1 - Accepting Debt as a Normal Way of Life
In grad school, I took a class where we discussed the different types of debt.
There was a spectrum where we’d line up all the different types of debt – from “good” debt to “bad” debt.
Good debts are debt that allows us to invest in ourselves so we can earn more in the future – think college or graduate school education. Or allow us to purchase assets that appreciate in value – think home purchase.
Bad debts are the opposite. These are debts associated with just pure consumption. Think of credit card debt, consumer loans or payday loans.
The basic concept was that as long as we stayed on the side of “good” debt and avoided “bad” debt, then we were doing well.
Most of us walked away from the class with the notion that student loans and home mortgages were a good thing and we shouldn’t feel guilty about having them.
They were a normal way of life.
However, there is danger to just accepting this idea without questioning some of the assumptions.
You can see this just by observing the increasing student loan crisis in the United States and the ridiculous home prices.
The danger of accepting that debt is “ok” and is a normal way of life makes us numb to the real danger of borrowing money.
When I was sitting at the financial aid office for my graduate school, I didn’t really comprehend the amount of money I was borrowing. I believed that “good debt” like a student loan was essentially investing in my future, so what’s the harm?
However, this thought led me to borrowing more money than I needed and my wife and I spent 3.5 years afterwards paying the price.
Don’t accept debt as a normal way of life.
You are essentially playing with fire and it’s the easiest and quickest way to get yourself into financial trouble.
2 - Not Paying Yourself First
What happens after most people’s pay day.
They go out and spend.
They spend on necessities like rent, food and gas. But they also spend on things that they want – like going out to eat at a new restaurant. Or buying that new shoe that’s been sitting in Amazon’s shopping cart until now.
And as an afterthought, they try to save what’s left over, after all the bills are paid for and their shopping spree is complete.
However, most often then not, there is no money left to save.
And they get stressed out by the fact that they can’t save any money and come next pay day, the cycle repeats.
If you read any time management books, the common concept you read throughout is the idea of ‘prioritization.’
If you don’t prioritize your biggest, most important task first, then there will always be other tasks that will fill your time.
Brian Tracy, a time management guru, wrote a book called “Eat That Frog.”
He referred to the “Frog” as the biggest, ugliest task of the day, and if you started out the day by eating that ugly frog, then the rest of the day would actually look pretty easy.
In the same way, saving money is essentially your “ugly frog.”
You know it’s important, but you just don’t want to do it.
However, if you don’t do it first – meaning pay yourself first. You’ll be paying everyone else and will have nothing left over by the time it comes to you.
If you want to get ahead financially, then prioritize paying yourself first.
Start small initially and see if you can increase it little by little as you develop this habit.
3 - Trying to Keep Up With The Joneses
We live in a world of social media and constant comparison.
Whenever we open instagram or facebook, we are bombarded with people who have the latest gadgets, the coolest vacations and the nicest cars.
My wife and I experienced the greatest pressure to conform to social norms when we had kids.
Having kids is probably one of the most life transforming experiences you can have. More than getting your first job and even more than getting married.
You have this new ‘being’ that comes into the world that is completely dependent upon you and your life is no longer just your life.
And you also need so many new gadgets to take care of this new being – a stroller, car seat, baby carrier, the list goes on.
And of course, the worst place to get advice on what you need is social media.
But I’m not a bright guy, so what the heck. I immediately opened up facebook and instagram and looked at what everyone else was buying.
And this, unfortunately, led me down to some dark places…
When it came to a stroller, we couldn’t just get the basic model from Target – but we had to get the ultra-cool one from the upscale store that expressed to other parents how much we loved our kid.
When it came to a car seat, we couldn’t just get any old car seat – but we had to get the safest one in the world, designed by the same engineer who built the F-22 pilot seat.
And when it came to a baby carrier. We scoffed at the parents that bought the off the rack brands and proudly displayed our custom ordered silk and satin carrier – couldn’t people see how much we loved our child?
But soon, I realized this would never end.
After my proud purchase, I’d go to facebook again and would be disheartened by the fact that Sally from down the street had upped me in all purchases and proven that she loved her daughter more than I loved my son.
I admit, it is not the proudest moment of my life, but I learned some harsh lessons from it.
Don’t get caught up on the comparison game.
Don’t try to keep up with the Joneses.
It’s a never ending cycle and your mind nor your wallet, will find any fulfillment from it.
4 - Not Tracking Your Expenses
Peter Drucker, the famous management consultant had a saying
“What gets measured gets managed.”
Essentially, if we want to manage something better, we need a way to measure our progress.
We see this often in the health and fitness industry.
If you want to lose weight, have a food journal.
If you want to improve your run time, time yourself
If you want to lift more, track your weights
In the same way, if we want to improve our finances, we need to track our expenses
We need to see where we are spending our money so we can objectively see it, and improve upon it.
My wife and I use a free app called ‘good budget’ to track our discretionary expenses
I remember once how tracking our expenses was an eye opening experience for us
My wife is a huge coffee lover – just by the taste she can tell what type of beans were used and the skill level of the barista
We were debating the purchase of an ‘espresso’ machine – one of those fancy ones that grinds the beans as well as foam the milk.
Because we tracked all the cups of coffee she purchased the past year at coffee shops, we were able to tally up everything and see that we’d actually make our money back with the espresso machine within 6 months, if she started making her own coffee at home.
Tracking your expenses for just one or two months will show you ‘objectively’ how you’re spending your money.
When someone asks, how much do you spend on food every month? Most of us answer off the cuffs with a general ballpark number.
But you’d be surprised when you see the actual spending – and most often it’s actually much more than you think.
Once you can see your actual spending, you can start making behavior changes to better control your finances.
5 - Putting Off Investing
Albert Einstein said this regarding compound interest
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
Now we all know Albert Einstein to be a smart guy – so what was it about compound interest that he would make a statement like that?
While the concept is simple, compound interest is quite remarkable.
Let’s say I offered you two options
One was, I’ll give you one million dollars today. Cash. In your bank. Today.
The second option was, I’d give you a penny, but that penny would double everyday for the next 30 days.
Which one would you take?
If you are like most people, you’d likely take the million dollars over the compounding penny.
It’s millionaire dollars – cold hard cash, compared to a penny.
I mean even if the penny doubled everyday for the next 30 days, it can’t be anywhere near a millionaire dollars, right?
But what if I was to tell you that in 30 days, the penny would be worth more. Far more.
If you do the actual math – double one penny for 30 days every day, you will actually end up with $5,000,000 on day 30.
That is the power of compounding.
If you have time on your side, you want to start investing, so you can take advantage of this power of compounding.
Many people, whether due to fear of the market or just procrastination, don’t invest and don’t invest early enough.
If you are in your twenties, this is your golden window.
Piggy backing off what I mentioned earlier regarding paying yourself first, take that money and put it into the market to start working for you.
If you aren’t sure what to invest in, I have a article about index funds and VTSAX you can check out.
Even if you aren’t in your twenties, it’s never too late to start.
Stop putting it off and start investing your money so you can tap into the amazing power of compound interest.
Good money habits are hard to develop.
Unless you were taught good money habits at an early age, most of us blundered through life making a lot of mistakes.
I’m a prime example of someone who had all the bad money habits you could think of.
Accepted debt as a normal way of life? Done it.
Tried to constantly keep up with the Joneses? Been there.
Put off investing because I was too busy living life? Got the t-shirt
However, I was also able to recognize my negative habits and learned to rewire myself with better habits.
If I can do it, anyone can.