even more money. Buying in bulk and paying bills ahead of time saves money in the long-term and is only possible if you have a good chunk to part with on the front end. Think of paying off high interest debt as a guaranteed risk free return on your future income, as the two are mathematically equivalent when it comes to your bottom line. The opposing school of thought argues that debt is a necessary tool for driving business growth. A loan can be seen as good debt if it is used to expand a business of income-producing assets. A smart business owner knows this, but he or she can only wield the power of leverage after mastering the fundamentals. This is not a discussion of advanced business strategy but one geared toward the basics of personal finance. The take-away point is to prioritize the payment of high interest, “bad,” consumer debt, for example the cost of charging a vacation to a credit card, and to avoid it whenever possible.

Your wallet is like a water balloon, and each repeating purchase is like poking a hole in the balloon. If you’re not careful you won’t notice your wallet leaking money from all angles. Most of the time you know how much you’re bringing in, but unless you deliberately track your spending it can be difficult to know where all the money’s going. Of course, spending is necessary. Hoarding money is not the way to achieve financial success. The goal is to keep the cash flowing while continuously stashing some away for the long-term. In order to do this you need a budget. After the in and out flows are accounted for, is there anything left over? Or do you find yourself leaning on credit to get by, making payments at the last minute and suffering late fees? Are you one flat tire away from being knocked into the red? If so you may need to reevaluate your situation and even consider a radical makeover to your spending. Take inventory of your belongings, prioritize what you value, and make an effort to abolish anything that is not absolutely necessary. Budget your expenses in each major spending category. The best system is the one you will actually stick to. The only wrong way is not doing it at all. Aim to create as large a surplus in the budget as possible without becoming emotionally deprived in the process. As long as you regularly spend less than you earn you are moving in the direction of wealth. Roughly how much are you able to save each month? The percentage of your take-home pay that you save is called your savings rate and might be the single most important metric in determining your degree of financial freedom, because without it you cannot realistically measure progress toward your goals.

Don’t just save for emergencies. Save for opportunities!

Have you ever stumbled across an outrageously good deal that you had to pass up because you felt you couldn’t afford it? This is the opportunity cost of staying broke. Having the money to take advantage of deep discounts not only accelerates wealth building, but it feels great because you know deals like that don’t come around often. The emergency fund is a pool of readily available cash there to seize opportunity as well as handle the inevitable curveballs life throws at you. A sudden lack of liquidity can turn an inconvenience into a crisis, but with funds at your fingertips you’ll be sleeping soundly and shaking off emergencies with ease. Your emergency fund should be large enough to cover your highest insurance deductibles and include a few months of expenses plus any additional savings toward your next down payment. The more the merrier. I like to think of this not just as the emergency fund but as the opportunity fund. This attitude gives you confidence to take on profitable ventures and begin imagining the possibilities for gain rather than anticipating a catastrophe. To natural spenders it might seem like incredible discipline not to spend every dollar to your name, but the act of budgeting means you’ve already given those dollars a purpose even if that purpose is to just sit there. An advanced discussion of the emergency fund would encourage investing most or all of it in relatively liquid accounts as opposed to having idle cash which actually loses to inflation over time. Whichever form the emergency fund takes, be it cash, stocks/bonds etc, the bottom line is that you have a source of funds to draw from should you need it. For clarity, 401ks, IRAs, and home equity are not a source of short-term liquidity and therefore not a suitable home for the emergency fund.

It is probably difficult to find a good reason to save if you aren’t decisive about the things you want to accomplish or acquire in the future, i.e. goals. By this time next year do you want to be doing the same job for the same pay with the same skills and the same bills netting you the same bottom line? Hopefully the answer is no. You want to continue to make progress in your financial life. Maybe you want to get a better job, buy a car or house, go on vacation, start a business, become debt-free, or retire early. Any significant lifestyle change will most likely require some resources up front that take time to grow. It can feel like an endless grind saving little by little and making sacrifices while friends and family are having all the fun. However, keep at it. You’ll rest easy knowing you can always get yourself out of a pinch without relying on credit. With freedom comes options, peace of mind, and the power to walk away from a deal. Without freedom you remain trapped on the hamster wheel which is the most psychologically detrimental state. It helps to reframe your desire to earn more into a desire to give more. So make gifts and charitable donations a regular part of your budget. Giving is key to a healthy psychology around money. It reminds you not to hoard it. After all It’s not your money. You’re just a custodian, the agent through which the power of money is allowed to flow.

The most important thing you can do to stay motivated is keep simple but detailed records either on paper or in spreadsheets. As the saying goes, what you measure improves. Track your expenses in each category to see where you can make improvements. Don’t pull your hair out by creating separate lines for things like “going to the movies” and “going out to eat.” Instead, budget these together in one category, namely “entertainment.” Finally, draw up a simple balance sheet to see how your debts and assets stack up side by side. The difference between your assets and liabilities is your net worth. Plot this number once a month on a graph and watch the results unfold. Budgeting is not about depriving yourself of joy; it’s about identifying the things which for you are worth spending on. Spending on experiences and luxury is not necessarily evil just as staying poor is not necessarily righteous. Righteous is having clarity and peace of mind, having the courage to be different and going after what you want. If it’s something that truly aligns with your core values, it won’t matter what you spent on it. So take the time to get clear on what you value in life and minimize the peripheral time-wasting activities that stand between you and your goals.

Stuart Wilde said, “The trick to money is having some.” I like to interpret this to mean life can be difficult when you’re broke, but keeping some fresh dough on the sideline goes a long way to creating the freedom and autonomy you need in order to contribute in a way that brings you the maximum joy and fulfillment. ❧

Peace and Love,
Tyler J