This is a guest post by Robert, who lives in Calgary and works as a financial adviser. He is married, has three kids and plans to retire at age 35. Robert and his wife then plan to return to school and become teachers, eventually living and working overseas.
Personal finance is simple and it’s intuitive. Most people, if asked how they should handle their money, know they should spend less, save more, invest wisely and eliminate debt. Seriously, it’s that easy. So why aren’t we all successful at managing our finances?
First, we have very few positive role models. Money is a taboo subject in our society, so most people don’t discuss how they pay for things or what they do with their money. If we don’t see people eliminating debt or saving up over a number of years, we only notice them spending large amounts and we risk feeling jealous. We easily rationalize that if they can spend so carelessly, so can we.
Second, our natural inclination seems to be to immediate gratification. It’s easier to go into debt and get the things we want immediately, rather than to wait and save up. This type of short-term thinking (and feeling) causes us to assign more weight to immediate desires and nearby outcomes than to the long-term consequences of our choices. Because we won’t experience the excitement of having a house paid off for 25 or 30 or more years, it’s difficult to get excited about paying more to shave off one year (and thousands of dollars in interest, in tiny amounts each year). In taking on more debt, it’s much easier to think of $350 per month, rather than $7500 in interest over five years, especially when driving off the lot in a shiny new car.
To counter these two tendencies, we need a plan that motivates. A goal that really resonates with what’s important to you. Figuring out what’s motivating to you is an entire blog post (or more) in itself, but try looking at your childhood dreams or trying different things until you find one that gets you excited. For me, it’s a combination of childhood education and living abroad. Because I want to work as a teacher in an international school, I’m willing to make “sacrifices” like paying off my mortgage in under 10 years and saving and investing a large proportion of my income. They didn’t feel like sacrifices, though, because I was building the future I want.
Not everyone has the same goals or plan in mind. When meeting with an investment advisor or financial planner, it helps to be clear what your goal is. Would you rather spend more money, and maybe take more vacations, while you are working? Would you rather save and invest so that you can stop working as soon as possible? Would you like to retire with just barely enough, so that you can relax? Or would you rather retire with more money than you had while working, for a luxurious retirement?
The rest is easy: spend less, save more, pay down debt (and avoid taking on new debt), and invest your savings. What kind of life is your money providing, or going to provide, for you?