Given our unavoidable daily financial transactions, one would expect us to acquire financial literacy naturally. Regretfully, we do not.
The result is that too many people, including 40% of those earning $300K-$500K, are living paycheck-to-paycheck (surprisingly, those in lower earnings brackets report fairing slightly better). During the government shutdown, people in good-paying positions declared they were unable to pay their rent after missing one or two paychecks.
Despite its crucial importance, schools do not teach financial literacy, and parents and peers are reluctant to talk about money due to a lack of knowledge or embarrassment. The most prominent financial information often features posts of enviable vacations, diamond-studded Rolexes, or aspirations of excess – manifesting a luxurious life, creating generational wealth, or get-rich-quick schemes.
Since the principles of sound financial management are relatively simple – live below your means, save for a rainy day, do not keep up with the Joneses – the issue is our relationship with money.
Why?
If we grew up in very modest circumstances, we want to enjoy what we did not have. If we grew up affluently, we want to maintain the lifestyle even when our current resources cannot support it.
For others, spending money is an excessive recreation or an attempt to fulfill an unmet need. We nourish our self-esteem by indulging ourselves in the latest fashion. Rather than adding to our savings, we continue to buy more clothes, despite not wearing half of what is in our closet in the past year.
Most people suffer from lifestyle inflation/creep, thoughtlessly spending more on fancier dinners and finer wines as their income grows, rather than building an investment portfolio that could serve them for decades.
The Result
When you spend an extra $10,000 on a car, you send $170 to the bank every month instead of adding to your savings and reaping compounding investment returns. You choose leather trim and a surround-sound system over $70,000 for your child’s college fund or $400,000 for your retirement fund. Use this investment calculator for any amount over any time period.
More frustrating than the squandered savings opportunity is the futility of more spending or a higher income without responsible habits. Spenders are never satisfied with what they spend or have; they are always searching for more.
A Reaction
Prudence in expenditure does not mean hoarding your money and denying yourself any indulgence (read this for the perils of a scarcity mentality). It is a question of honoring your values.
Last week, I took my granddaughters to Chicago’s fabulous Museum of Science and Industry. There was a special Spiderman exhibit requiring an extra admission cost ($18 for adults, $14 for children). I paid for the girls and their parents, but I remained outside perusing the general admission exhibits. You might think me foolish for denying myself when I have the resources to pay for my admission.
However, the mere confluence of desire and resources does not require expenditure. I retained the $18, anticipating a better use elsewhere. More importantly, this story reveals a mindset (just because you have it doesn’t mean you spend it) that undoubtedly contributes to my ability to acquire and retain resources.
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It is crucial that we discern between needs and wants and possess the discipline to adhere to sound financial practices. Being financially responsible is not something you can brag about on social media, but you will have less stress and the sense of accomplishment that comes with being a good steward of your resources.
