Money and investing
OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.
– Pudd’nhead Wilson’s Calendar
Whether in business or personal finances, there are a few good habits that seem to have survived the test of time: Staying out of debt, living beneath your means, removing emotion from your financial decisions, paying yourself first, and lesser known tricks, like taking advantage of momentum and inertia. Acknowledging these habits—and adopting them—helps keep things simple, increases our wealth much faster, and minimizes our tendency to be our own worst enemies in our financial lives. They keep the wheels of our plan turning; despite our doubts, fears, or plain old lousy judgment. These habits support, and are based on, some basic “laws” that you would do well to learn as early in your financial life as possible.
There seem to be a couple of basic laws that apply to the flow of money—much as there are in nature. Evidence of these laws shows up in other places in life, but they are often the most noticeable (and troublesome!) in the area of finance. I’ll list what I consider the most important ones here, and they will show up now and again during our talks about money, business, and finance.
1. Your expenses will expand in proportion to your income.
If you make two thousand dollars a month, you’ll probably end up spending two thousand per month. Conversely, if you only give yourself seventeen hundred, by re-routing three hundred into savings before you even see it(pay yourself first), then it’s highly likely that you’ll find a way to make do with the leftover seventeen hundred. I don’t really know if it’s just psychological—or metaphysical, using the Laws of Attraction—but I do know by personal experience that it’s true, and that we’re all better off living by it now and figuring out the “why” later.
2. You will spend less the more it hurts
When it comes to finances, pain and pleasure come in four basic combinations: pain now, pleasure now; pain now, pleasure later; pain later, pleasure now and pain later, pleasure later. (Don’t try to say these three times fast, you might hurt yourself!) For example, paying credit for a big screen TV would be pain later, pleasure now. Paying cash for the same would be pain now, pleasure now. Putting off the purchase entirely would be pain later, pleasure later. Purchasing a pre-paid store card for later use would be pain now, pleasure later. I personally believe that “pain now, pleasure now” or “pain later, pleasure later” are your two best combinations.
Use cash, checks or debit cards when possible or practical. For some reason, it’s psychologically easier to spend more when we use a credit card. I imagine it’s at least partly because we don’t “miss” the money right away. We don’t “feel the pain.” It’s not getting sucked out of our checking account or purse, so we get what we want without the pain of seeing our cash position decrease right away. By writing a check, using a debit card, or seeing our hundred dollar bankroll shrink to twenty-five before our eyes, we feel the impact of our spending right away. Pain now, pleasure now; we know whether or not we can “afford” the pain.
I have also found that I will spend more money, easier, when I have a credit balance, or have purchased a gift card. I’ve already experienced the “pain” of paying, and now I have a credit balance, but no “pleasure” yet. Pain now, pleasure later works—but only so long as we’re really disciplined enough to postpone the pleasure part of the equation. Personally, I don’t think it’s easy; so I’ve found the simplest thing to do is to avoid credit balances—or gift cards—whenever possible. If you want to pay ahead, open a savings account instead, and put the same amount into that account.
Pay yourself first
This is the simplest rule of all, and takes advantage of the first law, “Your expenses will expand in proportion to your income.” For some reason, when we wait until all our “obligations” are met to put money into our savings…we seem to run out of money! When we put money in our savings first, we seem to make our ends meet in the end, somehow. I hope that I can say or do something wise and wonderful to get you believing in—and practicing—this habit. All you have to do is save the first ten percent (or more) of every dollar you make, and make that savings untouchable. You’ll be rewarded later on in substantial, life changing ways. Now as simple as it sounds, it’s still not foolproof
—so here are some thoughts on making it work successfully:
Ten percent is only a guideline, but this really should be your minimum. You can save more, but set aside only what you can afford to leave untouched until your target date. By this, I mean resist the urge to put fifteen, twenty, or twenty-five percent into this account if there’s any likely hood of you just having to take it out when things get tough. If you can afford more than ten percent, then create a second account and keep the ten percent account “untouchable” and the other account for a medium term goal; like a car, house, or mega wedding—so Dad doesn’t have to pay for it all! Also, I think it’s important not to swing too far to one side or the other on the pendulum of lifestyle. Don’t spend all your money, but don’t live like a hermit, hoarding every penny, either. Life is meant to be enjoyed, but enjoyed wisely and consciously.
Ten percent of your income means gross income, before taxes—when you work for someone and receive a standard paycheck. For a business, I’d say it means ten percent of your net profit before taxes and excess (section 179) depreciation, or even EBITDA (Earnings before interest, taxes, depreciation and amortization.) Again, ten percent is only a guideline, but I believe it should be the minimum. If you can’t live on ninety percent of your income week in and week out, then some changes are called for: Quickly! Whatever you pick, stick with it through thick and thin. It’s much easier to adopt this standard from the beginning and stay within its boundaries than it is to change later on, after your habits are already ingrained.
Those are just a few, and in no way complete. I’ll add to and edit this as I have time. Stay well.