Taking Charge of our Personal Finances

Choosing Beyond the Present

What we need to be able to take control of all of this is to deliberate sufficiently about every aspect of our financial dealings and seek to make decisions that are in line with our ultimate goal of long-term happiness. This involves our not just seeking immediate gratification but instead looking to compare the relative benefits of present happiness with future happiness and ensuring that both are properly accounted for in our calculations.

This is not so easy to do for a lot of people as they find financial restraint difficult to put into practice. They may tell themselves that they need to save more, but when the rubber meets the road, the desire to consume simply becomes too difficult to resist.

What really happens here is that our savings goals become overtaken by a distorted view of what qualifies as necessities and what counts as discretionary income. If we convince ourselves that taking our family on vacation once a year is a necessity, for instance, then we will tend to do this whether we can afford it or not.

There are lots of people who can afford spending a certain amount of money a year on something like this of course, but many more who cannot and just do it anyway because they feel it is needed. This is just one example of things that people spend money on that they may not be able to afford, and the list here is a very long one in fact.

It is not even a matter of having the money in the bank for this additional spending or being able to borrow it and pay it back without much difficulty, it is what we are giving up down the road for this that matters the most. What we are giving up is the opportunity for financial returns on this money as well as the ability to spend it later when it may be needed, or have more value per dollar to us.

Saving for retirement is an obvious example, where a few thousand today can grow faster than the rate of inflation and be worth more later, at a time where we will probably need it more, after we stop working and have to rely on past income to get us through our final years.

We also may miss out on tax advantages here as well as our employers matching our contributions to our savings to some degree, which can have these amounts worth much more in the future than they are in the present.

Retirement isn’t the only reason to save, and far from it, although it certainly is a major one and what tends to suffer the most when we spend too much and save too little. There is also a need to save while we are still working as well, for example to allow us to prevent having to borrow for things and pay interest instead of earning interest and paying none after the money is spent.

While the health of modern economies depends primarily on credit, people borrowing lots and lots of money, and the great majority of our money supply isn’t actually currency but money created by credit, from an individual perspective, this does come at a real cost.

The real point of action when it comes to managing our finances, the thing that influences our financial health the most, is decisions around spending, and everything else flows from this. Depending on how well or how poorly we choose here, this will determine how much or how little we will set aside for the future.

As our future evolves over time, while we can help ourselves by making good investment decisions, our spending levels directly determine how much fuel we have for these investments, and therefore is even more fundamental.

Other Factors That We Can Control

Therefore, whenever we speak of one’s financial health, spending levels will always be at the forefront, the base of our personal financial pyramid so to speak. While this is not the only factor, and we might say that how much we earn matters just as much, we may not have much control over our income, but we certainly do have a lot of control with our spending, at least to the extent that we realize that we do.

Our savings can certainly benefit from sound management, and there is both a quantitative and qualitative aspect to this. The quantitative part is saving more, and if we can manage to invest our money smarter, the qualitative side, this can enhance the amount that we end up with as well.

Given that people almost always know very little about what they are doing when they invest money, they become very prone to the most simplistic of strategies, such as taking long term positions in stocks. While this may beat simple but more conservative strategies such as investing in bonds or putting your money in a savings vehicle, it is not the only approach to investing or the only correct one as so many have been taught to believe.

There are two components to successful investing, looking to maximize our returns and looking to manage our risk. The risk management part doesn’t enter the discussion much with typical investors, and they may wish to manage risk better but simply do not know how.

As far as seeking out better overall returns, all they usually know generally is that this is done by selecting the right funds, and see most funds not even beat the market. Those of more means may go with a hedge fund which tend to do a better job at both seeking better returns and managing risk, but due to regulations, this is beyond the reach of most people who don’t have the wealth to qualify.

Some folks look to forage off on their own but do not have either the skill or experience to do it, and often end up hurting themselves even more by looking to take more control of their destinies.

We do need to realize though that, in addition to looking to save more money, we can also look to earn more from our money and even earn it more safely than the norm, the traditional buy and hold approach, if they are motivated enough to acquire the basic skills needed to do this.

There are a lot of books out there on this, of varying degrees of quality, but books on investing tend to be written by authors who are too married to the traditional approach to provide much in the way of valuable insights or usable knowledge.

If we are really looking to learn how to invest well, we really need to learn how to become good traders, because good investing is really about making good trades, even though the trades that an investor will make are of a fairly long duration compared to what we normally consider to be trading.

Most traders fail at short-term trading, so this might scare us, but short-term trading is considerably more difficult than long-term trading, and people fail at short-term trading due to a lack of sufficient preparation and knowledge, something we can mitigate with the proper attention.

Managing risk extends to more than just protecting our investment portfolios though, as this also deals with things such as being protected against the sort of perils that we insure against, as well as unanticipated events that may significantly affect our financial welfare.

There is also the matter of simply looking to earn more income, and we may wish to explore other employment opportunities that may be more lucrative, or look to supplement our income by seeking to earn money from other sources.

People tend to be pretty well focused on these things, and sometimes excessively so, and will pursue income opportunities quite zealously often times, even becoming duped into spending money on get-rich-quick schemes that may have little or no actual merit or be realistic for them.

It’s the other side of the coin though where we fail the most, not taking enough responsibility for our spending and not using the income that we do have in a way that is conducive enough to our overall financial well-being.

We do need to make sure that we are spending enough thought on what we can actually control when it comes to our personal finances though, and we very often do not. There will be a price to be paid for this though, and the price isn’t paid now, but it will need to be paid, and that price is lost opportunities.

The first and most important step in looking to improve our finances is realizing that we do have quite a bit of power to influence this. Like the famous prayer, we need to do a good job to control what we can, not worry about what we cannot, and know the difference between them.