It would be fair to say that the vast majority of people on the planet find themselves at some stage in a place of financial stress. Particularly in times of crisis, as we have now with coronavirus and lockdowns. This is a situation that we couldn’t foresee. But like any financial crisis, it is one we could have protected ourselves from by using wise financial management.
Due to a lack of education about money, many have found themselves in extremely difficult financial positions without any backup. Without the knowledge to manage money well, many live from payday to payday. In today’s society, that’s not enough.
On top of this stress, we add a pile of ‘buy now, pay later’ debt to get things that we can’t afford now. We borrow to buy them, not taking into consideration these debts have to be paid back.
Every day, we are surrounded by messages to spend. On social media, on bus shelters, in movies … we are bombarded with calls to separate us from not just the money we have, but the money we don’t have!
We’re simply not taught how to use money or debt wisely.
The Two Ways to Make Money
Spending is one of the two worlds of money. The other world is accrual where we build wealth by setting aside a portion of the money we earn and then leverage it.
There’s a saying in the financial world: “There are only two ways to make money. One is to work for it, and the other is for it to work for itself.” This is what leveraging means.
Financial freedom comes from getting our money to work for itself. Over time, as this money continues to accrue, we can be released from the need to work for it.
As our money continues to grow, it reduces our financial stress and offers freedom. It is money that we can benefit from throughout our lifetime.
We have learned that wealth is the car that we’ve got or the clothes that we wear. Wealth and success are about what we can buy to have on show. Whether its the latest model phone, car or handbag.
But all of these are what we call depreciable. After we buy these items, they don’t have any further monetary value. This means once the money is spent, it’s gone. That money is not coming back.
But life is short, so why not enjoy it? If we don’t want to be living with constant financial stress – and the negative impact it has on our health and relationships – we need to find our balance between the worlds of spending and accrual. Understanding how best to do this is part of what I teach my clients in the Financial Freedom seminar.
Saving to Spend
When people say, “Yes, I’m saving,” my question always is “What are you saving for? This is generally followed by “I’m saving for a car” or “I’m saving for a holiday.” Although this looks like saving, this is not saving to improve their wealth. Rather, they are just delaying a depreciable. Those savings are still going to disappear. They are just going to be gone sometime in the future.
This approach to saving will keep us on the path of spending. However, if we learn to put aside part of that saving into a safe area where it can grow, that growth will also, in turn, increase. This is what is called compound growth.
This path to accrual starts by living within our means and avoiding unwise borrowing. As mentioned, most borrow for depreciable things that wipe out our money.
This ‘rinse and repeat’ cycle of save-to-spend and ‘buy now, pay later’ doesn’t set us up for financial hard times that can come when we unexpectedly lose our job, stop work to raise a family, or retire.
Saving for a Rainy Day
Peace of mind for some can be found in the concept of “Saving for a rainy day.” During times of crisis, those savings will provide a lifeline for many.
However, this is not the primary purpose of saving. Rainy day savings do help to relieve stress, but they don’t generally provide financial freedom.
From Financial Stress to Freedom
Financial freedom isn’t just the realm of the rich. It can be achieved by anyone with the right education and mindset.
Have you ever noticed that when you decide on something in your life you start to see more things that are similar? For instance, I have a client who was thinking about changing her career to focus on something she really loved. Once she started down that path, she began to notice other things around her that reinforced that direction.
It’s as if the world was responding. Or perhaps she had simply become more aware. Whichever way we look at it, this phenomenon happens with your finances too.
The more you focus on learning about financial freedom and managing your finances wisely, the more opportunities come your way.
And that’s how you begin to journey from financial stress to financial freedom.
Photos courtesy of Unsplash