“We often feel stress or anxiety about money….but it doesn’t have to be that way.”
Stretching the City’s Financial Wellbeing coach, Barney Whiter shares his lessons on how to make money less a source of stress and more a means for empowerment and possibility.
No wonder we get anxious about money – We haven’t been taught about it.
Money is the number one source of arguments in relationships. We find it hard to talk about money openly: its the last taboo. Money worries can contribute to anxiety in the workplace and anxious employees are far less creative and productive.
Despite it’s potential for gargantuan marital arguments and poor performance at work, it’s no surprise that money worries are rife amongst society – as few of us have been properly taught about money. The school curriculum covers little about managing money and personal finances. Maybe we were lucky and our parents taught us about saving? But often that’s not the case.
Why weren’t we taught this at school? For example, most people don’t realise how incredibly powerful compound interest is.
We hear in the media that people are not saving enough for retirement. But consider the case of ‘Kate’, our illustrative school-leaver who gets a job aged 18 and then starts saving. She pays herself first every month, setting up a direct debit to invest £167 per month for a total of £15,000 from 18-25.
She then saves nothing more from 25 to 65 when she retires. At a growth rate of 10% per year, her £15,000 of contributions will have grown to a pot of just over £1 million. That is the power of compound interest.
Spending does not equal happiness.
Advertising and marketing have turbo-charged our consumer desires and led us to believe that spending = happiness. So if we leave any money unspent it may feel like we’re leaving our happiness on the table, of suffering from some serious FOMO.
But studies on happiness consistently show that increasing income tends to improve happiness only up to a certain point. In a well known 2010 study in the USA, Nobel Prize winner Daniel Kahneman found that happiness only increased with household income up to about $75,000 (about £50,000) per year. So if a household consisted of 2 people on an average UK salary of about £27,500 would be earning £55,000 ($82,500) and would already be over the level at which additional income moves the needle on happiness.
The best things in life are free
If the relationship between income and happiness is weak, the effect of spending is even weaker. Any boost to happiness from spending will often be short lived. The problem is that the buzz of shopping wears off and we need a bigger purchase to stimulate the same pleasure. This is known as the hedonic treadmill.
There is truth in that old phrase that the best things in life are free. One way to think about this is to draw a up a list of the things that reliably make you happy. Often you will find that these cost nothing. Examples might include:
- Going for a walk with your partner
- Watching the sunset.
- The thrill of learning new ideas or solving a problem
- The calm you feel when in nature: in a forest / the mountains or at the beach
Don’t be a slave to Lifestyle Inflation
Although it may seem strange, even people on high incomes often struggle to save and are juggling debts and living paycheck to paycheck.
Why is this? Lifestyle inflation is a strange thing where, even as our income goes up, our bills seem to go up in parallel as if by magic.
Life starts out simple but as we accumulate jobs, families and possessions our responsibilities and outgoings begin to mount. Minimalism is one antidote. Its where you stop buying and hording ever more physical possessions. Minimalism is about choosing less stuff…not just as a money saving wheeze but also because of the benefits in terms of lack of clutter.
Paying yourself first
There’s this idea out there that you should save whatever is left at the end of the month. Can you see the problem here? Most people don’t have anything left at the end of the month. That’s because saving does not come naturally for most of us.
How do you make it easier to save? Paying yourself first means you pay yourself before you pay everyone else.
If your salary hits your account at the end of the month…then, the next day, you sweep a chunk of it from your current (spending) account to your savings account. Ideally this should be automated so you can “set it and forget it”.
The money that you pay yourself first goes as follows:
- Repaying expensive debt (e.g. credit cards)
- Building a cash emergency fund
- Investing in to wealth generating assets.
How much of your income should you be paying yourself first? As much as possible!
But here’s the thing: when you’re just getting started, the amounts don’t matter. What matters is that you are getting into this habit. Habits are incredibly powerful things. If you have your autopilot set to “saving”, you will get richer…its inevitable.
Invest in yourself
You should be the Chief Financial Officer (CFO) of your own life. We all need a certain level of basic numeracy and willingness to roll our sleeves up and understand our own numbers.
A good CFO understands the difference between expenses and investments. Expenses are bad things and need to be minimised. The money that you pay for your electricity or water or gas or council tax is an expense. The less you pay, the better.
Investments on the other hand are good things. They give you a positive return on your investment.You should spend on things that are good investments. Yes, investing in wealth generating assets such as shares or property counts as investing. But here are some other things that look like expenses but are actually investments:
- Books (esp self development books)
- Health spending (e.g. physiotherapy, pilates, strength training)
- Useful training / education / coaching / certifications
Often the most powerful thing that you can spend your money on is not “more stuff” but rather using your money to build wealth and buy peace of mind.
We can change the way we think about money so instead of being a source of stress, it becomes a tool that allows us to do what we want to do.
Barney Whiter is an experienced financial coach, personal finance writer and chartered accountant with 20 years experience working in corporate finance. He delivers our Financial Wellbeing Workshops: Creating a Positive Money Mindset, Money Management and How to Worry Less about Money. Find out more here.