Philosophy is defined as the most general beliefs, concepts and attitudes of an individual or group. A financial philosophy, therefore, is the development of general beliefs and attitudes as they relate to money and business transactions.
I began to think about this article months ago when it dawned upon me that I simply wasn’t getting the level of enjoyment out of my money that I ought to be. Each new purchase has become a cause of fear and anxiety rather than a cause of joy at having the resources to make the purchase.
My in box has been flooded with blog posts all asking the same thing: what is wealth accumulation all about?
The decision to create wealth is motivated by something: too much debt, inability to send a kid to college, inability to give to charity, an upbringing in poverty. What ever the reason, when a certain level of wealth is reached, you will ask yourself the inevitable question, why am I doing this? Why do I want this money? The inability to answer those questions will threaten to undo even the best-laid plans.
So how do you develop an enduring financial philosophy?
Consciousness and awareness about personal finances begins with a financial education and a commitment to ongoing education even as you achieve your goals. “A financial education” definitely does not mean getting an MBA, but it does mean developing a personal financial library and maintaining that library over time.
Through exposure to Robert Kiyosaki and Ric Edleman I determined that my house is not an asset and that if I want to maintain liquidity I should put money aside into various accounts for investment purposes rather than prepay my home. Because I developed a philosophy of maintaining liquidity, I maximize only one tax deferred investment vehicle. Because of my personal philosophies about the stock market, I invest in stocks only through the tax-deferred vehicle. Because I want to maintain liquidity and diversify my investments, I invest in positive cashflow real estate. I rejected Suze Orman’s advice of paying off consumer debt before starting an emergency fund, because I was tired of being broke and I wanted the Law of Attraction to assist me in wealth creation.
So let’s look at the personal financial philosophies developed so far and the behaviors that followed:
Philosophy number 1: My house is not an asset
Behavior number 1: I saved extra principal payments for later investment
Philosophy number 2: Maintain liquidity at all times
Behavior number 2: limit the number of tax deferred vehicles that I invest through and hold my money in a high-yield savings account.
Philosophy number 3: Limit my exposure to the Stock Market
Behavior number 3: invest in cashflow real estate, precious metals, start a home business.
Philosophy number 4: Use the law of attraction to build wealth by starting an emergency fund right away.
Behavior number 4: Save small amounts of money even as I paid off high interest debt. The benefit was that I had started and begun to enjoy the habit of saving, so that when the short-term, high-interest consumer debt was gone, I had a destination for that “new money.”
Philosophy number 5: Pay off all consumer debt including cars, credit cards and student loans.
Behavior number 5: Negotiate with credit card companies to reduce interest rates, then put in place a plan to eliminate all 3 sources of consumer debt. Close outstanding retail accounts and track all expenses. Pledge to pay off and then drive a car for 10 years.
To the above, I added a sixth philosophy: It is okay, under the right circumstances, to spend money for my own personal enjoyment.
Behavior number 6: Set up multiple accounts into which dedicated amounts are deposited so that I can make spending choices.
If someone develops a personal financial philosophy that all debt, even mortgage debt, is bad, then he will pay off mortgage debt rather than save extra principle payments for later investment. He will also sacrifice short-term liquidity by tying up funds, that cannot be easily accessed, in the house.
Each new behavior in the world of personal finance will require some form of sacrifice. Whether or not one chooses to incorporate mortgage reduction into a personal financial philosophy or not, the above philosophies and behavior will result in an increase in wealth so that one will inevitably ask five or ten years down the road, when the financial pressures are lessened, “why am I doing this?” “Why am I sacrificing to gain wealth”?
This is where I am today: at a point where my financial philosophies are in conflict. The need to maintain liquidity is clashing with my sixth philosophy, that it is okay to spend money for my own personal enjoyment.
How can you avoid this clash in philosophies? The easiest answer is to understand your “why” for improving your financial picture. Very often the decision to improve one’s financial situation is made in the heat of a crisis when there is very little time or inclination to ask the probing “why” questions. Just wanting the pain to stop is enough motivation. The key, then, is to begin to ask the “why” questions as soon as you have some distance from your problem, just after you hit a short-term financial goal.
Begin by asking yourself what it is you enjoy doing. Let’s say you enjoy fly-fishing or wood working or spending time with the kids. You may have eliminated the hobbies altogether or reduced time with your family to take on extra projects to increase revenue. As quickly as you can, begin to add your activities back. Maybe you wanted to change your financial picture so that you could take guilt-free trips. As quickly as you can, set up an account to fund the trip and then take it without guilt. Maybe you want to leave a legacy, gifts to charity. Set up an account so that you can realize that desire now rather than have it waste away on “someday isle.”
Developing an enduring financial philosophy begins with financial curiosity and financial knowledge. The financial knowledge will inform philosophies. The philosophies will inform behavior, finally the behavior must be tempered by awareness of your long-term goals and passions for your philosophy to become truly enduring. Determining your long-term goals and passions starts by asking yourself “why” as early in the process of wealth creation as possible otherwise you will create monetary wealth for the sake of monetary wealth and monetary wealth without purpose will not last.