I have started a new series called Money Talks. I am attempting to heal my relationship with money and I am bringing my blog readers along for the ride! In Money Talks #1, I reviewed three personal finance books I have read recently. In today’s post, I am sharing what I learned from reading those books.
1) It’s not that complicated
The world of finance can seem very intimidating, but there are some basic maths concepts at play:
1. If you spend less than you earn, you will accumulate money.
2. If you invest the money you accumulate, it will grow without you having to do anything, due to the magic of compound interest. “Invest” is a scary money word to a lot of people, but it’s not that hard if you do a bit of research and take it one step at a time.
2a. To manage risk, you can invest in several different things (there are simple ways to do this)
2b. Investing might seem scary, but keeping your money in the bank is a guaranteed way to end up with less buying power. Inflation is typically higher than standard bank interest rates. This means that over time, your money is losing value sitting in the bank.
That’s the basic maths. Actually spending less than you earn is easier said than done, and we bring very complex issues to our relationship with money. But the money itself is not complicated.
2) Focus on spending money in ways that are going to enrich your life, rather than saving money through deprivation
I have always thought that being ‘good with money’ means being frugal. And being frugal means depriving yourself of luxuries (and sometimes essential items). All three books posited an alternative: instead of skimping yourself, spend lots of money on things that are important and valuable to you, and skimp on (or avoid buying altogether) things that aren’t.
The authors of Your Money or Your Life (YMOYL) have a practical way to establish if you are spending too much or too little in a subcategory of spending.
Having tracked your spendings for the month, calculate how many hours of your life energy you had to expend to buy that item(1). Then ask yourself: “did I receive fulfillment, satisfaction, and value in proportion to life energy spent? And “Is this expenditure of life energy in alignment with my values and life purpose?”(2).
So I get paid about $35 an hour after tax. But once I factor in time spent commuting and winding down, and money spent on work clothes, work lunches, and hiring a cleaner because I’m too tired from work to clean, maybe my actual hourly rate, in terms of life energy expended to get the money, would be $15. So that pair of stockings I bought a few months ago that I wore once and realised were too tall for me, so had to give away, cost me more than an hour of life energy. I can’t get that life energy back.
This is not a shame and blame approach to reducing spending, it is a clear-eyed look at aligning spending with what you actually value in life. Responding to this exercise doesn’t always mean spending less. You might find that you are skimping yourself on something that you really care about and should be investing in. For me, doing this exercise inspired me to buy wool to repair my commander keen blanket project, which I have been putting off for a couple of months. I have now repaired the blanket and it makes me happy when I see it on my bed with all the holes filled in.
We are better off spending most of our money on a few good objects and many good experiences, rather than frittering away small amounts of money on lots of things that we won’t be using in a year’s time (3).
3) I’d rather be wealthy than rich
The word “rich” brings to my mind images of flashy cars, expensive clothes and haircuts, and not having to worry about the grocery bill or filling up the car. Millionaire Next Door paints a contrary picture, revealing that a lot of millionaires in America live modest lives – hunting bargains and carefully budgeting. The people we might think of as “rich” – ones with flashy status symbols – are likely to be high income but asset poor. Or up to their eyeballs in consumer debt. Or both.
Having wealth gives you something way better than “looking rich”: freedom. Months of living expenses means you don’t have to worry about an emergency. It means you don’t have to feel trapped in your dayjob. And eventually, it means making enough money from passive income that you don’t have to work for a living.
So that’s what I’ve learned from the three books I read recently about money. What have you been learning or thinking about money lately?
(1) The authors of YMOYL define money as what you get for your life energy. Life energy is the only resource naturally available to us. We trade our life energy for money. YMOYL website has a life energy calculator, which is customised for US context but you might find it helpful.
(2) She also has a third question, which is: “How might this expenditure change if I didn’t have to work for a living?” This is related to the goal of Financial Independence and not immediately relevant to the point that I am making.
(3) If we all did this, we would put Amazon out of business. Jeff Bezos’ entire business model seems to be spending lots and lots of small amounts of money on shit you don’t need. And exploiting workers while doing so. Let’s divest from such evil by getting our life energy back. (Full disclosure: I have not read the full article I just linked).