Sorting Out the Layers of Success in Personal Finance
One of the most interesting things I’ve discovered over the years of writing articles on personal finance, charting my own financial progress and changes, and communicating with countless readers is that personal finance is a lot like an onion. Onion? Yes, it’s all about the layers.
This post was originally published on The Simple Dollar .
It looks like an onion in the sense that it is made up of a group of layers that are not really very transparent. You know what is below them at some level, but it takes time to truly understand each level and incorporate it into your life.
Here I’m going to summarize some of the onion layers so you can understand what I’m talking about.
First level: debt is bad, savings are good
This is the level at which many people who are really struggling with their money see their finances. They understand that debt is bad and that saving money is good, but when it comes to what they want in their life, it seems secondary. Isn’t it better to just spend that money on what you want? Big house? Lots of stuff to fill? A shiny car in the driveway?
The basic ideas of personal finance – spending less than you earn, avoiding debt with high interest rates, trying to save some of the money you earn – are actually pretty obvious. Everyone at some level understands these ideas, but does not apply them in practice.
Why? They don’t really see the connection between their day-to-day behavior and the huge amount of debt and lack of savings they have.
Of course, they understand the idea, but it in no way enters into their life. It’s like a fact that they know, not one that really matters when it comes to their behavior.
Let’s open a little more.
Level Two: Your Choices Create Both Debt and Savings
The next level of awareness is when people begin to realize that the things they spend money on create both debt and savings. The more money you spend on things, the less you will have savings, and if you spend too much, the more debt you will have. The less money you spend on things, the more savings you have and the less debt you have.
In other words, the few choices you make each day are the determining factor whether you have debt or savings and how much of each you have.
Whenever you buy something, you reduce your potential savings. If you have debt, you are also effectively increasing your debt, because that money does not go into saving or paying off your debt.
This goes from big purchases like cars and so on to the smallest purchases like a bottle of soda at a gas station. Each of these purchases – each of these options – has an impact. Every time you decide to spend – and when you decide to spend less or not spend at all – you determine if you have debt and savings.
Let’s open a little more.
Level Three: Much of What You Buy Doesn’t Make Lasting Joy
The counter-argument against cutting nonessential purchases is that it takes away the pleasure of life. I am totally against it. If the purchase brings genuine and lasting pleasure to your life, don’t cut it short.
The catch is that the vast majority of purchases are not long-lasting joy. Do they bring small, short-term bursts of pleasure, but lasting joy? It is actually quite a rare occurrence when you spend money.
I went to dinner last night. The dinner was good — it was a pleasure — but the pleasure was already fading away. It was expensive and did not bring long-term joy, and soon I will either forget about it completely or regret the expense. On the other hand, my most memorable meal of the past year was what I ate with an old friend. It really created an enduring joy – the food we still talk about reunited me with an old friend.
If you are going to spend money on something irrelevant, why not spend it on something that is likely to bring you long-term joy?
For me, one of the most effective ways to do this was to get out of debt and have some money in the bank, because the stress that he eliminated and the little sense of security it created actually gave me an enduring joy, a joy that lasts until that moment. day.
In addition, there are several items in my home that I bought that bring me lasting joy. Most of them? Maybe I thought they would and they wouldn’t, but in fact most of them were bought without even thinking about it, and now I regret it. This money went from something that will bring me lasting joy (financial independence), to something that does not exist (many items in my house).
Let’s open a little more.
Fourth level: money can buy time
Most of the things that bring lasting joy to my life take time to bring that joy. My relationship with my wife is joyful because I spent time on this relationship. My relationship with children is joyful, because I took the time to this relationship. Some of my major hobby purchases have given me enduring joy because of the time I have spent on the hobby.
A casual meal in a restaurant rarely brings long-lasting joy because you don’t spend time with it. On the other hand, the food you eat with a friend, no matter where it is, can often bring lasting joy because you have built that relationship. It doesn’t matter where you eat, because the value lies in what you put your time in – that friendship.
Many people feel like they are running out of time and often use their money to buy time, but the question arises as to how they use this time that they are saving. A person can buy convenience foods to save time on cooking, but how does he use this time?
There are a few things you can always do with this extra time to provide long-term value. You can rest. You can build a strong relationship with someone. You can learn a new skill or some key knowledge.
The point is, money can certainly buy time, but it also becomes a waste if you don’t do anything valuable with that time.
Let’s open a little more.
Level Five: Money Can Buy Freedom
Spending money on buying time in the form of time- saving tools like convenience foods and time-saving services is a great way to get some free time in the short term, but it won’t help solve a long-term problem if you don’t take advantage of it. extra time and turn it into something durable.
The long-term solution is that instead of spending extra money buying time, you use it to buy freedom.
Let’s say you found yourself in a situation where you had enough money saved up and invested so that the income from this investment could replace your salary. What would you do with your time in this situation?
This is not a “time saver”. This is freedom, and money can buy it.
We are excluded from such freedom because of the need to make money, and whenever we use money in a way that does not bring lasting joy and pave the way for such freedom, it is probably not the best use. this money.
At this point, you have approximately as much freedom of choice as to use your time and energy as much as possible. You choose where to invest your time and effort, and if you choose to invest it in something that brings lasting personal joy, you will build a joyful and personally fulfilling life.
Is there a core?
Once you get beyond this level, you will quickly start to run into problems regarding what you personally value. Perhaps you value your children. Maybe you value a particular hobby, or maybe you really care about some kind of social cause.
At this point, you begin to link your financial choices directly to the things that concern you the most, and you begin to see the connection between your choices in each area.
Gradually, this begins to spread to all your actions. You have so much time and energy. How can you use them most effectively to not only save your life, but also influence what you really care about?
On the outer levels, money seems to be the center of everything, but after a while you begin to see it as it is. This medium is a way of exchanging time and energy for what we care about. Almost every personal finance problem we face arises from poor trading.
The true nature of personal finance, as far as I can tell, has nothing to do with money at all. Spend your time and energy on what you care about. Sometimes this means building up resources so you can feed, clothe, and provide shelter for yourself and the people you love the most. Sometimes it means using your time and energy on the things that really matter to you, whatever that may be.
The best life you can lead is to spend your time and energy on things that make your life the best you can, both now and in the future. As far as I can tell, if there is a core, then it is, and in order to achieve it, you need to figure out how to make the time and energy trading for other things as efficient and smart as possible.
Good luck on your way to the center.
Money Onion: Smoothing Layers Of Success In Personal Finance | Simple dollar