Which came first, the chicken or the egg? This age-old question can be adapted to many questions on origin, including financial planning.
Financial planning’s “chicken and egg” question is: Is it about saving or spending less that brings forth financial accumulation? The answer is spending. You cannot save unless you choose to spend less. A friend once told me how amazed he was that his spending had kept up with his income level since college graduation. I do not know about you, but I was a full-time college student and a full-time employee, just trying to get by in 1980. I lived on $5,000 annually, which in today’s dollars is equivalent to about $18,000. At that time, I lived with two roommates, and we shared all the costs of the apartment and other living expenses. Today, I live in my own house on six acres―it would be difficult to earn much less than $118,000 annually, even more so when the kids were still at home.
The good news is that what I spend these days, though significantly more than what I spent during my college years, is still well below my overall income. Yes, I allowed for more spending in relation to my income in the years after college, but I never let it come close to exceeding my overall income. There came a time when I decided to stabilize my spending despite income increases. That decision was a spending decision, which then produced a corresponding saving increase. If someone saves more and does not either decrease spending or increase income with a corresponding slower rate of spending, then it will result in debt accumulation. Our federal government is a shining example of this problem.
Saving is the easiest way to accumulate wealth, but one can save only if spending desires are tamed. This is a monumental feat in today’s world of high technology and instant gratification, but we have a major weapon to win the battle—a cash flow report. A cash flow report merely totals what you spend and what you earn with enough detail to let you monitor spending levels compared with income. If this report is monitored properly, a monthly review will incentivize the determined saver to spend less. The cash flow report illustrates how money is wasted. Spending $1 here or $5 there does not sound like much, but if these amounts are spent daily or weekly, it can culminate into a significant amount. The cash flow report forces us to see exactly what that daily $3 coffee costs over the course of a year ($1,095).
The Foundation of Financial Planning
Even the most determined saver can experience difficulty in curtailing spending habits, which can be blamed on what I call the “foundation of financial planning”. The foundation is based on what money represents or symbolizes to a person. A person projects meaning onto money and subsequently, this determines what a person will do for money and how he or she will spend it. In other words, subconscious thoughts can circumvent conscious logic.
In such cases, we need to first look within to find the cause of this dysfunctional application of meaning to money and then replace any unhealthy relationships with money with functional ones. Money is the root cause of many marital issues, and fighting with one another about poor spending habits and money management serves as a recipe for disaster. Spouses who are at odds over marital financial matters should seek professional help in an effort to find the root of their collective issues.
For the first 15 years of my own marriage, I thought my wife had poor money habits, but it turned out that I communicated a message of “I love money, not you.” As an act of retribution, she took the perceived love of my life—money—and mistreated it. When I realized the error of the message that I was communicating, the situation resolved itself, and we have had 20 years of personal financial peace and a much stronger marriage since. The moral of the story is do not assume that you are in the right when it comes to money discussions.
The bottom line is that monitoring your spending is far more important than saving. The one who monitors and controls spending will save and accumulate significant wealth.
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