Friday, April 19, 2013

The Fifth Law of Financial Management

One of the soundest investments a person can make, if not the best, is in themselves.  Specifically in their mind and how they think. Material things and investments can always be lost, destroyed, or taken away but what you put in your head can reap fruit for a lifetime.

This is why I have chosen to write on the topic of financial intelligence today.  Congratulations to you for deciding to read something on the matter and for taking some time to invest into that area of your life!  I must first say that nothing I post here should constitute financial advice or counseling; however, these are principles I have been taught and what I share are stories and opinions from my own personal experience as well as the experiences of those around me and I hope you can find them useful, but please seek competent financial advice from a professional before implementing any types of specifics.

I've chosen to share a principle from Orrin Woodward's book RESOLVED: 13 Resolutions for LIFE.  The principle I've chosen to share is not the most important principle in my opinion, but it is important.  What's more is that I believe this principle is one of the easiest to implement immediately, like right now, and follow through with on a regular basis.  Don't get me wrong, none of the principles are easy, per say, but the results of developing financial intelligence are worth it by far. As a good friend of mine, Dan Gilligan, always says, "Money is a lot like air.  Most people really only worry about it and think about it a lot when they are running out."

The Fifth Law of Financial Management
Set a Price Limit on Spontaneous Purchases

What does this mean?  Very simply put, no matter what, if a purchase is above a certain price point (that you and your family need to decide upon in advance) you DON'T buy it.  At least not for 24 hours.  You must sleep on all purchases over this limit, which means you will miss out on a lot of "one day only sales" (at least until they have the same "one day only sale" the following month) in the short term, but you will also miss out on squandering money on things that are wants that will end up being thrown out or sold at garage sales for 10% of what you paid for it.
"If you look at money as merely a means of exchange to swap for your latest heart's desire then money will always be your master. If you can somehow see money as a tool in your toolbox, under your control, in your domain, then you'll see that money is your slave."
If I had only learned this principle sooner I would have saved myself tens of thousands of dollars in spontaneous purchases of things I simply did not need, or even in some cases didn't want. One negative example from my own life I still regret today is an Emporio Armani watch from their Donna Collection (whatever that means...)  I paid $225 for this watch at an outlet with a no-returns policy.  The next morning I realized I honestly didn't like the thing.  (Turns out it is a women's watch)  I, to this day, have not been able to find a buyer for this watch even as low as $60 on craigslist and other web sites. Now I have an item I spent $225 for, that I've never worn or used, and I'll be VERY lucky to get $20 for at my next garage sale.
"Just being able to sleep on a purchase before making it makes you feel like you have power over your money instead of your money having power over you."
A positive example of someone applying the principle correctly would be my great friend Edgar and his wife Dani. When I met Edgar & Dani in 2008 their financial situation was... let's say, special.  They had more than their fair share of consumer debt and no real plan to become financially sound.  Through applying the Ten Financial Principles they were able to become completely debt free in a matter of a few years, they never finance anything that depreciates, and they genuinely live with a lot lower stress level because finances are sound.  I remember back in June of 2012 when Edgar came and asked me about purchasing a laptop.  (He was not asking permission, he was asking what technical specs I thought he would need and would fit his budget.)  Edgar had saved up more than enough cash to pay for a laptop outright, he had the money and the need for one, but what he did when he found one that fit his budget and the specs, was he slept on it.  It was above his spontaneous purchase limit.  Edgar began to debate in his mind whether the laptop was really a need or whether it was a want.  He actually ended up turning his 24 hour rule into an six month rule.  He decided the laptop wasn't a need quite yet.  He held off, and delayed his gratification for several months before making the purchase.  When I asked him if it was frustrating waiting that long or if it had been worth it he very calmly explained that his family's financial security was more important than the spontaneous purchase and that he does not regret putting as much thought into it as he did.

Delayed gratification is something we all struggle with, but need to learn.  In fact, it's one of Robert Kiyosaki's Three Keys to Wealth.  What Edgar realizes that we all need to realize is that not buying something you don't have money for is not delayed gratification.  If you can't afford a new car and you don't buy it, that is not delayed gratification.  It is when we can afford something, without financing it, and we still choose to hold off.  Following the spontaneous purchase limit and cooling-off period is a great step toward building delayed gratification.

What should my spending limit on spontaneous buys be?  This really needs to be a personal choice that is discussed with the family. However, I know someone, whose financial advice I trust, who makes several million dollars a year income.  This individual has a spontaneous purchase limit of $500.  So if a millionaire limits himself at $500 I would think ours should be A LOT less.  Now we probably can't do this proportionally or many of us would have to sleep on 5 cent purchases overnight, but find something that works for you.  Maybe it's $100, for me and my family we set a limit of $50.  Hopefully that gives you a starting place to think about where yours needs to be and I'm very interested to hear any stories you may have about how following this principle has helped you.  Please visit back after you've tried it out for a week or a month and let me know how it's going!
"Get good at denying yourself.  You will almost never regret denying yourself some material possession, for at least a period of time."