Personal finance gurus have driven the personal finance space with clichés that have complicated how we manage and think about money. They keep on telling you that there is a ‘secret’ to doing well financially when there isn’t any.
The most surprising thing is that some of the most cherished principles do not work. They appear to be true in theory, but they do not make any practical sense.
“Not everything can be counted counts, and not everything that counts can be counted.”
Albert Einstein
There are many things that you can focus on when you want to level up your money game. But only a few of them matter.
Most of the cherished principles don’t work because they obscure some truth. Many people miss out on the fundamentals that form the foundation of personal finance. As the Pareto Principle says, 80% of the results come from 20% of the inputs.
While there are a lot of things that influence our financial success, there can only be a few of them that greatly affect how we do financially.
1. You Cannot Personal Finance Your Way Out of Poverty
The old school secret to doing well financially is “cut on your expenses and live below your means. Only spend on the essentials and save everything else.” That’s the secret that financial gurus sell to people as the only secret to getting rich. They expect everyone regardless of their levels of income to be able to have a high savings rate.
What they do not tell you is that it not only becomes possible to save when you have a high income but it also becomes easier to save money when you have a high income.
“The ‘secret’ is the thing in personal finance that no one wants to talk about: it’s easy to save money when you have a high income.”
Low-income earners don’t even manage to meet their essential needs. Yet you are expecting them to put money aside and save. Remember you cannot reduce your expenses to zero. You still have to eat and meet other basic needs.
Nick continues and says,
“In all seriousness, you can talk about cutting expenses all you want but it’s income that builds wealth.”
For a person with a total income of 10K per month, even if they saved 100% of their income, they would still have 10K only. Nothing more.
For a person earning 10K a month, asking them to save 10% of their income, would mean they have to put aside 1K every month. This will be very hard considering their income is not even enough to meet their daily basic needs.
On the other hand, for someone earning a net income of 100K, saving 10% would mean he puts aside 10K of his income and he still has 90K to meet his daily expenses. For him, it will be much easier to save 10% as even after deducting his savings, he still has 90K to spend.
As Nick writes,
“This is why the personal finance industry loves the “cut your lattes and get rich” style of advice. They love it because it opens a new door in a world where the other door (high income) is closed for most people.”
Yes, cutting your expenses works, but often the problem is low-income level and financial illiteracy. You can talk about cutting your expenses all you want, but you cannot personal finance yourself out of poverty.
2. Striking a Balance Between Spending and Saving
For most people, personal finance means living below your means, never spending money on things you love because you only spend money on your basic wants. This means you go for the cheapest and most affordable options whenever you are shopping. This means settling for less and saving as much money as you can. This means you never eat at fancy hotels, you don’t fly first class, you don’t go for expensive holidays.
For most people, personal finance takes a front seat in the class of scarcity and a back seat in the class of abundance. We want to deprive ourselves of all the good things that our money can help us achieve.
Everyone is shouting how we should try to cut out unnecessary expenses and save as much as we can. No one ever talks about how we should spend our money to improve our lives. We may have very good financial positions but we still go through problems that our money can help us solve.
In his book, “ I Will Teach you How to Be Rich” Ramit Sethi writes,
“My friend Jim once called to tell me that he’d gotten a raise at work. On the same day, he moved into a smaller apartment. Why? Because he doesn’t care very much about where he lives, but he loves spending money on camping and biking. That’s called conscious spending.”
Even before, you get started with managing your finances and investing have a goal in mind. You should not just be cutting on your expenses and saving just because your favorite financial guru says so.
Be intentional. Have goals and things you want to achieve with your money. Don’t be that millionaire who is still worried about the extra buck charged for packing his groceries at the grocery store.
Ramit Sethi adds,
“Conscious spending isn’t about cutting your spending on everything. That approach wouldn’t last two days. It is quite simply, about choosing the things you love enough to spend extravagantly on- and then cutting costs mercilessly on the things you don’t love.”
Imagine what your rich life would look like. What are some of the things that you would want to never worry about in your life? What would you like your money to do for you? For you, you may want to never care about the cost of the bill whenever you go out for dinner with your partner.
Enjoying money and using it to improve your life is not bad as financial gurus make it seem. You are making money so that you can improve your life. Be strategic and conscious about your spending. Spend more on things you like and spend less on things that you do not like.
3. It’s Not What You Think
When most people think of acquiring a lot of wealth, they think of buying luxurious cars, houses, expensive holidays, eating at expensive restaurants. They falsely think that being rich is all about spending huge amounts of money.
In the Psychology of Money, Morgan Housel writes;
“when most people say they want to be millionaires, what they usually mean is they want to spend a million dollars. And that is the literal opposite of being a millionaire.”
While many people focus on spending a lot of money, being rich is about investing a lot of money. It’s about having a high savings rate and learning to be satisfied with less. That’s the price that you have to pay before you can be able to spend huge chunks of money on luxurious items without going broke.
If you want to be rich, envision yourself having a high saving rate and building a high-value portfolio. Only envision yourself buying and enjoying the things that come with being wealthy after you are ready to pay the price involved.
4. Debt Will Not Improve Your Credit Score
As I recently wrote, debt has become so easily accessible that it is quickly ruining our future financial positions. Companies have reduced the old school bottlenecks that made access to loans difficult.
True to Dave Ramsey’s words,
“Debt has become so ingrained into our culture that most people can’t even envision a car without a payment, a house without a mortgage, a student without a loan, and credit without a card.”
Companies have come up with new and clever ways to seduce people with debt. One new way is by encouraging people to take up debt as this will improve their credit score.
While this is true, what they do not tell you is that whenever you take bad debt, you are robbing money from your future self.
They are trying to make debt sound like a good thing that has financial benefits while it’s not. Yes, you will have a good credit score, but do you want to keep borrowing money until you die? Isn’t your goal to be so wealthy that you can meet all your needs without necessarily having to borrow money?
While they shout that taking debt will increase your credit score, they do not mention the stress that comes with doing monthly repayments for your loan. They do not even mention the high-interest rates on loans and the ridiculous fees that come with loans.
Make Your Money Rules
As you may have realized when it comes to personal finance, only the fundamentals matter. The rest of the principles only apply to certain individuals depending on their goals in life.
The best way to get the best from your money is by setting your own money rules. Guided by your financial goals, come up with the guiding principles that will help you achieve your goals.
The only person you should be listening to and learning from more than anyone else is yourself. Learn what works for you and learn what matters most for you. And that is how you successfully learn how to manage your money.
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