How do you think about money? Does it provide a sense of security that was molded by a parent or guardian who instilled a savings-mindset during your childhood? Is it mainly a means to new experiences and travel created by a relatively affluent upbringing? Or does it cause anxiety, centered around years of living paycheck to paycheck? Your past experiences have a direct impact on your perception of money.
On the surface, it can seem uncorrelated to other aspects of your life. However, in taking a deeper look, we find that much of how we live our lives revolves around our innate feelings toward money – our money scripts – as coined by Ted and Brad Klontz in their 2011 study on the topic. In their study, they found that people have an unconscious bias toward money that is closely tied to the financial decisions they make.
Take a moment to think back on memories you have that may have shaped your view of money. Was it positive or negative? How did you respond in those past situations? Can you connect any of those memories to your current perception of money?
Your idea of money influences your financial habits
Financial habits are the natural tendencies you have when faced with a monetary decision. These can stem from your personality type or can be engrained from past money-related experiences. Determining these tendencies can help provide background to your financial situation and offer a clear perspective when moving forward in your financial journey.
A few key personal finance areas are mentioned below. Take a minute to ask yourself where you fall as well as how you can best fight the negative financial habits or continue the positive habits you may have built over time.
Savers vs. Spenders
As a kid, if your grandparent gave you a birthday card with cash inside, what was your first reaction? Would you ask your mother or father to take you to the store immediately? Or would you stash it in your piggy bank instead? As an adult, are you prone to buy the newest iPhone on the exact date it is released? Or are you the type that saves and saves and never buys anything for yourself?
For the spenders out there, most likely you know who you are. To be clear: being a spender is not always a bad thing as long as there is a structure (budget) in place. Three of the main reasons we earn money is to provide for ourselves and our family, give to others, and enjoy life. While some people may overdo the latter part, this is where the power of budgeting comes into play.
If you are someone who enjoys shopping, I am not telling you to stop shopping altogether. Instead, create a budget beginning with your net income (the money you take home), subtract out non-discretionary expenses such as mortgage/rent, utilities, insurance, etc. Then, after saving at least 15% in a tax-efficient retirement savings vehicle, decide what is most important to you from there.
Are you saving for a house down payment? Do you want a monthly “shopping allowance?” Do you want to give a certain amount to a local charity? Rank the things that are most important to you and then divide your cash surplus (after non-discretionary expenses) into those categories. Congratulations, you’ve created a budget! Consider checking out a few different budgeting apps to make your life easier, which in turn will increase the chances of you sticking to your budget for the long haul. A few budgeting apps we recommend are: YouNeedABudget (YNAB), EveryDollar, and Mint.
For the savers out there, I feel your pain. At a certain point in your life, you may have been called “cheap.” I am here to tell you that, as with everything, balance is key. Echoing the earlier budgetary information, after allotting for necessary monthly expenses and savings, carve out an amount that can be used as “fun money.” My wife and I are allotted a certain amount per month, meaning neither spouse can question what the money is used for nor when it is used.
Without naming names, one spouse uses the entirety of her fun money on Starbucks drinks. Now, some of you may be wondering, wouldn’t Starbucks be accounted for under a “Dining Out” category? The answer is yes, unless you visit Starbucks every other time you leave the house. The point is that the “fun money” can be used or saved for anything. This method can help your finances and your marriage!
No matter what group you fall into, take the time to create a budget and stick to it. If you are having trouble getting started, check online for budget templates to give yourself an idea of how it may look for you. If creating an entire budget feels overwhelming, I recommend simply tracking your spending for one week. You may be surprised where your money goes.
Investors vs. Cash-only savers
Cash-only savers are people who have saved a lot of cash in the bank, but that cash is earning them almost nothing. Again, this tendency is often learned at a young age. If your parents or grandparents were the kind of people who kept their savings stashed in coffee cans under the bed, you may be inclined to put all your savings in a safe place (hopefully a bank, though, and not a Folgers tin). The problem with this approach to savings is that your money will never work for you. You will always only have whatever you put into that can.
The general guideline for how much cash savings to have is to map out three to six months of expenses, and keep that amount of money in an emergency fund, preferably a high-interest savings account. Then, determine your goals that are at least three or more years out and consider slowly deploying the cash that is earmarked for those goals into a well-balanced investment portfolio. Be sure to invest according to your risk tolerance and time horizon, shifting more conservatively as you grow closer to your goal.
While there are several books written on risk tolerance and time horizon, here are two questions you should ask yourself before jumping into the market: How far out will this money be needed? How much risk am I comfortable taking? Answering those two questions will help provide a starting point to your investing journey. Consider speaking with a financial advisor to help determine your risk tolerance as well as an appropriate investment allocation to match your financial goals.
To investors, keep on investing, but don’t get caught up in trying to time the market. Don’t let the idea of “buy low, sell high” keep you from investing in an upward trending market – let dollar cost averaging do the work and stay consistent. And always remember to have a cash fund available for emergencies – even if your tendency is to go all in.
Debt-free vs. Debt
Debt is a touchy subject for a lot of people, and as such, isn’t generally discussed, even within a family setting. For that reason, lots of people struggle with debt, having never had an honest, open conversation about it with adults or influential people in their lives. This makes it difficult to know what an acceptable amount of debt is to take on.
Often young people get overwhelmed with debt as soon as they are financially independent, not understanding the impacts of interest payments and credit scores. For others, taking on debt is a terrifying concept and they stay away from it at all costs – including taking on debt for things that may add value, such as getting an education or buying a home.
For people currently in debt, consider creating a debt payoff plan. Write out all of the loans you have outstanding and order them from highest to lowest interest rate. Then, attack the loans with the largest interest rates first, while paying the minimum required payment for all other loans. Map out how long you think this will take you based on your current cash flow and make sure to check in monthly to see your progress. The longer you are in debt, the longer your money is used to pay other people back rather than saving for your future. We breakdown debt into three general tiers:
- Personal debt: Things like credit card debt, a personal line of credit, and payday loans can swallow your financial plan whole. This is high-interest debt that we believe should be targeted first as fast as your cash flow allows.
- Low interest debt: As mentioned previously, once you have paid off all your high-interest debt, work your way down to paying off the lower-interest debt. These can be things like car loans, student loans, boat loans, etc. Depending on the interest rates of each loan, you can determine which loans are best to pay off first and how quickly you should pay them off.
- Home mortgage: Once all other personal debt is paid off, you may be left with a home mortgage. Determining whether you would benefit to pay off or pay down your mortgage quicker may vary on a case-by-case basis. There are certain tax benefits that may cause it to make sense for you to not pay off your mortgage right away. Conversely, you may have a higher-than-average mortgage rate where it may make sense to pay it down quicker or even refinance. Check with a financial professional regarding your specific situation.
To all the debt-free people out there (excluding your mortgage) – great job! You have freed up your cash flow, which if reinvested, can continue working for you, rather than being used to pay off debt.
Your financial habits can be shifted to reflect a healthier financial lifestyle
Your experiences with money shape the way you make financial decisions. It is important that you reflect on those experiences and how they have translated to your current financial situation. From there, write out a detailed, time-oriented plan and take action to establish positive financial habits. Small, consistent steps forward in your financial planning can pay large dividends over time.
If you feel like you need help assessing your financial habits and improving upon them, give Tull Financial Group a call. We love helping our clients create healthy financial habits that allow them to achieve financial freedom. Contact us today at 757-436-1122.