Getting Ahead
Fundamentals To Get You Started
Pat Brennan | January 15, 2021
Getting ahead financially is something virtually everyone wants to accomplish, however, life and its travails, and maybe more importantly how we think about money can easily get in the way making this goal difficult for many. With a little thought, a little discipline, and a little patience this process of getting ahead becomes achievable.
Simply put, to get ahead you have to do two things: spend less than you make, then save and invest the “surplus” over time. It’s just that simple–but not necessarily easy.
Spending less than you make requires you to have a good grasp of your income and expenses and to make decisions which allow you to have a surplus, say, every month. If you have a reliable, steady income you can make decisions regarding your large expenses such as housing, transportation (cars), and lifestyle that can have huge impact on your financial condition over many years. For instance, I’ve always avoided being house poor. Before and shortly after marriage, we rented apartments. When the opportunity for using military housing presented itself, we used that option three times. My first house, purchased 10 years after graduating from college, was a 3-bedroom starter home that cost about two thirds of what I could afford. Because I wasn’t house poor, I could afford to put myself through graduate school at night, contribute my IRA and my spouse’s and contribute to college funds for my two children which quickly became four. And after buying my first two cars new, I discovered the virtues of buying certified pre-owned cars and other used cars letting others suffer the huge, upfront depreciation cost. When able, I chose to live close to work saving time, money and stress on my commute. Making sound decisions, over time, can have a huge cumulative impact on your finances. Again, the keys are a little patience and discipline.
Spending less than you make requires delayed gratification—the ability to forego an immediate reward in preference for a reward later. Without the ability to get along with a little less or defer purchases until you can afford them, you will find it extremely hard to get ahead. This need not cause one to suffer deprivation, you just have to be smart about it. And when you do defer the gratification and finally have the ability to afford what you need, well, you’ll enjoy it more for longer. For example, when choosing where to live, say you forego the $1400 a month deluxe apartment and go with the decent $1,000 a month option. By doing so over three years you could save $14,400 which begins to give you options towards a down payment on a house, developing an emergency fund, or any number of useful goals. Living on less than you make and saving the difference give you options and frees you from the worry that one large, unexpected expense will set you back.
As a result of spending less than you make, you can now save and invest those funds to get ahead. Investing is sort of a twin sister of delayed gratification. Investing is defined as expending money today with the aim of achieving a profit or gain later. After setting aside savings for emergencies and other regular, but sometimes large expenses such as a set of tires, a brake repair, a root canal, etc., putting your money to work in common sense investments is necessary to stay ahead of inflation. As I write this post, interest rates are so low that one suffers a negative return on savings due to the fact that the inflation rate exceeds the interest rate on most savings vehicles such as bank savings and money market accounts. Every day, infinitesimally, your money decreases in value.
Because what we are talking about here involves, at times, our emotions it’s important to understand the concept of the hedonic treadmill. The hedonic treadmill is the idea that the pleasures gained by acquisition of new things won’t last long and we will return to a base level of happiness after the glow of this new thing wears off. It explains why people continue to buy new and better things they may not need and it’s even worse if done with credit cards (borrowed money). You literally get on a financial treadmill where the more you spend and buy keeps you from getting ahead. There is also a flip-side to the treadmill and that is we tend to recover back to our base level of happiness after a setback. Thinking “this too shall pass” helps us restore that base level. Suffice it to say, we need to think a bit before we purchase non-essential items and ask some basic questions regarding whether the item is needed or simply wanted.
I hope this initial blog post will get you thinking about the mental approach necessary to get ahead. My aim in the next several posts is to provide some practical ideas on how to budget, pay yourself first, explain the powers of dollar cost averaging and compound interest, and how to go about investing in a simple, almost automatic pilot way. As you’ll see, just about anyone with a little extra money can start getting ahead.
Onward,
Pat Brennan
Copyright PWB Enterprises, LLC 2021. All rights reserved
