Seven Truths to Understand so you can control your money
Money
We exchange our time for money to exchange money for goods and services from others. This is what it is all about. In my last blog, we talked about seven myths about money that have been ingrained in us. (See "Seven Money Myths.”)
Today we will explore truths you need to understand to be able to control your money.
Why Control my money
Controlling your money through wise decisions will help you spend less money on goods and services and have more money for yourself. But, more importantly, if you don't control your money, it will ultimately control you.
The Seven Foundational Truths
Truth 1. — The difference between needs and wants.
Abraham Maslow studied and developed a human needs pyramid.
As we move up the pyramid, our needs are Basic, psychological, and finally, Self-fulfillment. In our discussion of needs, as it relates to our money, we can see that physiological and safety relate to the needs for our money. But for many of us, the one that crosses the line and gets us into trouble is the manifestation of "belongingness and love needs."
Think about this for a minute. How often do you spend money you don't have because you want to give your spouse what she wants, or you buy the latest and most incredible new toy for a child although you can't afford it? Although belongingness and love needs are precise psychological needs according to Maslow, they are not "money needs." Money needs are those basic and safety needs.
Everything else is a thing you want. For example, she wants an expensive vacation, and you want to give it to her when you don't have the money.
For a successful partnership, the understanding of needs versus wants is essential. It is as important as being on the same page when raising children.
Truth 2 — It is almost always better to pay cash than use credit.
Credit is the bane of our society. We buy so much on credit that we end up paying for the goods several times. However, there are some exceptions to this: buying a house and buying your first car, especially in the western US. Almost everything else is better saved for and paid for with the money you have on hand.
This is the truth that is most often ignored. As a society, we are hooked on instant gratification and the use of credit cards. This makes us usually pay more than twice what the item would cost if paid directly with our money. When you use someone else's money, you always pay more for the item.
As we have become a little bit smarter, the lenders have become creative by saying if you pay for the item over a fixed period and never miss a payment date, then there will not be any interest charged. They are betting that, in most cases, you will fail to meet one or more of these conditions, and they will get all of their interest. Be wary and very careful with these deals. Always know what you are agreeing to and do it without fail.
Truth 3 — Controlling your money requires good decision-making and self-control.
Couples often see money decisions differently. These decisions are difficult because they are each brought up in different environments with different beliefs. For example, my wife couldn't stand not being able to pay every bill off every month, probably because she was raised by a single mother who was pretty frugal. On the other hand, my family lived where debt was a part of our lives.
Unfortunately, rather than dealing with these differences directly and together, I took over the money side of our lives. Rather than facing the issues squarely when we were young, they were just ignored and became a burden that I still carry.
Shared decisions about money expenditures for big items like cars, vacations, and how much can be spent for Christmas and birthdays is essential. It may not be easy in the short term, but you will be rewarded over time.
Good decisions made together with understanding wants versus needs in Maslow's hierarchy will stand you in good stead in the long run.
A regular review of your money status will also help.
Truth 4 — You need to save for unplanned events.
We live in a chaotic time. Not everything will go as you expect it to. I worked for a public utility in a large city with a highly stable workforce. My supervisor had worked for this company during his entire career.
One day we were told that we were going to have layoffs and early retirement packages. After the third layoff round, the company stabilized again. But during this period 2000 of the 6000-person workforce became unemployed overnight. Unexpected things will and do happen.
A drunk driver hits a car, and a father of three is killed instantly, leaving a single mother with three children to raise. A sudden heart attack kills a mother.
Truth 5 — You need to save for retirement
We all want to retire as early as possible, but few of us are really prepared. It takes a great deal of planning to ensure you can meet your needs when you retire and to pay for your needs until death. Since we don't know when we will die, this is a tricky calculation.
What I have observed is that the theory that you will use less money when you are retired is a fallacy. You use it differently. Fewer clothes and more travel. More medical care. Your entertainment expenses will rise. Insurance rates go up. So, please don't plan on spending less, and remember our lifespans are longer now, so that means a more significant nest egg.
Truth 6 — No more than one credit card that you pay off in full each month
If you have to have a credit card for travel reservations and ease of use. Then to minimize the amount of money you waste, pay it off in full each month. Every month you don't pay off the card, the costs of what you purchased go up. Especially now that interest rates are rising rapidly.
If you have to use plastic, the best card is a debit card tied to your bank account.
Truth 7 — Control your money, or it indeed will control you.
The first step in learning how to control your money is to consider and understand these truths deeply in the fiber of your being. Then, work with your partner to develop a coordinated method for handling and making decisions about your money. And perhaps lastly, don't make decisions about money by comparing yourself to others.
What they do with their money has no bearing on what you should do. They aren't you, and you aren't them.
If you feel like your money is controlling, you then put together a plan to take back control. We will cover some ways to do this in our next post.
"The most important thing to do if you find yourself in a hole is to stop digging." Warren Buffet
