My Financial Philosophy

Posted By Paul

I thought it would be fun to write up my "financial strategy" and add it to the blog and periodically check back to see if what I wrote today is a strategy I agree with a year from now. So here goes:

When trying to summarize my financial strategy I find myself turning more to a series of guidelines than a series of steps. Not to say that my financial growth hasn't been a progression but I've discovered that the progression comes more from the financial landscape changing while my guidelines have remained the same. Therefore I am trying to capture the guidelines that I follow in the hope that some (or perhaps even all) of them will be of use to you.

Never confuse "need" with "want". This is something I discovered several years back when I first travelled to what I would view as a developing country. The trip was through my work and came at the perfect time as I had just bought a house a month before I left on my trip. After visiting this other country where the people survived on so much less than we did, and where even the wealthiest people that I visited had lifestyles that would be considered modest by American standards, I became acutely aware of how often people (myself included) would use the word "need" when they really mean "want." I need a bigger TV. I need a new cell phone. I need a new car. These are phrases that you hear all the time yet when you take a moment to truly think about the concept of need you discover how absurd the statements are. You don't need a new cell phone, you don't need a cell phone at all. Now this is not to say that you shouldn't have a cell phone, but it's important to acknowledge the difference between needs and wants because in my mind things you need should be purchased things you want should at least be briefly considered before you buy them.

Never try to keep up with the Joneses. Of course no one really thinks they are trying to keep up with the Joneses, but we probably all do to a point. I guess what I'm trying to capture here is that in this world where weekend cyclists own "professional grade" bikes and we are bombarded with the latest this or that which we can't live without it helps to take a moment, to step back and ask ourselves if we value something because we really derive some utility or pleasure from it or because we've been told that it's "the best" or "something we can't live without". In a society that seems to focus so much on perfection (the perfect wedding, the perfect house, the perfect car) we seem to have lost track of "good enough". Not to say that you should feel bad buying an iPod or a DVD player, but I would suggest making sure that the amount of time you'll spend using and enjoying that iPod or DVD player justifies the purchase.

Try to enjoy saving more than spending. This is one that I'm still struggling with, as of course it's generally more fun to spend than to save, however over the years I have made investing a sort of hobby. I research investments and I'll occasionally pull the trigger and actually buy some gold, or a savings bond or a CD. Granted some of these investments don't result in huge returns but consider that if I buy a $100 savings bond that makes a pathetic 2%, then in a year I have $102. Nothing to write home about, but what if instead of buying that savings bond I spend the $100 on a new watch. In one year I'll have...a used watch. My point is that even a poor savings vehicle is generally better than simply spending the money.

Live within your means, even better, live well below your means. I am consistently amazed at how over the years people have come to me asking for financial advice and I've discovered that they aren't even sure if more money is coming in than going out from month to month. I've sat down with people, taken their total income, added up their total monthly expenses and discovered that their most basic expenses (not counting movies, dinners out, etc.) add up to more than they make. Yet people wonder why the savings rate in the US is so dismal and why so many people have huge credit card debts. If you can't live within your means then stop reading right now since there's no point. If you can't live on less than you make and refuse to make changes then you will never have a healthy financial life.

Watch your monthly expenses. My personal view is that one thing you should watch like a hawk are your monthly expenses. Things that send you a bill every month that you have to pay. For example, I worry less about going out and buying some thing I don't really need for $80 than I do about signing up for some new cable package that costs me another $10 a month. Why? Because even if the new toy I bought for $80 is completely frivilous at least it's done, but the extra cable package is $10 a month every month for as long as I keep it, and as I'm sure many of you have experienced it, once you get used to a certain lifestyle, it's hard to scale back.

Track your net worth. After all, the whole point of saving and investing is to accumulate wealth, and there is no better way to see how well you're doing than by tracking your net work. I may not know the exact returns on investments of every asset I have, but I can tell you how much my networth has increased from last year. Not only is tracking net worth kind of fun, but it can give you great a sense of trending in your life. I'll post again later with more on this topic.

So those are my current financial rules for life.