Two wrong ways to handle money
There are two ways to mishandle money: you can either neglect it entirely, or you can make it the most important thing in you life.
The story of Emily
Emily does not really care about money. But she does care about spending it. The first 2 years after graduating college were a bliss: she was still living with her parents so all her salary went straight to the « shopping and entertainment » category of her non-existent budget. Bars on Fridays, clubs on Saturdays, and visit to the designer shops on the weekend with her entourage, of course. Emily was living the life. That life didn’t fit with her car though, an old Toyota she got for her 18th birthday, so she traded it in for a brand new Mercedes SUV, the kind that costs 80k. She took a leasing though because it felt less expensive and that way, she would get a new car every 2 years, which is the kind of treatment a woman of her caliber deserves.
After 2 years, she moved out of her parents home. Not that they kicked her out but she is 25 after all. A downtown loft caught her attention. Rent was a bit stiff but what the hell, you only live once. Living in your own place has its perks: no one bothers you when you shower for an hour. But it has its drawbacks: you have to clean once in a while. Such a drag… Better hire a cleaner for that. And cooking, what a waste of time. Eating out or ordering to go feels much easier. And bills… so many of them she never saw the colour of before: utilities, insurance, taxes. These things are expensive! But hey! That’s what credit cards are for!
Sometimes, on a whim, Emily wonders: « how am I paying for those things? ». But every time she comes back to her senses: « we’ll cross that bridge when we get there ».
But when she got there, there was no bridge to cross. After all her credit cards got rejected at a restaurant and she painfully had to beg her friends to pay for her, she called her bank. She discovered that not only was she more than 50k in debt (about a year of salary) but she was growing that debt at the incredible rate of 3,000 every month. All her credit cards were maxed out and she was paying around 15% interest on the balance.
Emily had dug a hole for herself. The kind of hole that takes 10 years to get out of. And we’re not talking about 10 years of walk in the park. We’re talking 10 years of French Alps hiking. Frustrations and privations. Radical change of lifestyle. And all that just to get back to where you started: at zero plus a few out-of-fashion designer shoes. Now imagine that Emily gets fired on her journey back to the surface. It can happen to the best of us. How is she going to handle even a month without pay? How is she going to negotiate an appropriate salary at her next job if she desperately needs an income? Emily is part of the wingers, and that scenario is exactly what we want to avoid.
The story of Stephen
Stephen has always been reasonable. After college he gets safe job at the local government office. All his expenses are planned. He knows his spreadsheet by heart but he still opens it every other day to see if he’s on track. On track for what? he doesn’t exactly know but he’s saving money and that’s what counts. Movies and restaurants are expensive so he doesn’t go. Renting is throwing money out of the window so he buys himself an apartment. But having debt is bad, even if mortgages are only 1-2% these days, so he decides to pay everything back as quickly as possible, 12 years that is. He calculates that if he just sells his dog and drives Uber on the evenings on top of eating at his parents place on Sundays, he can manage the payments.
Is Stephen happy? Kind of. He gets a kick every time he opens Excel so there’s that. He is still single though because who has time and money to date these days, especially when you work two jobs to pay back a mortgage twice as fast as normal? He doesn’t really have friends either because it seems like all friends want to do is go on trips and concerts and restaurants. But since he is working long hours, he doesn’t really have time to think about his happiness anyways. Maybe when he retires early at 55 (because then and only then will he have enough money) he could go back to his passion: drawing. That will be fun. But for now, he doesn’t have money for canvas and brushes.
Stephen is part of the over-planners, and that scenario is not what we’re looking for either.
What Emily and Stephen have in common
When we think of financial planning and of using a budget, we think of going from an Emily kind of life to a Stephen kind of life. And although the Emily kind of life isn’t sustainable in the long run, the Stephen kind of life isn’t very appealing either.
Emily and Stephen could not be more different when it comes to money. Emily is sacrificing the future for the now while Stephen sacrifices the now for the future. Yet they do have something in common: they have no freedom. Emily is essentially enslaved by her debt and her carelessness but Stephen isn’t free either: his unwillingness to spend any money at all is chaining him up. They both experience money as a master and not as a tool.
We want to find a balance between Emily and Stephen. And that balance will be different for everyone. But by planning a little and allowing maximum flexibility, we ensure that we don’t fall in the trap of carelessness while still allowing ourselves to live a little.
This middle ground is what I promote here. Plan? Yes. But don’t elevate money to the status of a divinity. Money is not a goal. Money is a tool. A tool to reach the goal. What goal, you say? Well, only you can decide on that…