If you learned anything form your parents about money, it was probably this:
Spend less than you earn.
And that’s great advice. The problem is that it doesn’t work anymore.
Our parents learned the “spend less” rule from their parents, whose world was vastly greater than ours. Raised in times of lack, they went hungry when the money ran out. So they tucked money away, hid it under their mattress, or put it in the bank. But times were dramatically different then.
First, banks were paying interest of 5-6% on basic savings accounts. Now they’re not.
Second, our grandparents didn’t pay interest on most things: they saved the money to buy something because they didn’t have credit cards or access to credit.
Third, stuff was a lot harder to buy. Instead of seeing thousands of dresses on Instagram, they might see two in the local store or five options in the annual Sears catalog.
And fourth, they weren’t surrounded by images of everyone else buying stuff al the time.
Our grandparents didn’t have more financial discipline than we do, and they weren’t smarter about money. They just had less temptation; no credit; and a memory of hunger pains. So their financial strategy was a simple one: Hide the money until you had enough to spend, and then spend it.
Our parents, raised in that environment, followed the same advice. But our parents faced the burden of temptation: they saw their friends getting new cars, bigger houses, taking trips. Access to credit meant they didn’t have to save money to pay for stuff.
Their financial plan to “hide the money” was the same: they just had to hide it from themselves. So they set up auto-withdrawals on their paycheck to hide the money in mutual funds. They set up auto-tithing payments to hide their church money before they could spend it. Governments set up auto-tax deductions to hide their share before our parents could spend that money, too. But the rest got spent as quickly as possible. Our parents didn’t have more financial discipline than we do, either: they just had places to hide their money.
Of course, the credit industry eventually beat that game. “No money down” offers, leveraged loans against retirement savings, instant tax refunds and payday loans mean that we can spend money we haven’t even dreamed about earning yet. The result?
We have millions of people clipping coupons, watching for sale pricing, and hosting an annual yard sale…but still thousands of dollars in debt. We pinch our pennies and throw our dollars to the wind. The average national debt is higher than the average annual wage. And worst of all, every time we get a raise at work, we just spend it!
Financial independence doesn’t mean financial discipline. Take it from a person who helps people lose weight for a living: cutting is unsustainable. “You can’t have that!” is not a plan.
So what IS the plan?
To flip the script on saving. To be the bank, earning compounding interest and revenue outside your salary. To stop waiting for someone else to give you a raise.
Spending less than you earn is good advice. But there are two parts to the equation: what you spend, and what you earn. Tomorrow, I’ll talk about how to increase what you earn.