The Psychology of Money and Financial Control
I recently read a post on social media that was advertising for financial services. It went something like this:
“Don’t buy the brand new $70,000 car. Buy a used $30,000 car and invest $40,000 in XX fund. Instead of having payments of $1,500 per month for 6 years, you will have over $1,000,000 in 20 years”.
I may be off on the actual numbers, but the gist of the post was the same. Don’t over spend on a car. It’s just a car. Invest with me instead and I’ll make you a millionaire.
If this were truly the way to become a millionaire, why doesn’t everyone do it? Its simple, there’s a psychological side of money that is rarely considered. Some call it “keeping up with the Jone’s”, but it can also be described more scientifically by Parkinson’s Law.
Parkinson’s Law states “work expands so as to fill the time available for its completion”. Ever had a project due in 24 hours? Magically it takes 24 hours to complete. If you had been given 2 weeks? Well, it would have taken two weeks. The same principle applies to money.
We all work incredibly hard for our money. We work hard to achieve our financial goals and dreams and we all want to create a financial future that is bigger than our past. As our income increase, so do our expenses to match our income. Is that the only reason $300,000 cars exist? To fit in expanded budgets? Well, not exactly.
That $300,000 car come with status and features that are not available with a $1,000 beater, and that’s okay! There is nothing wrong with spending money on nice things. The problem lies with assuming you will never want to. If you had worked extremely hard for the last 10 years to finally have an income where you can afford a $70,000 car, you might just buy one because you “deserve” it. No one gets to answer if you deserve it or not, and that’s not the point. The point is, there will always be the temptation that as your income or net worth grows, so do the temptations to spend that money.
Further to that, even if you had conquered Parkinson’s Law and did buy a cheaper car and invested the difference, what is stopping you from pulling out those gains well before they reach $1,000,000 simply because you needed the money for something else?
There will always be decisions in life tied to money. Does it make more sense to keep my investments alone to grow so I can use them someday when they are bigger if I need them now? If you had a $500,000 mortgage, simply because you live in Southern Ontario, and your investments are equal to $500,000 you are going to struggle with this. You could live mortgage free, but you have to interrupt the compounding of your investments to do so. Especially if you factor in life. Potential job change, kids, other major life events. There will always be temptation.
The wrong assumption in the above example is that financial freedom equals having no debt. That’s not true. The super rich have tons of debt, they just understand how to leverage it. Now, those people have teams of financial advisors to manage their money, and they are compensated very well to do so, but for regular folk I would argue financial freedom comes from having no debt obligations outside their control.
Think about a world where you could mimic a portion of how the ultra wealthy live. Not by having their resources, but by mimicking the way they think about money. If you had a system where your money continues to compound and grow uninterrupted, and then you could leverage that money to finance the things you need in life, all while owning and controlling the system, you would have an extremely powerful tool.
Most people are under the assumption that once you spend money it is gone forever. It can feel like you handle money rather than control it. Which means you will be cursed to watch money flow through your hands into the pockets of others. You will watch others get rich while you sit back and watch as the stream of money that flows through your hands grows along with your income.
If you had a financial system that was all encompassing, you could funnel your money to a warehouse you own. Watch as that money grows, like all good assets do, and then leverage against the money in that warehouse to buy the things you need. Think of it like a home equity line of credit. You have an asset, in this case your home, and you put a lean on that asset so you can borrow money. If you fail to repay the loan, the lender will take your home and sell it to recoup the outstanding balance.
What if we rethink the asset so it’s our warehouse of wealth that is tied to the span of our life? What if the lean is placed on an asset that is guaranteed to pay out, and guaranteed to grow and compound over time? You will have “debts”, meaning you have borrowed money and are paying interest for the privilege of using that money, but it all comes out in the wash because the growth of your money in the warehouse is far greater than the simple interest you are accruing.
Then, as you pay off your loan, the money is immediately accessible to you again. If this warehouse is completely under our control and is designed to pay out when we die, then there is no risk of having that loan called in. When we die, the loans are taken directly out of the balance of our warehouse, with the proceeds going to whoever we choose.
The true goal of understanding the psychology of money is to look at money from a different perspective so you can break out of the pattern you are currently in. One where you are constantly at war with yourself over what the right thing to do with your money is. When you look at things from a different perspective, you see that conflict is not helpful, nor is it necessary. Build your warehouse of wealth first, and use that as leverage to finance the things you need in life. Imagine what your financial future would look like with 90% of your income going towards building your financial future vice just the 10% you save now.
Control and understanding are what are going to get you to your biggest financial future.
Think about it.
