What is your money personality? We all have one and it can have a profound impact on your financial health. While there is much a financial planner can do to lay out a plan for a bright financial future, much of your success ultimately rests in your hands.
How much you earn, spend, and save has greater bearing on your financial health than any other factors.
It doesn’t matter if you have the perfect investment strategy if you don’t have the funds the feed it (and have a lot of spending to consume it).
Most of us know people who almost seem to enjoy scrimping and putting money away for a rainy day. It may be motivated by fear or they may have grown up with Depression-era parents who emphasized the value of a buck. Maybe money is just a way for them to keep score, and the more they pile up, the better they feel.
These Born Savers don’t usually come into my office looking for advice on cash flow. They are already putting 15 percent to 20 percent of their income away in retirement accounts and other investments.
When you think about a financial planner, you probably imagine that they are always encouraging clients to save more and more. Born Savers are a different breed. We often need to counsel them that they should come up with ways to spend more, as their current resources far outstrip their needs.
The Big Spenders, on the other hand, may only have a general idea of their financial situation. They are running balances on several credit cards and take out loans at furniture and appliance stores.
At certain times in their lives, they have paid down one or more credit cards. But the balances have a nasty habit of creeping back up. The Big Spenders need a monthly budget that they can stick to, and perhaps should consider a cash based system to rein in their spending.
Most of you fall somewhere between. Let’s call it Financially Stuck. You pay off your credit cards in full and keep your car and other personal loans to a reasonable level, but at the end of the month there just doesn’t seem to be much money left.
You put 5 percent of your pay into a 401(k) plan at work, but know that those savings will not be enough to support you in retirement. You make a decent income, don’t live extravagantly, but always feel a bit pinched and put off spending decisions as long as possible because money always seems a bit tight.
The Financially Stuck are on the margin. With a few meaningful changes, they can accelerate their move toward Financial Independence, or with some poor choices can find themselves the debt vortex of a Big Spender.
Your monthly spending is one of the top three indicators of your financial health and is critical to understanding when you have moved into the realm of Financial Independence. Unfortunately, most people have no idea of how much they spend each month.
A Working Account at your bank or credit union can be a big help to the Financially Stuck, and those with other money personalities. When combined with a Bill Paying Account, the Working Account allows you to seize control of your financial future and understand your spending without collating three months of receipts.
I’ll cover the details of the system in a future column, but the general idea is you want to decouple your earning and spending into different accounts, so you can measure your spending and aren’t drawn to spend your checking account down to zero every month.