#FinLit Disclaimer: If you only want to live a simple life with no debt, taking care of reasonable expenses as they come up, we don’t need to talk. We only need to talk if you want to build wealth to leave to your children’s children.
You have finished college, or you just got another job. You still can’t make your ends meet. You still live paycheck to paycheck even though you make more money than you ever have. If you missed a paycheck, you would be in financial ruin. You can’t understand why this situation persists.
Consider this truth. It doesn’t matter how much money you make if your relationship with money is unhealthy. Money relationships are just like other relationships. Even though looks are important, it doesn’t matter how great he/she looks if your interactions are unhealthy.
Here are some of the pitfalls we have been trained to fall into. That’s the big deal, the grand deception. You think what you are doing is financial health, but it’s not. As with life in general, the healthiest experience comes from the most honest communication. Learn more about yourself, and don’t deceive yourself. Consider the following unhealthy approaches to money:
1. Pitfall: Get out of Debt – Sustainable Option: Borrow at 0%
It seems like a worth goal. But, it is just not where you are in your financial journey. Being in a position to pay everything off is 7 to 15 years off at your current debt-to-income rate. You have some assets (poor assets) to show for your debt, but nothing that you could liquidate easily. My point is not about keeping debt. My point is that you have debt, and the job right now is to manage it well.
The average US household has $15,863 in credit card debt, and $156,584 in mortgage debt, and $33,090 in student loan debt. My question for you is about your interest rates on that debt, not the total. Managing debt well, can mean paying it off more quickly. But, more important to me is that you utilize the debt wisely. This means managing the interest and investment while paying it off. That provides liquidity (cash) to fund your productivity. Productivity will result in wealth creation as well as debt alleviation.
2. Pitfall: Buy What You Can Afford – Sustainable Option: Invest in What’s Needed
Again, it sounds good that you purchase only what you can afford. But, most people interpret this to mean that you limit your purchases. That’s not a problem except that you will continue to break that rule throughout your life. For those of us without a rich uncle or parents that foot our bills into adulthood, It’s broken when you buy an engagement ring, a car, a house, and your child’s tuition.
I don’t like making rules that I have to continually break. The alternative is to realize a purpose for all of your purchases. I am not even going to prescript what you buy Gucci bag, Jaguar, 3 bedroom house when you live alone–whatever you want to buy is your business. Just make sure your business is purposeful. If your goal is wealth creation, I want to know the return on the investment you have made.
3. Pitfall: Pay Your Bills Up – Sustainable Option: Manage Finances & Investments
You are paying your bills up front, months in advance because you value the relationship with the creditor and want to demonstrate responsibility. You want to get the bill responsibilities out of the way so you can have what you call “free money.”
The more sustainable option is to cultivate a disciplined approach to managing your money. I recommend having a sit down with your money at least twice per month, or more if you are paid weekly. During this conversation or meditation (depending on the analogy that works best for you), you reflect on the best use of the funds to achieve your goals. Your budget is your guide. Your math skills are important. Your cushion account, and worse case scenario contingency are always at the ready.