How To Think About Money

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The way we think about our money influences the rest of our lives. The way we see ourselves and our money has an effect on the car we drive, the house we buy, the amount of debt we take out, and the amounts and types of investments we make.

How you think about money will also influence your family, friends, and those around you. Would you rather spend your bonus on a big screen TV and surround sound system to watch the game with friends or movie night with the family? Would you rather spend it taking your family on an adventurous vacation they won’t soon forget? Neither is right or wrong, but the way you spend it will influence your life and other decisions.

A special thank you to Level Up Financial Planning not only for sponsoring this episode but for being patient as BJ dealt with his near accident this past weekend. Lucas was very patient and understanding and he’ll treat you with the same kindness and respect when working to help you make the most of your money.

Episode Breakdown

Wrong Ways

Looking Forward to a Big Tax Refund

This is one that gets a lot of people, even those who make a good paycheck. It is a sign that you are having too much withheld from your paycheck. Basically this is a no interest loan to the government with money that you could have for your own purposes. You would be better off paying less into the government and putting that money into a low interest savings account.

Not Having SMART Financial Goals

Reviewing, SMART stands for specific, measurable, attainable, relevant, and time-bound. A good formula to use is: I plan to save {amount} for {item/trip/etc} in {time-frame} by {method}. Goals may be further out such as saving for a house, or retirement. Saving whatever is left at the end of the month is a mistake. Budget savings first, then monthly bills, then fun things.

The Wrong Motivations to Make Decisions

Most mistakes with money stem from having the wrong motivations behind the decisions we make. Ego-driven decisions cause you to buy unnecessary, expensive things just to give the appearance that you are doing better financially. Emotion driven decisions lead to impulse purchases such as buying a new car after getting a big bonus or a raise. Fear driven decisions are acts of desperation that things like selling off long term investments because of a downturn in the market.

Not Fully Understanding Your Options

Under-thinking your choices is willful ignorance, make sure you do your research before major purchases or decisions. Impatience is another culprit of poor decisions, it’s one that car salesmen use all the time. Over-thinking your choices is the opposite end of the spectrum and can lead to analysis paralysis. Simple solutions are usually the best as complication tends to lead to confusion.

Avoid the Hedonic Treadmill

This the idea that no matter how much more one gets either financially or in other areas you stay the same level of happiness. The more money you make or have to spend the more your expectations rise meaning you have no long term gains in happiness. Studies indicate that people have a happiness set point and while at certain times we can be happier or less we’ll tend to return to that average. For example, buying a new car will make you happy initially when you purchase it but it will quickly become the new normal and you’ll return to your average happiness. Raising your happiness set point is a lot more complicated than having or not having money.

Correct Ways

Start With The Basics

Build an emergency fund to cover you basic expenses for 3-6 months then continue to add until you have 6-12 months in case of a recession. Pay off high interest revolving debt such as credit cards as soon as possible, you can use credit cards effectively to gain rewards if you pay them off each month. Have SMART goals and a plan for how to use your money. Autopay can be a two edged sword, on one hand it is very convenient and helps to ensure that you don’t forget to pay an important bill however it can also cause trouble if a set bill suddenly changes.

Money is a Tool You Use

Your money should work for you, not the other way around. If you have the mindset that you have to work for your money then you are allowing yourself to be a slave to money. Even if you don’t have an abundance, start thinking about budgets and financial planning as a way to control your money instead of a way for it to control you. This is not easy to do, especially at first when you are getting control of your money. It’s almost like it fights back because you’ll find there are more demands than you expected.

Less is more when it comes to spending and happiness.

There is a unique situation where happiness does not tend to increase when making over $75,000 a year. The more nice things you accumulate, the more you have to maintain. You are more likely to be happier with frequent smaller purchases than occasional large ones. On the bigger purchases, you’ll also be happier if you delay gratification and don’t buy something right away. Most people report more happiness when spending money on others than themselves.

Focus Spending on Experiences

People seem to think that having more or better possessions will make them happy. There will always be someone with bigger or better stuff but they won’t have all the experiences. When purchasing possessions focus on things that will bring you experiences that you want. Invest in a good camera and lots of interesting vacation locations, when we can travel again.

Aim to Have Enough to Live the Life You Want

Save as much as you can early on so that you have the financial freedom to do the things you want. Expect to live a long life and plan ahead to have what you need when you do retire. To help with retirement savings have a plan as to what you want to do when you retire. Love what you have, take pride in caring for the things you own to make them last. When making a purchase, buy less often and focus on the quality of what you are buying.