Personal finance is simple, but hard
Personal finance is pretty simple. If you save 20% of your income, have proper liquidity, carry basic insurance (home, auto, liability, life, disability), and invest your long-term money in a low-cost, diversified index fund (and don’t sell), you’ll probably be just fine.
While it may be that simple, it’s also hard.
To save 20% you must delay gratification and spend less than you could. To have proper liquidity, you must have money sitting in cash while the market potentially soars. To have basic insurance, you must spend money on something you hope never to need. To invest your money in a low-cost, diversified index fund, you have to accept you’ll never be the big winner in any given year. And, to not sell, you have to ignore your instinct and the behavior of others to run for the exits when the market inevitably drops 50%, and it looks like the world is ending.
In addition to all that:
Our human defaults and hardwiring don’t encourage “good” financial decisions
We don’t teach people about money in schools and just how expensive life really is
People are more comfortable talking about their sex lives than their bank account balances, so we don’t have any clue what “normal” is
The industry that exists to help people is known more for sales than advice
As our understanding of the human mind has increased, so has our ability to influence our brains to do things we don’t want to (advertisers are dang good these days)
Finally, it’s hard because crap happens, but we don’t think it will happen to us, so we don’t prepare for it. (Not to mention, accurately planning for and projecting all of this is nearly impossible because life isn’t linear—our income, expenses, health, tax rates, investment returns, inflation, etc., all fluctuate—so there’s a nearly infinite combination of potential outcomes we could experience.)
Hard vs. soft skills
Ultimately, success in personal finance requires a blend of technical “hard” skills and behavioral “soft” skills. Perhaps surprisingly, the hard skills are easy, and the soft skills are difficult. As author Derek Sivers so wisely noted, “If knowledge were enough, we’d all be billionaires with six-pack abs.” Amen, Derek.
We all know we should eat right, exercise, save money, blah blah, but we don’t. Why not?
Because we fight an eternal battle between what we want in the moment and what we want in the future.
Our brain has two primary objectives: 1) conserve energy and 2) minimize pain and seek pleasure (in that order). The problem is what we want in the future (e.g., being healthy and wealthy) usually requires us to spend energy, endure “pain,” and forego pleasure in the present (e.g., exercise, save money, delay gratification). So, to get what we want in the long term, we must fight our brains' hardwiring in the short term.
As they say, “Hard choices, easy life. Easy choices, hard life.”
Adding in the “spiritual element”
Unfortunately, even if you’ve mastered the hard and soft skills – meaning you know what to do (technical/hard skills) and will actually do it (behavioral/soft skills) – there’s still something missing if you want to make the most of your money. Like a two-legged stool, we’re still a bit wobbly.
This stabilizing third leg is the spiritual aspect. Not spiritual in a religious meaning, but spiritual in a “meaning” meaning. Meaning, are you putting your knowledge and behavior towards the life you actually want? Is the ladder you’re climbing leaning against the wall you want to get to the top of?
Moreover, none of us get to start with a blank slate: we have to play the cards that we get dealt. Part of this spiritual discipline is accepting the things we cannot change about ourselves, our loved ones, and our circumstances while using our resources (in the form of time, money, energy, and attention) to make the most of it.
The three-part balance to make the most of your money
So, to make the most of your money, you’ve got to
Know what to do (technical skills),
Actually do it (behavioral skills), and
Put it towards the life you actually want (spiritual skills).
We must strike this balance throughout our financial lives. This continuous process is what financial planning is really about.
The article was posted with consent through our partnership with Ataroke Wealth.
The original article can be found at Personal finance is simple, but hard — Ataroke Wealth — Fee-Only Financial Advice.