Stress Free Money
Why do we have so many money worries? Why does it cause so much stress in so many peoples lives? Money should be stress free. So, what are some simply ways we can achieve Stress Free Money? It should be there to serve us. Yet, it seems that we regularly becomes slaves to it. Buying more, earning more, consuming more, borrowing more. The cycle never ends. The Smith family, probably like almost everyone else in the world, grappled with this problem for years. Over time we built a framework to help us achieve Stress Free Money.
Stress free money is achieved through 4 practical steps that rest on a solid foundation, consisting of the 4 “knows”. Like Maslow’s hierarchy of needs, each slice builds on the other.
1. Know where you’re going
Where are you going? And why are you going there?
Unless you’re simply meandering through life, you need to know where you’re going. Are you looking to F.I.R.E. or simply reduce the amount of financial stress in your life? Are you going to university and incurring a large student debt because you can see yourself loving the chosen career, or are you simply in it for the cash? Do you have family, or want one in the future? Build a solid base by knowing where you are going.
The Smith family wants a home in which to raise our children. We enjoy our careers so don’t have much interest in F.I.R.E. (yet), but would love to reduce the amount of financial stress in our lives.
2. Know who you are
What sort of person are you? Deep down inside. Are you the sort of person who follows the rules and doesn’t like to stick out too much, or are you a risk taker who likes to gamble it all on red? Do you have a need to fit in and don’t want to be caught without the latest fashion, or do you not even realize they’re laughing behind your back at your old, worn out sneakers?
Knowing who you are drives how you should set up your financial situation. Money stress is caused by a misalignment between what you want and who you are. Importantly, what type of people do you surround yourself with? Your loved ones and friends? Are your values aligned or wildly different?
I am a natural risk taker. I struggle with slow and steady savings. Yes, I know all about the power of compounding interest. But for me, I know that at some point I’m likely to take that hard saved cash and take a risk with it. Sometimes it pays off and sometimes it doesn’t. Therefore, I am better off setting my investments in a barbell; extremely conservative at one end and big risks at the other. Middle ground just doesn’t work for my personality.
2. Know your cashflows
The next step to stress free money can often be the hardest. Having a good hard look at your income in and where you spending goes. Do you know what you spend? How much goes on housing, food, clothing and travel? How much income do you make? Is it a regular salary or lumpy with bonuses and commissions?
Write it all down somewhere. It could be a spreadsheet, a piece of paper or you could use an app. It doesn’t matter. Once its down, have a good hard look at it.
What about the last month? How much income came in? Then look at all your expenses? Is there a gap? If so, is it positive (yeah, you’re saving money) or is it negative (oh no!). Either way, it doesn’t matter. What does matter is that you know where you stand. Now you can make a plan.
Its usually easier to cut costs than to increase income. Have a good hard look at everything you spent money on. Is there leakage? Are there little expenses that can easily be cut out with no impact on your lifestyle? Probably. Then look at the larger expenses. These are usually more strategic in nature and harder to in the short term. Is you mortgage or rent too high? Do you have large car payments or private school fees to pay?
Don’t worry too much yet about the net worth, we will get to this in the future. What’s most important for now is your cashflow. What comes in and what goes out. You can be the richest person in the world, but if you don’t have cash coming in to pay the bills, it doesn’t matter a damn what you’re worth.
We produce a monthly report of our income and expenses to keep tabs on things.
3. Know risk
Its not a topic that is explicitly raised very often in the F.I.R.E. community, but I think its important.
Risk can come in many shapes and sizes, from the easily identifiable financial risk such as running out of money or losing money on an investment, through to non financial risks such as getting sick, crashing your car or getting divorced.
Understanding and being aware of risks means you can make decisions about them. Should you keep the risk, which you will do if you want to earn a return on your investments, or mitigate the risk? Risk can be mitigate in a number of different ways. Diversification, which spreading your risks around, and insurance, which is transferring your risks to someone else.
4. Save then spend
Building up savings is critical to stress free money, Now how you do this is going to depend a lot on the sort of person you are. Some people are really good at creating a budget and then sticking to it. For most people a budget is a waste of time.
The Smith Family struggle to stick to a formal budget. Weak willed, I know, but that’s the fact of the matter. We Know Ourselves. Instead, we achieve far more success by putting our money into an online savings account that I can’t access anywhere other than at home. Once locked away, we can’t get to it.
5. Control debt
Too much debt will kill you, especially consumer debt.
But the right sort of debt can also be used for good. Leverage works when the price of an asset goes up. If you have lumpy cashflows, using a credit card can help even out your spending.
How much debt do you have? Divide it into two types, productive debt and consumer debt. Consumer debt is debt that is used to buy “things” or depreciating assets, like credit cards and car loans. Its expensive, very easily obtainable and very addictive.
Productive debt is debt that is used to purchase appreciating assets. Your home loan is a good example. Over time, the value of your home (usually) goes up. Productive debt is often harder to get (ever tried applying for a home loan?), and usually far cheaper.
Even student debt isn’t necessarily a bad thing. If you get a degree that leads you to a professional qualification, you will earn more over time. Its positive leverage. The issue becomes when you get a large amount of student debt on a degree that you either didn’t finish or won’t lead to a higher paying and fulfilling career.
6. Invest wisely
Once you know how much comes in, you started saving a bit and have your debts under control, the next step is to start investing.
Investing means that you earn extra income on your capital. It can be anything from a simple savings account, through to sophisticated private equity. The first rule of investing is not to lose money. The second rule is see rule one.
But what does it mean to invest wisely?
It means knowing risk and knowing your returns. All investing involves taking on risk – that’s why you’re getting paid. The more you’re paid, the higher the risk. Simple, right? Yes, its simple, but often forgotten in this day and age of super low interest rates.
7. Give back
I’m not a great believer in spirituality or a high power but I do believe that the world gives you back what you put into it. Giving to those less fortunate than you. And yes, there is always someone worse off. Find a way of giving back. It might be money but it could also be time.
We use Kiva to make small loans to entrepreneurs in developing countries who would otherwise not have access to credit to expand their businesses. We also give back by being involved in our community and by raising our 4 children.
Money Should be Stress Free
We’ve outlined how we manage our money to be stress free. These steps are not a quick, one-time solution. To actually achieve Stress Free Money takes time and effort. Are you ready for the journey?