Re-wiring You Mind For Money Success

Saving money seems like it is out of reach, especially with the rising costs of living. Inflation is at its highest in decades and the majority of Australians have not experienced a recession.

Even prior to the onset of inflationary pressures, you can postulate that there are a considerable amount of individuals faced with the challenges of maintaining a budget. Let alone save.

Despite the lessons from the pandemic, recent articles have pointed out that millions of Australians have no savings. A staggering 31% of Australians do not have emergency savings for 1 month of expenses.

Another 1 in 3 have roughly 6 months of funds and almost 1 in 5 have zero emergency funds at all.

With interest rates and inflation costs continuing to climb, a reduction in available funds is being experienced. Considering figures mentioned, the extent of financial hardship that individuals may currently be enduring is a sobering thought.

Many are grappling with saving money, while others are burdened with high debts and maxed-out-credit cards. You could argue that we ourselves are the catalyst to our own demise. Or possibly society as whole for making us think the way that we do.

We can focus on the doom and gloom of peoples financial decisions. But it is also true that there are many that have successful money habits.

But without pointing fingers how can we solve this problem and re-wire our minds for money success?

Reverse Budget: Saving Money First

Ever had a friend or yourself make a New Years resolution to save more money. But only to make it through a couple of months before giving up?

It is commonly perceived by many people in this similar situation that saving money poses a challenge. Despite planning a budget with the intent to stick to it, it appears to be a taxing task for various reasons.

The issue lies with the ineffectiveness of budgets. While allocating fixed amounts for bills, groceries, and discretionary spending, amongst other expenses, it is often difficult to strictly adhere to the plan.

Like Mike Tyson famously said, “everybody’s got a plan until they get punched in the face”. As a result, budgets tend to fall short in achieving their intended purpose.

So how do we work around this problem? In the beginning I thought I was budgeting, but apparently what I had been doing was a reverse budget.

The principle of “paying oneself first,” as taught by George S. Clason, is one that I firmly believe in. It is a fundamental law of wealth creation that teaches us that part of all we earn is ours to keep.

This philosophy resonates deeply with me and I consider it a cornerstone of my financial planning approach.

Therefore, the better way to budget and make sure you have enough left over to save or invest is to take that money out first. That money immediately goes to a savings account or a brokerage account.

The remainder you can allocate to your fixed bills and living expenses. What ever left over is discretionary spending and you will have no guilt spending it.

Reverse the order and you will find that you are able too keep more in your pockets.

Nominal vs. Real Value Of Money

Money is a tool for you to use. Once you are able to successfully save money you should let it work for you.

Prior to 2023, interest rates have been at record low and leaving cash in the bank meant that the value of each dollar was being eroded away.

Individuals need to start thinking about their dollar value in terms of real vs nominal. In simple terms, if you are getting a 4% interest in a savings account, while inflation is at 8%. The nominal interest rate you are getting is 4% but the real interest rate is -4%.

While “savers” are currently receiving higher interest rates for their savings, their purchasing power continues to decline. The issue lies in the invisibility of this phenomenon, as you might perceive an increased interest rate as a positive development. In actuality, the benefits are negligible in real terms.

Which brings me to the concept of capital allocation. A skill that can differentiate good businesses from great ones. Many exemplary managers and CEO’s know this, which is essential for achieving sustained growth and success in the business world.

The skill of effectively allocating capital towards areas that yield higher returns is a valuable lesson that could benefit numerous individuals.

Much like how suboptimal capital allocation can lead to bankruptcy in businesses, it can also lead to financial struggles on an individual level. Therefore, having a good understanding of this skill is critical for achieving financial success and stability.

To optimise your financial resources, it is essential to make prudent investments that yield positive real returns, or at the very least, mitigate the impact of negative real value.

The Evils Of Consumerism

Our society has evolved into a world that values capitalism and consumerism above all else. In the past, a family could purchase a home and live a comfortable life on a single income. However, now it takes the combined earnings of two income earners just to maintain a semblance of comfort.

An inherent issue arises when we acquire more wealth is the compulsion to spend it. We often find ourselves caught in the peculiar phenomenon of frivolous consumption, where we fritter away our hard-earned money on unnecessary things.

The appreciation in house valuations can also be attributed to this effect. It is no secret that the growth in house prices has outpaced the average Australian wage. In 1990, a house could be purchased on a single income, but now it takes two full-time earners to afford the same.

Not only have houses gotten bigger, but so has the amount of money available to bid up house prices. As more women entered the workforce, households began to have two income earners. This made it harder for other families to compete without both earners.

In reality, home loan affordability could have been assessed based on a single income, and the second income could be viewed as additional funds. With this in mind, a family with two income earners could potentially work part-time and still achieve a better work-life balance.

In his book ‘The Psychology of Money’, Morgan Housel discusses the ‘Man in the Car Paradox‘. This paradox suggests that individuals are less likely to consider the person driving the nice car, but rather they think about how possessing the same car would elevate their social status.

Subconsciously whether we want to believe it or not, everybody wants new things to impress people they don’t even know. The allure of material possessions to impress unknown individuals is a common desire among people.

Key Takeaways

• By paying yourself first you can prioritize saving and investing. This approach can help overcome the challenges of sticking to a budget and lead to increased financial success and security.
• It is important to consider the effects of inflation when making financial decisions in addition with effective capital allocation.
• The desire for material possessions have led to a societal shift where individuals are caught in a cycle of frivolous consumption, often at the expense of financial stability and work-life balance.

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