We have all heard the proverbial fish story, where each time the story is told, the fish that was caught gets bigger and bigger. It is probably not a big deal when you are listening to a story about a 20 pound bass, but what if a friend is telling you a fish story about his money? How does that affect how you view your own financial position?
For example, a friend tells you that she just paid off her home. How do you interpret that? I contend that you would immediately begin to evaluate her financial situation. Perhaps you know what she does for a living, the size of the home she has, the kind of car she drives, the number of kids she has, and so on. You calculate in your mind what her financial picture looks like, comparing it to your own situation. Then you determine that she must know something you don’t, because your situations are similar, and there is no way you could pay off your home. So how did she manage that? In other words, was the fish really that big, or is the story embellished to impress you?
This is your cue to take a time out. Before you allow feelings of jealousy or even depression over what your friend has done creep into your life, take a deep breath and realize that there is more than likely information missing in this equation. There is no magic wand or secret process for getting ahead financially. Perhaps your friend did not mention a gift she received from a parent, which enabled her to pay her home off. Now that changes things, doesn’t it?
Since money is a measurement of status, it may explain why a friend may not tell you how she paid the home off, but she still wants you to know that she did it. Telling you how she did it may make it seem less of an accomplishment, so leaving this part out makes it appear to be a big deal. Whether you call that deception or vanity, it is what it is.
So why am I talking about this? Over the years, I have had many clients struggle with what I call their financial identity. They are disoriented by what they hear and see other people doing, and they want to know where they should be for their age and situation. To help articulate this issue, it is important to point out why they are feeling this way, and it begins with understanding that what you see is not always a true reflection of someone’s financial situation. At the end of the day, I believe this has everything to do with the “keeping up with the Joneses” syndrome, and it is a slippery slope, since you will never know the whole story. Instead of comparing yourself to an imaginary twenty-pound fish, setting goals and planning out your spending each year based on what you have and know to be true will provide you with the best measurement for determining your success.
Comparing yourself to others will likely only lead to a feeling of frustration. Instead, make your money an area of your life managed against your own goals. Work to accomplish what is best for your family, and that will propel you toward contentment.
When you think about it, there are many different stereotypes about money. For instance, you may know people who are “frugal” with their money, while you may consider others “free-spending.” Some you may view as “calculating,” while others you see as “emotional.” These are all opinions and stereotypes that we have formed about people’s behavior with their money. You may look up to and have a positive perception of those you agree with, while looking down your nose at those whose views you do not admire.
Our beliefs about people and our own behavior with money illustrate how society and our experiences have led us to have a certain view of what is the “right” way to handle money, and what is the “wrong” way of handling money. However, it may surprise you to realize that your opinion of what is right does not mean that what others are doing is wrong. You do what you do, because of what someone taught you, or an experience that you had, while the same is true for others. There is not a single, correct way of handling money.
It is helpful to view money as a tool for providing something in your life. This helps you to shift your focus away from money itself, and more toward the things that mean the most to you. The question then becomes, what is most important to you?
What I have found to be true is that people tend to hold one of the two following beliefs about money:
Money is something you accumulate and hold onto. It is something that is preserved, and the goal is to have a lot of it. Money itself is the goal.
Money is something used to acquire things. It is a means to live your life. Money is not the goal; what the money can buy is the goal.
Here are two very simple illustrations of how these differing views may look:
A retiree has lived in the same house for forty years with a million dollars sitting in a bank, while he lives off of Social Security and a pension. He never uses the money in the bank for anything. All his needs are met. Life is good.
A retiree has a house on a lake, which he just bought. He keeps a few dollars in the bank for emergencies and lives comfortably off of Social Security and a pension. All his needs are met. Life is good.
Neither person is using his money better than the other. The example does not show that one man is better with money than the other. It simply shows that each man views money differently. So before you adopt someone else’s way of thinking, let’s walk through identifying what your purpose for money is.
When constructing a home, the first step in the process is a vision for what the home will look like. You envision the room sizes, brick color, landscaping, countertops, deck size, and the view from your window. You then take those ideas and share them with an architect, who figures out how to make your vision a reality. After the drawings are made and permits are pulled, construction begins, with qualified professionals capable of making the drawing a reality.
While this seems like common sense for building a home, this is also an apt metaphor for building a financial plan. Unfortunately many people—and even some financial advisors—do not understand this process. They treat buying an investment as if they were building a house by just buying a piece of land, having lumber delivered, and starting to nail that lumber together. They have no blueprints, no plan—just nails and lumber.
So how do we translate the process for building a home into building a financial plan? The answer is to begin with the end in mind.
Everyone who saves and accumulates money does so with the intent to use it at some point, for some purpose. Identifying the purpose for your money, and understanding how you will ultimately use it is the key to developing a successful financial plan.
When you think about it, money can be put into one of two categories:
Money you will spend on big-ticket items such as cars, refrigerators (and other appliances), and education. In other words, the money will be spent in a lump sum.
Money you will use as an income source for budget-related items in retirement. The principal will be preserved, while drawing income from its earnings.
My experience working with people who come into my office after having worked with another financial advisor is that they often have a portfolio of investments that does not align with what they are trying to do. The investments are not necessarily bad, but are often incongruent with their goals.
By starting with the end in mind, you can begin to construct a financial plan that will act as a blueprint for how to build your vision for the future, and which will ultimately offer guidance for how to arrange your investment portfolio.
If you have a question let me know. I receive a lot of money related questions and do my best to answer questions within 24 hours or so.
The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. Kalos Capital, Inc. does not provide tax or legal advice. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance.