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Three Universal Misconceptions About Money

We hold three misconceptions about money that are almost universal.

The first misconception is: If I had more money, I would be happier. I could move to a bigger house. I could get that new car. My investment portfolio could get to the level it needs to be. I could finally get ahead and not struggle so much. I would have more peace of mind. I would have more free time. I could do what I really want to do—and be happy at last.

The reality is that more money will not give you peace of mind. No doubt you make a lot more than you did on your first job. Is your life more fulfilled because of your additional income? Do you feel freer, more content, more secure, and more alive? Do you have fewer problems now? Do you at last have money figured out? Does more money really bring you happiness? You hope that it does.

The second misconception is: People who make more than I do don’t have money problems. We assume that we are alone in not understanding money. When we see another person who earns more money than we do, we automatically assume that they must have money figured out.

Just because people make more money than you doesn’t mean they are free of the financial problems with which you wrestle on a daily basis. Most people spend up to the level of their income, and their problems follow right along with them. Assuming that your basic needs are well-covered, it makes little difference how much money you make—unless you have a plan.

We are often “insane” about money—we keep doing the same thing over and over again and expecting a different result. Until you have a plan, life is not going to change. It has little to do with how much you make. It has everything to do with your goals and whether your spending is consistent with those goals. Think about it. What is your life all about? Are you heading in the direction of your true purpose? Is your financial plan leading you toward or away from that purpose?

The last great misconception about money is: Someday, one day, it is all going to turn out okay. When people say this to me, I ask them, “Just what is going to happen to make it all turn out? Your next raise? An inheritance? Or maybe winning the lottery?”

I need to tell you this, my friends: Someday it’s not going to turn out—unless you do your part. You’re probably not going to marry the prince or the princess who will bestow instant wealth upon you. You’re unlikely to win the lottery. Your next raise won’t fix all your problems. It’s not going to just work out unless you have a plan that includes your goals and you implement that plan.

What would life be like if you decided to be more satisfied now? What would it be like to have a conscious understanding of money and its role in your life? How would you feel about money if its sole purpose was to provide an avenue to your goals and deeper passions?

We need to better understand the real purpose and potential of money, and how we use or misuse it. Money is simply a medium of exchange. By clarifying our goals, we can put money to work for us instead of the other way around.

The course to success begins by reflecting on why we react and spend as we do, while leaving behind our old beliefs about money. We can then head in a new direction based on knowledge—knowledge founded on where we are and where we want to go. Getting there then becomes a simple matter of steering and adjustment.

If you wish to change your relationship with money, there are three things you must do.

First, gain a clear understanding of how you spend your money and on what you spend it. Second, incorporate your deeper goals into a financial plan and commit to that plan. And third, allow yourself to be satisfied now.

If you are not satisfied with your life, don’t look to money. It will not solve your troubles. Look elsewhere. But where?

Perhaps the ancient Chinese sage Lao-Tzu is a place to start:

Fame or integrity: which is more important?
Money or happiness: which is more valuable?
Success or failure: which is more destructive?

If you look to others for fulfillment,
You will never be fulfilled.
If your happiness depends on money,
You will never truly be happy with yourself.

Be content with what you have;
Rejoice in the way things are.
When you realize there is nothing lacking,
The whole world belongs to you.

Putting It All Together (part 2)

The final area where I can help you in your Personal Spending Plan is the determination of where to make the changes—where to reduce your spending?

When you review your monthly expenses, classify them into three categories: Committed, Somewhat Discretionary, and Very Discretionary.

Committed items are things on which you are obligated to spend money—house payment or rent, utilities, car payment, car insurance. These expenses are not likely to go away, no matter what your goals are.

The Somewhat Discretionary category includes things on which you must spend money, but which allow you some discretion on the amount. You have to buy food, for instance, but perhaps you could do so more economically.

The third category is the Very Discretionary items, like gifts, eating out in restaurants, clothing, hobbies, snacks, and entertainment. These are the things on which you could really spend a lot less if you chose to, and you want to look here first for money to be reapplied toward your goals.

In this part of the process, you want to reduce the amount you spend on the Very Discretionary and Somewhat Discretionary expenses. First, reduce these amounts so you are at least not spending more than you make. Then, continue to cut back until you free up money to accomplish your goals in the time frame you desire.

Don’t be discouraged if you can’t fund all your goals the first time you try this process. This round is only the beginning, and as you accomplish one goal, that money can be reallocated to the next goal on your list.

Before you reallocate anything, ask yourself, “How much satisfaction does this bring me?” If you have an item for which you spend money that is very discretionary, but truly brings you a lot of satisfaction, then don’t cut that one first. For me, dining out once a week with my family gives me a great deal of satisfaction. If I were to cut that from my spending plan, it would constitute deprivation.

However, I use a great deal of self-restraint when spending money on movies. I don’t buy lattés, and I rarely go out for lunch. I pass up a lot of indulgences to save the money necessary to dine out once a week with my family. Though discretionary, some items on your list may need to be put in the “do not touch” category.

When you decide to cut back in a particular area, try not to be overly aggressive at first. The objective is not to deprive yourself, but to gradually steer spending momentum away from things that are of lower value in your life, and toward your true goals. Put the money where it counts the most, and remember that a little saved in a few areas adds up to a lot each month.

One helpful way to keep your goals in front of you is to put your list of goals on your refrigerator or next to your bathroom mirror. When something on which you want to spend money comes up, take a look at your list. Ask yourself, “Is this new leather jacket more important than saving to go to Europe?” By keeping focused on your goals, passing up that leather jacket will not seem like deprivation.

It’s all about personal choices based on facts—not sacrifice. It’s about funding your goals and living a life right now that is consistent with what is important to you.

When compared with the amount of knowledge most people have of their personal finances, just finding out where all your money goes in a month is a major accomplishment. To follow through by identifying and writing down your goals is even rarer. To complete the process by reallocating your spending to reach your goals—well, happy are the few who dare to venture this far.

Try it. The journey will be worth it.

Putting It All Together

The third part of a Personal Spending Plan is to make the all-important lifestyle and spending decisions based on the facts you have gathered. You want to determine how you can alter the way you spend money so that you can indeed accomplish your goals—without deprivation.

The reason you determine your top goals prior to making any changes in your spending habits is that without this data, your efforts are doomed to fail. I’ve never seen people stop spending money simply because they thought they should, or because someone told them to do so. It takes dedication to a deeply held desire to achieve lasting change in your spending habits, and this focus requires a clear definition of what’s important to you—your goals.

One of my favorite examples of this kind of dedication is Jeff.

I was leading a seminar for a group of hair salon stylists. One thing about hair stylists is that a lot of cash goes through their hands in the form of tips. For most of them, it’s easy come, easy go. They usually don’t know how much they get in tips, and they don’t keep track of where they spend it. I took them through the entire Personal Spending Plan process. I had them do a fact sheet on their current spending, identify their deeper passions and goals, and reassess how they were spending their money in light of those goals.

Three months later, we had a follow-up session. Before I could start, a young guy in the front row was waving his hand for me to call on him. It was Jeff.

“Um, is there something you would like to share with the group?” I asked.

“Yes,” he said. “From the goal-setting exercise you had us do, I got very clear about my goals. And I committed to them. I established two goals. I wanted to go to Hawaii or someplace else where it’s sunny once every year. . . .”

“That’s not a bad goal for someone living in Seattle,” I interjected.

He laughed. “Actually, for me it’s a necessity,” he said, “and I wanted a red Mazda Miata convertible. Those were my goals.”

“Sounds reasonable,” I said.

“I added up how much I spent on lattés and eating out in restaurants. In the three months since we were last here, my Hawaii trip is paid for . . . and you passed my red Mazda Miata when you walked in.”

I wasn’t the only person in the room who was visibly shocked. “How could this be?” I asked. “How could you do that in three months?”

“For three months, I went cold turkey on lattés and I learned to make my lunch and take it to work. I didn’t go out for snacks whenever I felt like it, and I ate dinners at home—or let other people take me out and pick up the tab!”

“I counted up how many lattés I consumed during the day. Six! Six lattés with tips is $24 a day. I spent an average of $5 a day on snacks. I went out to lunch everyday and spent about $8 every time. So far, that’s $37 a day. I work six days a week. That adds up to $888 a month. Cutting a few dinners eating out, I ended up saving nearly $3,000 over a three-month period. My Hawaii trip will cost me $1,100, and the remaining $1,900 was enough for the down payment on the car. I can now afford the monthly payments from the amount I won’t be spending on lattés and lunch everyday.”

People in the seminar applauded.

“I’d say you are a pretty committed fellow,” I said.“Congratulations.”

“Yeah, but here’s the thing,” he said. “If you had asked me at the last session how many lattés I drank a day, I would have said six. And if you had told me that I was wasting a lot of money, that I was spending too much—and that all that coffee was bad for me, I would have told you that you had no idea how much energy it takes to cut people’s hair everyday. It’s not only the haircutting and being on your feet, but also having to keep up the conversation. I would have told you that I couldn’t have gotten through my job, talking to those people all day long, if I didn’t have my lattés. I would have told you not to tell me how many lattés I should drink. And I would have told you that I don’t have the time to make my lunch every day. I barely make it to work on time, work long hours, and go home dead at the end of the day. That’s what I would have said to you. Instead, when I saw for myself that the lattés, lunches and snacks were costing me almost $900 a month, I realized I can more than adequately make a car payment and have plenty left over to go someplace sunny and warm every year. I instantly stopped drinking lattés. I got through the caffeine withdrawal—it wasn’t a big deal. And I’m getting up early each day to make my lunch.

“It’s like, once I realized that I could actually have these things, nothing could stop me!”

Jeff exemplifies a great truism about financial planning. When you clearly determine what you are committed to, and when you clearly understand the facts, you are likely to change your behavior.

With a Personal Spending Plan, you know what is really important to you, and you gain the motivation to alter, sometimes dramatically, how you spend money.

This plan is not about deprivation—quite the opposite. In Jeff ’s case, the result was abundance—attainment of the things he wanted most, and in a very short period of time. It also gave him a sense of pride, confidence, and personal power.

If I had told Jeff not to spend money, he would have felt as if I was trying to deprive him. It would have generated resistance: “Don’t preach to me about spending. You can’t possibly know what it’s like to be in my shoes.” But when he clearly understood that he could go to Hawaii and have his new dream car, simply by changing his spending habits, he altered his behavior immediately. He became self-motivated.

Just like dieting, financial deprivation doesn’t work. However, setting your sight on a positive goal aligns your energy toward achieving it. The negative activity just falls away.

That is the reason a Personal Spending Plan works. You first gain an understanding of where your money is going, and then you figure out what it is that you really want. With these two pieces of information, you can easily determine the areas where adjustments in your spending are possible and realistic. In no time at all, your goals become reality—without feeling deprived!

First, become clear about your spending habits; then become clear about your goals. Finally, determine the areas where changes in spending habits could be made.