Apr 30 3 Money Rules

Written by John D. Buerger, CFP®.

There are many aspects of personal finance that are up for debate - active vs. passive investing, wants vs. needs and others - but there are a few cardinal “money rules” that cannot be broken.

Ignore these rules at your own peril - which is unfortunately what most of your friends and neighbors are doing. Play by these rules and your life will be happier, no matter how much income you make.

RULE #1 - THE LAW AGAINST DOLLAR DUPLICATION

You can only spend a dollar once.

Once you spend a dollar on something, that dollar is no longer available to be spent (by you) on anything else. As much as we would all like to “have our cake and eat it too,” in real life when it comes to money, that just isn’t going to happen.

Sorry to rain on your parade.

Our fast-paced, immediate gratification society encourages you to try to break this rule every day and yet it is the one, most-immutable law of personal finance.

Tip #1 - Become “conscious” of every dollar that you spend. There are plenty of ways to go about this, but the key is to be sure you visit and then revisit each purchase you make. Saving money should be automatic (done for you in the background - so you don’t have to think about it), but every expense should be deliberate.

RULE #2 - MONEY MATTERS

Here’s a fun exercise and proof that you really do understand Rule #1.

--- Find a coupon for $100 off some significant purchase (like a television). Now take that coupon and cut it into several pieces.

--- Next find a $100 bill. Now cut IT into several pieces.

If you are like most people, shredding the coupon was pretty easy. Cutting up the cash was far more difficult. In fact, I would bet that you didn’t/couldn’t do it. The emotional part of your brain would have been screaming for you to stop before you even put your hands on the scissors.

Lots of emotional energy is attached to money (especially cash). That dollar bill represents everything it could possibly buy, complete with emotional baggage for each of those items. When you think about cutting up the $100 bill, you don’t just think of one thing worth $100 you’ll be losing, you think of ALL the MANY things worth that $100. It adds up to thousands of dollars in perceived pain.

Tip #2 - Be honest with yourself. Accept that every dollar counts. Each of us has limited resources, and one of the most precious of those resources is money. This is your motivation to become “conscious” about your money … because your money does matter.

RULE #3 - HUMAN BEINGS ARE FINANCIAL IDIOTS

Somehow, we have been led to believe that we are all supposed to be naturally brilliant money managers. Most people refuse to discuss financial issues with friends or even family (much less strangers) because they don’t want to admit to anyone (even themselves) that they have made financial mistakes.

Get over it. We’re all stupid when it comes to money. That’s just how we’re wired.

A vast majority of your decisions (91-96% of all choices) are made with the limbic system - your emotional brain, not the cognitive rational “human” brain. When it comes to financial choices, that percentage is closer to 100%.

The key to smart money choices is to build a process where the high-speed emotional brain can run its course (it will engage whether you want it to or not) and the much slower cognitive system has time to examine and process the data and be a part of the final decision.

Tip #3 - Before making any purchase decision, “Take Five.” Put the decision on hold for five minutes for every $100 in value. This will allow the drug release that comes from your emotional brain anticipating the purchase to wear off and for your rational brain to contemplate all the options.

GET CONTROL = BE HAPPY

After a decade of working with financial planning clients, especially on cash-management and spending plan techniques, I can say with great certainty that the key to building wealth AND enjoying a happy life is being in control over you money. Part of this is accepting the real rules of the money game and using them to your advantage.

You can only spend a dollar once, so get as much value as possible for each dollar you spend. Money IS important, so don’t ignore it. Dollars are like your teeth - ignore them and they will go away. We’re all wired to be poor money managers, but with some simple tools and techniques (like our Cash Flow Hydrant™ online cash management tool), you can enjoy considerable improvement.

John

Check out our Cash Flow Hydrant™ online cash management tool - an easy way to become more conscious and purposeful about every dollar that you spend. With the Cash Flow Hydrant™ you will be able to shift hundreds (if not thousands) of dollars each year from paying for stuff that doesn't matter to having more of what's most important to you.

The Cash Flow Hydrant™ is our most powerful tool to improve your quality of life.

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Apr 02 LIfestyle vs. Quality of Life

Written by John D. Buerger, CFP®.

Lifestyle and Quality of Life are two separate concepts and they are very much in conflict.

The pathetically low savings rate in the United States (currently less than 5%) is a direct result of this conflict. People don’t save because they mistakenly believe doing so will mean a lower quality of life. Rather, it is quite possible (we have plenty of documented cases through our Cash Flow Hydrant™ cash management tool) that saving money while shifting to a less costly lifestyle will result in a substantial INCREASE in your quality of life.

In this case, you really can save your cake and eat it, too.

LIFESTYLE = STUFF

Your lifestyle is the sum of all the commitments you have made in the past to surround yourself with “stuff” and limit your future choices on what you deserve (“we no longer have to eat hamburger”). It includes the size and style of your home, the temperature on your thermostat, the cars you drive, the clothes you wear and the places you allow yourself to be "seen."

This lifestyle is completely wrapped up in your belief system about yourself and those material goods of which you think yourself worthy.

It is just a belief system and nothing more - it isn't real.

QUALITY OF LIFE = EXPERIENCES AND RELATIONSHIPS

Your quality of life is determined by your alignment with who you are as a human being, most notably through experiences and relationships. This is because we human beings are, at our core, social creatures put here to serve each other.

We are hard-wired to remember experiences and interactions with other living creatures far more than the short term feel-good sensations associated with the hormone release that goes along with getting a shiny new trinket or walking through a newly decorated room.

MONEY DOESN’T BUY HAPPINESS

There is a misconception that happiness is derived from money and that the more money you have, the happier you will be. This is taught to us by the media, our peers and politicians ... and it’s wrong.

Scientific studies have proven beyond any doubt that once a person’s income is above a surprisingly low poverty threshold, additional income has little to nothing to do with that person’s overall happiness. In fact, many people find that they are less happy as their incomes increase because with the additional financial resources come new stresses - mostly in the form of bigger obligations and more “stuff.”

WHY MONEY DOESN’T BUY HAPPINESS

The reason more money doesn’t lead to greater happiness is because in most cases, the additional money is used to improve the lifestyle but not the quality of life. The money is spent on more “stuff” - a bigger house, faster car or nicer clothes, not on having better relationships or more vivid experiences in life.

MOVING UP?

The Hedonic Treadmill paradox exists because of this basic misconception that “Stuff” equals “Happiness” and the more stuff you have, the happier you will be. Humans adjust to their surroundings and their belief systems also adjust accordingly:

Suppose you move from a 1500 square foot home to one of 2500 square feet (pretty much what the average home size has done the past 40 years). You were comfortable before so this has nothing to do with minimal requirements for living. When you first move in, you feel like you’re in a castle and are king/queen of the world. A month or two later (or less), you have normalized to your new surroundings and embraced them into your belief system that you belong here and no place less grand.

Your quality of life has not improved … just the size of the space you call “home” and the obligations associated with paying for it. Your relationships and experiences are the same (or many times, worse).

FOCUS ON WHAT REALLY MATTERS

Spend that extra money on building stronger, richer relationships and experiences and you will get a completely different return on your investment, especially if those relationships and/or experiences are in alignment with your highest values - the things in life that are most important to them.

The key to all of this is to become “conscious” of how each of your dollars is being spent and then to ask yourself the simple question, “Am I getting good value for this dollar, or is there someplace else I could spend it that will give me more of what is most important to me? Better relationships with people I care about? More vivid experiences I can share with those I love?”

Most people who embrace this simple shift in their thinking (from obligations and “stuff” to stronger relationships and richer experiences) are enjoying a much better quality of life today while saving more money for their future.