Saving is silent, consumption is conspicuous
At the most basic level, the only way to grow wealth is to earn more than you spend and save the rest. If you can get that wealth equation to work for you, then you’re not going to have to worry about financial independence at any time in your life, but we all know that life happens, and more importantly – emotions happen. Humans are complicated, add money into the equation and it really becomes a mystery. Money has the power to completely change someone’s character, and let’s face it, it is even one of the major motivations for murder. We all have a ‘money mindset’, and often that is deeply entrenched in how we’ve been brought up, or the challenges we have had to face getting to this place. The past doesn’t always stay there, it lives in your mind and can influence everything you do, positively or negatively. That doesn’t mean to say that that mindset cannot be changed, the brain is a powerful thing, and more importantly it has plasticity, the ability to grow new connections all our life. We might have the most neurons we ever are going to have at birth, but considering we only ever use 5% of that brain, we have billions of ‘spare parts’, so we can make new pathways and those neurons can grow new connections all the time.
Building up a habit is the equivalent of walking a well-worn path in the brain, so deep it can become a rut. When we’re out and about doing our daily thing, we naturally walk down paths, they are easier and more comfortable – the same with our habits. We are often oblivious to our habits – how we dress, eat or talk. We all have money habits that we are probably just as unaware of, and most of those are wrapped up in emotion. Do you get a sinking feeling in your stomach at the beginning of the month when the cacophony of notification after notification signal the decimation of your bank account? There is a very good reason stores have payday specials – it isn’t that we are all looking for a great deal, we’re often looking to get a retail therapy high – because we deserve it.
Most of us boost our self-esteem with physical things we wear, drive or live in – that hasn’t changed over time, what has changed is the social media platform where all that and more can be ‘shown off’. Somehow, unless you take a selfie of yourself in an exotic place, eating a magnificent meal or attending an extravagant event – then it never happened, and there is no memory of it. This is equivalent to a tree falling in a forest if nobody hears it then did it happen? Consumption, aka spending, is conspicuous. You can take a selfie of it, or of you doing it – and be rewarded by ‘wow’ or ‘love’ emojis, all giving your self-esteem a nice little boost of serotonin. Saving though is silent. We don’t screen-save our bank statements or investments and post them on social media. Salaries are secret. There is no external validation for your good saving – only for your consumption.
Habits are continually reinforced because they are easy, or because they give us pleasure (and the brain chemicals, of course, play a part). The brain rewards us for taking the path more travelled, getting the brain to take another route is stressful, and often downright unpleasant. One obvious pathway to wealth is to get pleasure out of saving, not just consuming. That saving needs to be smart, not just effective. One of the first things you can do is to do some introspection and determine what your current mindset is. As uncomfortable as it might feel, you need to start paying attention to your money – the modern equivalent to balancing your chequebook and opening your bank statements. Until you understand the dynamics of what you earn and spend, it is impossible to make sure enough flows into your wealth. You may need to rethink your beliefs around wealth. Your home is not part of your wealth, at best it is pre-paying your rent in retirement. It is euphemistically called a ‘lifestyle asset’. Cars are another expensive lifestyle asset. Changing either your house or car too frequently puts nasty dents into your wealth. Holiday homes that don’t act as an investment and produce a decent return are black holes for wealth.
One way to understand and make friends with your money is by having a financial journal, probably the old-fashioned pen and paper kind (there are studies that show that the physical motions of writing something down has more permanence in the brain). Track the money that is coming in, the tax you’re paying, and what is going out and where. If you want to make it sustainable and not bore you to tears, probably only do it weekly or monthly. You could start off by looking back a few years, and find out the bottom line – the inputs, outputs and balance of your wealth at the end of the year. Once you know where you are and what your habits are, set yourself long-term goals in paying off your debt and investing. You can monitor these at the beginning of your journal, by visually crossing off your debt, or filling up your wealth. If you’re looking for ideas search under debt bullet journals on Pinterest. By making these goals visual the brain can understand it better, it can focus and you will get the flow of emotions from achieving something physically – even though you won’t be posting it online I guess. You could share it with your financial advisor though.
Once the wealth starts flowing, how should you invest it? Start with an emergency fund, equal to at least 3 months expenses after tax. Next, start on your retirement savings and use the tax breaks to their max. Your financial advisor will be able to tell you how much you need to put away on a monthly basis – there is no simple formula or percentage because it will depend on how much you have already saved and your expectations on retirement. Once you’ve maxed out your tax savings on retirement, then look at a tax-free savings account. This is supposed to be a long-term investment, but you do have more wriggle room than a RA or Pension. Never cash-out your pension before retirement – catching that up again is almost impossible.
Invest and draw down your debt concurrently. You might think that it is financially savvy to reduce the debt as quickly as possible, but your money mindset will probably sabotage that. If you’ve built up huge debt, you’re going to have to find out for yourself why – and change that – or you’ll never be able to really build your wealth. It is not going to be comfortable, but if one of the best habit to break or reset. Use credit cards but don’t let them use you, they should have a zero balance every month, and if you can’t do that, cut them up, pay them off and work on your money skills – use cash. Make a list of your debt (excluding the bond and car), start with the smallest balance – irrespective of the interest rate (within reason), the ‘small wins’ of killing that off will produce the right brain chemicals to reinforce the positive behaviour. Using cash instead of plastic or the internet has a similar effect on the brain as physically writing – it grows new pathways and allows negative hormones from being a spendthrift to be felt immediately.
Action: If you can change your emotions around saving and investing you will be well on the way to financial freedom.
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Author Dawn Ridler ©