CFP, CFA, MBA, CKA
Financial Wellness co-columnist Bob Crew is a financial life planner with Triune Financial Partners. He received his B.A. degree from MidAmerica Nazarene University and his MBA from the University of Kansas. In the financial industry since 1986, he is a member of the Financial Planning Association and the CFA Institute. Learn more at triunefp.com.Read Articles Written by Bob Crew
Today’s financial journalism is long on hype and the shortcuts to financial success. The media likes to tout stories of people who turned an idea into a financial windfall and tells of magical investments that would have put you on Easy Street if you had made them. While such wild accomplishments happen occasionally, the unfortunate reality is that 99.9% of us will not capture financial lightning in a bottle and spend our remaining days in luxury and ease.
So, absent good fortune, how can you hope to attain some level of personal financial success in your life? We’ve identified six time-tested principles. Some are as exciting as watching paint dry, but they work. Experience demonstrates that if you apply the principles faithfully over decades, you will find financial success and, perhaps more importantly, peace of mind.
Set Long-Term Goals
Have you heard that if you aim at nothing, you will hit it every time? That’s true in personal finance. Financial goals are the main ingredient to financial success. Goals motivate us and give direction to our lives. Setting goals also creates accountability for our actions.
Financial goals are specific intentions you decide for your money. Your goals are unique to your values and economic circumstances, and they give you defined targets. Goals identify the ideal outcome of your financial decisions over time. Your goals should be specific, personally meaningful, measurable, achievable, time-based and regularly monitored.
Examples of financial goals are:
- Eliminating $5,000 worth of credit card debt within six months.
- Building a six-month emergency fund within 18 months.
- Paying off a home mortgage in 10 years by putting an extra $1,000 a month toward the principal.
- Retiring by age 67.
You should create short-, mid- and long-term goals to stay on track with your financial objectives. Long-term plans are critical. Set them first because they will force you to prioritize your short- and mid-term goals.
Avoid Excessive Debt
A Hebrew proverb says, “The borrower is slave to the lender.” Unfortunately, debt is a serious problem in society today, and the effects of excessive debt can be traumatic. Stress alone can lead to health problems.
Here’s an example of the effects of debt: If you buy $2,000 worth of furniture on your credit card at 11% interest and pay $25 a month (the approximate minimum), you’ll end up spending more than $3,600 by the time the debt is retired. All that over 12 years and one month. On the other hand, you could save for the purchase by setting aside $142.85 a month for 14 months and then pay by cash.
Some debt is inevitable, such as with a home purchase, but using debt to cover living expenses causes you to spend more than you likely can afford and uses future income to pay for past costs. All this keeps you behind the financial eight ball.
Spend Less Than You Earn
That sounds so simple, doesn’t it? Yet, many people spend more than they earn (going into greater debt) or live payday to payday (spending whatever they earn).
The positive effects of spending less are:
- You begin eliminating debt. Spending less than you earn frees up the money needed to make larger payments on your debt. Over time, it begins to disappear, reducing your monthly bills and giving you more breathing room.
- You begin to save. Accumulating cash in a savings account helps you roll through emergencies, such as a car breakdown or job loss. You’ll gain the breathing room to start saving for retirement, paving the way for some tremendous golden years.
- Your stress level falls when you know that you have fewer debts, that your emergencies are covered and that your retirement is planned. You also sleep better and feel happier about life.
- You can explore previously closed possibilities. When your debts are gone and you’re spending far less than you’re bringing in, you have the financial freedom to chase your dreams.
Plan a Financial Margin
Have you noticed that life doesn’t always go as planned financially? That’s why you need a financial margin.
In his book “Margin: Restoring Emotional, Physical, Financial, and Time Reserves to Overloaded Lives,” Dr. Richard Swenson describes margin like this:
“Margin is the space between our load and our limits. It is the amount allowed beyond that which is needed. It is something held in reserve for contingencies or unanticipated situations. Margin is the gap between rest and exhaustion, the space between breathing freely and suffocating.
“Margin is the opposite of overload. If we are overloaded, we have no margin. Options are as attractive as they are numerous, and we [overcommit financially].
“If we were equipped with a flashing light to indicate ‘100% full,’ we could better gauge our capacities. But we don’t have such an indicator light, and we don’t know when we have overextended until we feel the pain. As a result, many people commit to a 120% life and wonder why the burden feels so heavy.”
Our need for margin applies to our schedules and finances. If your living expenses are running beyond your income limit, you have no financial margin. When the car breaks down or your income declines, you have no reserve or margin to pick up the slack.
You might be thinking, “What? Giving money away is a key to personal financial success? That’s crazy!” Well, it’s counterintuitive, but hear us out.
- Giving breaks the power of spending and accumulation.
- Giving gets the focus off yourself and enables you to see the needs of others.
- Giving forces you to admit that you already have more than enough.
- Giving helps you realize that you can find joy in meeting the needs of others.
- Giving helps you see the difference between your needs and wants.
- Giving is self-denial. Through self-denial, you realize that your life can be fulfilled without more stuff.
We encourage you to give giving a try. If you are not giving in some way to help others, start with $100 a month. If you are already giving money away, increase the amount by 5% or 10% this year. You can grow into being a generous giver.
Over Bob’s 30 years of working in financial life planning, he has yet to meet a generous person who didn’t have great financial peace of mind and contentment.
Create a Partnership
If you are married or in a committed relationship, you and your significant other need to be aligned financially. In most cases, one is the saver and one the spender, so agreeing on financial goals might be hard but is necessary. When the two of you commit to working toward a desired financial future, both help carry the load. The joy experienced when the goal is achieved is greater when it’s shared.
Start by talking about these broad, long-term goals:
- Financial independence (retirement).
- Debt reduction and elimination.
- Family needs.
- Major purchases over the next five years.
- More charitable giving.
The six principles above work if applied consistently and diligently over time. Consider engaging a certified financial planner (preferably someone operating as a fiduciary instead of a salesperson) to assist in your financial journey. Outside perspective and expertise could be invaluable.
You’re unlikely to be an overnight financial success, but that doesn’t mean you can’t achieve financial peace of mind over time and enjoy the journey.
DID YOU KNOW?
Forbes counted a record 2,755 billionaires in a list published in April 2021 at bit.ly/3y6uTIB. “The U.S. still has the most, with 724, followed by China (including Hong Kong and Macao) with 698,” Forbes noted.