Today, I have teamed up with Shannon from The Heavy Purse and a group of awesome bloggers to talk about getting financially real with your finances. You can read the other posts over at The Heavy Purse.
I know a lot of people live in denial with their finances. That may mean knowing you need to make way more money to sustain your lifestyle, yet charging a bit more to your credit cards every month. Or knowing you can’t really afford this or that, that new car on credit, that house twice as big as what you really need, or that amazing dress, yet going for it, crossing fingers it will all turn out ok, and hoping for the best. I was really never an optimist when it came to finances, I had to work my way through college, doing all sort of odd jobs to pay the rent, and I was always afraid something might go wrong, so I was always saving for a rainy day.
But as things got better, I realized I would always be able to do something, whatever it was, to pay for my basic expenses. So I got comfortable. Things got so much better I had no idea how much I was really making. There was money from a day job, money from side jobs, money from personal endeavors like freelance writing or selling stuff I had in storage. I had no idea how much I was spending either. I was never crazy about buying stuff I didn’t need. I always thought what I wanted was reasonable, and I should have it since my needs were few. But if I wanted to really plan for my future, the numbers were vague at best.
That is when I realized I was doing something wrong. I was earning decently, yet claiming every single expense was justified because I wanted it. “Oh, I work so hard, I really deserve a holiday four times a year”. “I shouldn’t think twice about buying that $500 gadget, since there is money in the bank for it. It won’t put a dent in my budget”. Being in the green every month doesn’t mean you are doing it right.
Sure, you are better off than many who live beyond their means. But if you have such a big goal in mind as financial independence, it is going to take more work than this. You need to get real about your situation. Set a number, off which you can comfortably live for the rest of your life. Set a safe withdrawal rate, usually under 4% a year, so you know your investments will keep providing for you for as long as you shall live.
That means if you want to live on $30,000 a year, you need a $750,000 nest egg. That means you have to live on $2,500 a month, and every $85 you spend is taking you one day away from financial independence. Suddenly, that fancy dinner, dress or gadget is taken into perspective. You can choose to have it, since you are doing so great, or you can choose to do without, and reach your goal one day sooner. And a day isn’t much into the grand scheme of things. But those days add up. And suddenly you are a month, or even a year behind.
For me, getting financially real meant putting all expensive in the balance, and wondering whether they were worth working an extra day for. Would foregoing that trip to Europe be worth a couple of months of freedom? If it meant being with my friends and family, probably. If it was just about seeing new places I could enjoy anyway a few years from now when being financially independent, probably not.
You may think you are doing well, but only when you really crunch the numbers will you realize you are doing just ok, or excellent. Every financial decision you make should be carefully thought through, so you are confident you made the very best decision in accordance to your principles, and your financial goals. Otherwise, for as much as you say you want to get to a point, you will get delayed by a spur of the moment.
Jayson @ Monster Piggy Bank says
I got financially real when I realized that I had much and overwhelming debt that I couldn’t pay. That’s when I started forming a mindset that I would one day enjoy financial freedom and have a debt-free life.
Shannon @ Financially Blonde says
I got financially real when I decided that financial freedom over retirement was something that I wanted. I knew that I needed to make smarter choices if I was going to accomplish that goal and thankfully since setting the goal three years ago, making smarter choices has been easy for us because we have the concrete goal in place.
Brian @ Luke1428 says
“…Being in the green every month doesn’t mean you are doing it right.” That’s the money quote of the article for me Pauline! So easy to get that confused and think just because there is money left over at the end of the month then everything is fine. When we switched to a debit card and I was forced to pay attention to how much money I had in the bank before I made a purchase, our spending drastically decreased. That’s when I realized how much money I had been wasting in my monthly budget. There was a lot more margin in there than I thought.
Our Next Life says
“Being in the green every month doesn’t mean you are doing it right.” So right. It’s so easy to make those “little” purchases without thinking about what they really represent. To help us keep things in perspective, we’ve figured out that we’ll need about $100 a day to live in early retirement, and so any $100 purchase has to feel worth trading a full day of our lives. This may not work for everyone, but it’s working for us!
Shannon @ The Heavy Purse says
“Being in the green every month doesn’t mean you are doing it right.” – So true, Pauline. People often confuse not having debt to mean that they don’t have to worry about money. But that’s not true. Not understanding how you spending your money is never good thing, whether you have debt or not. I love your practical approach to make sure you’re spending money on what truly matters and you understand the cost of your choices. Thanks again for your participation and I appreciate your continued support!
The day I found out I was pregnant was when it all came full force at me. There was now someone other than us and we were responsible for building a life for her and us…there was no room for debt.
It’s so hard to calculate how much I want to live on. So it’s hard for me to know for sure when I want to reach FI. Because what about when I get old and my expenses drastically change. My grandparents are all needing help and that is not cheap. My grandma’s room in assisted living is $9,000 per month! It’s tiny, unfurnished, the meals are crappy, and it’s in the middle of nowhere. Eeek. What do most FI people do? I’ve never known. Do they just not think about old age, do they buy a heck of a lot of insurance, do they rely on a government, do they move abroad?!
That’s a super interesting question, and I’m dying to know the answer myself now that it’s been put out there.
I love how you put the numbers in perspective, Pauline. Where every $85 you spend is robbing yourself of one more day of FI. That type of thinking can definitely alter behavior in a positive way!
Abigail @ipickuppennies says
My husband and I have struggled with money in one way or another since we met. He came to the relationship with student debt. I was on disability, and he made about $30,000 a year. Then he became unemployed and we had to add $12,000 of medical debt (along with random expenses related to our health problems).
We finally paid it off when I was able to find a job that worked around my medical issues (he’s now on disability). But then we got a house a little early so his parents wouldn’t be homeless. The repairs on that. Unexpectedly needing a new (to us) car last year. And this year $25,000 in oral surgery for him.
It feels like we never get to take our eyes off the prize. Which is good, but it’d be nice if the “prize” were something a little more positive once in awhile! Sheesh.
Mike Carlson says
I really appreciate article like this. It’s very informative and I learned something from here. Thanks for sharing and I will definitely share this to my friends this article about Getting financially real.
So true Pauline!
Sometimes we try to justify what we do without much thought. I do it all the time especially when it comes to eating out and buying a cup of coffee – it definitely all adds up! Though, taking that extra time to think things through may open up other opportunities and paths to venture. For me personally, it’s taken me to another level by learning how to cook and making my own coffee. 🙂
Looking forward to reading the other blog entries. Great piece! 🙂