The birthday month continues! It’s now been almost 2 weeks since I turned 40. I’ve already talked about emotional maturity and what I love about aging. Today I’ll talk about the big financial lessons I’ve learned. If you read a lot of personal finance blogs like I do, these won’t come as a surprise. Hopefully I can add something by providing some personal details. While it would be hard to list everything, I’m instead going to talk about the main 3 lessons that have had the biggest impact on my finances.
Without further ado, here they are:
Your Friends Matter
No surprise here: Who you spend your time with will largely dictate how you spend your money. Back in college, I spent a lot of time with one of my high school friends. We were going to different schools in the same town so it was easy to get together often. However, her perception of money was far different from mine and it was her bad influence that won. She felt that there was no reason not to spend a little more than you currently make since you’ll likely make more in the years to come. I was doomed, since we lived near the biggest shopping mall in the country and we liked to hang out there.
A few years after college graduation, we drifted apart. It wasn’t because of money but because we seemed to have less in common as we got older and both focused on our careers. While I sometimes miss her friendship, I’m grateful that I was able to pull myself out of debt shortly afterwards. Not spending time with her improved my finances greatly.
One of the benefits to getting older is that many people have additional financial responsibilities (read: kids). No one scoffs at the idea of doing something cheap or even free, since they have other obligations. Meanwhile, I get to bank any savings. So much easier to be cheap when everyone is in the same boat!
It’s Not What You Earn, But What You Spend
Sure, it’s easy for me to say that now, making close to the average of an MBA graduate. But I wasn’t always making this much (see below). It took earning more to make me realize that income matters far less than your lifestyle and spending.
Part of my journey towards financial independence has been exploring the concept of minimalism. For me, the idea of enough is what I’m striving for. I’m not going to deprive myself of experiences or anything that would truly make my life better. Instead I want to create a life where I’m grateful for what I have and don’t live a life of excess. This, to me, is mindful spending.
Mindful spending allows me to create a lifestyle that works best for me. In the process, I’ve been able to see just how little I need in order to life a great life. If you read any of my monthly expenses blog posts, you know that I plan to spend $20k/year. What’s crazy is that I feel like this is still too high, and I should be able to live off a lot less.
Your spending dictates how much you need to save for retirement, and that’s the real lesson here: What is the number you need to reach to buy your freedom? The oft-quoted 4% rule says you need 25x your annual expenses to be able to retire/reach financial independence. I’m aiming for something more conservative, 3-3.5%, and increasing my annual spending figure to determine my number. While I could try to live off $20k/year in retirement, it would be very difficult given the increased medical expenses and additional time on my hands.
It’s up to you to determine just how much you need to live and how much you need to save to buy your freedom. The less you need, the sooner you can be free.
You Can Be Debt Free at Any Income
I racked up a lot of debt between the ages of 22 and 28, between credit cards and house expenses/remodeling. By many people’s standards, it wasn’t much (around $7k total) but to me it was overwhelming. At that time, I kept track of my budget in a notebook, using a pencil. I was looking at how much money I owed and started to panic. It was then that I decided I’d had enough and finally turned things around. I consolidated everything into my line of credit and aggressively paid it off. I’ll never forget the feeling of being free from that debt, even though it happened 11 years ago. The best part of this story? I was only making $37k/year.
What lessons have you learned? Which have had the most impact on your finances today?