Author and financial expert Ramit Sethi has a brilliant suggestion. When you approach the subject of finances, start from your dreams.
If you start with the numbers on an excel sheet, you are instantly on defense. You know that you are doing something wrong, but not sure how to get it right. Instead, start on a more positive footing. The compound interest benefit, the asset allocation, the fund selection, and the nuts and bolts of portfolio construction will then follow.
Here are his suggestions on how to set a foundational context of your vision for your future.
Why are you saving?
I remember a dinner conversation with somebody in their 60s. I asked him what advice he would give his younger 20-something self today. He said that he would tell his younger self to save more. I was aware of his financial situation and I know that he is doing just fine. I asked him if you would have saved more, what would you have done with the extra money? He was stumped.
There are many who end up in their 60s with money but have no idea what to do with it. They sacrificed. They did the right things. They saved. But they forgot the most important thing, which is to have a reason why.
What is rich to you?
Rich means different things to each of us. Rich might be your ability to go out and buy $1,000 cashmere sweater. For others, it might be being able to pick up your son or daughter from school at 3 pm.
I have a friend who always has fresh flowers throughout her tiny New York apartment. She spends the equivalent of a cable bill every month to surround herself with beautiful, artisanal flowers that are delivered to her house every week.
Someone else’s pleasures and material items may not be necessary for living your rich life. Everyone wants a rich life, but their perception of what constitutes it differs.
My definition has changed over time. When I first moved to New York, a rich life was being able to take a taxi in the summer instead of sweating in a subway station. As I started to grow my business, that definition changed — Rich was being able to order appetizers, because I never did that growing up. Now, it’s all of those things, plus the ability to spend my time and money on the areas that are important to me: convenience, working from home, traveling every year with my wife, and bringing our family along whenever we can.
What do you want to do with your money?
What do you love spending money on? Love, not like.
Everyone has that one thing. When I ask people that, the most common answer is eating out. Second is health and wellness. Third is travel. After that there's a steep decline. But there are a variety of different categories. Mine happens to be convenience.
Ask yourself what it would feel like to spend on the things you love. Most of us have been surrounded by people telling us “no” around our money that we’ve never thought about what saying “yes” would feel like.
What is your money dial?
If you could quadruple your spending, what would it look and feel like?
This is really a pivotal moment because most people have never thought about spending more on the things they love. They have only been berated to spend less on everything.
I remember speaking to a young man in DC while I was on a book tour. He mentioned eating out when I asked him what he would love to do with his money. I then asked him what that would look and feel like if the money was quadrupled. He looked off into space and finally said: “I have a list of every Michelin starred restaurant in town, I would go there.” I leaned in and asked him who he would take along. He said: “My family, because they've never been able to afford to go to those places.”
That is a money dial. That is what turning up that dial can look like. Your money dial could be travel/convenience/generosity/ social status/relationships and so on and so forth.
Take basketball player LeBron James. He spends $1.5 million a year keeping his body in top form, according to this article from The Ringer, investing in nuanced health-promoting practices like cryotherapy and hyperbaric chambers. His personal chefs and trainers help him adhere to a strict diet and routine. Everything in his life, down to the last detail, is focused on achieving peak physical fitness. His number-one Money Dial is health and fitness, and so he’s architected his life and finances around it.
Once you know what you want to spend money extravagantly on, then you can cut costs mercilessly on the things you don't care about. You may love to spend on week-long trips to exotic locales, but someone else would rather spend that same amount of money on electronics and gadgets. That is perfectly normal. Just be true and honest to yourself.
What is your benchmark?
Let’s look at a basic rule of thumb: The 10% rule. The 10% savings rule is a guideline for how much of your gross income you should set aside for retirement. Like all generalized benchmarks, it gives people a starting point.
A lot of people are not aware of it. And that is okay. But once you have a benchmark, you realize that you can make it work. Let’s say you are unable to do so because of debt. That is no cause for needless anxiety. Start with where you are. Can you do just 7% this year? If yes, do it. And once you get an increment and start clearing your debt, then hike it up.
You may not be able to hit the benchmark perfectly, but having one will put you on track and make you feel good. Once you hit the designed numbers of savings and investment, the rest is guilt-free spending. You could spend it on whatever you want. Start with a blank slate. Spend it on an experience you want to create. If you could have your money go anywhere, where would it go?
What season are you in?
A relative once said to me that we really have just around 20 years of peak spending -- 40 to 60. His logic being, early in life, one does not have much money. Later in life, for various reasons, you won’t do certain things such as a backpacking trip around Europe when you're 78.
While we can disagree on the numbers, this does help us get very intentional about spending.
What season of life am I in right now? What's important to me? Family? Starting a new business? Charity? Then dial in on those.
Knowing that we have a finite amount of time gives us clarity and direction. So spend as much time on that as you do tweaking your investments and tracking your spending. Learn to enjoy your money and make it work for you.
Sources: An interview with Ramit Sethi / Money Dials / What is your rich life? / An interaction with Ramit Sethi