I am going to skip the introduction and get straight to the point. Here is the formula for financial success: save more than you spend, invest that amount at a decent rate of interest and watch compounding do it’s magic. The longer you save and/or the higher the interest rate, the richer you will be! It is as simple as that. This can be expressed in the pretty formula below.
THE SECRET FORMULA: (Save>spend)*(1+r) t
The formula for financial success is SIMPLE, but as you may have already guessed it’s not EASY. Each of the components of this success formula is a function a set of unique personal variables which you may or may not have control over.
A comparison that is often used because of its parallel modality is weight loss. We all know the basic formula for losing weight; eat healthy, exercise more and over time the weight will come off. However, in spite of hundreds of diets and exercise programs on weight loss, many still find it to be a struggle. The various diet and the exercise programs are all tools. They will only be effective when a person has understood what caused the weight gain and what is required to lose the weight and this is a very personalized process. Only after figuring out what caused can solution plan be formulated and implemented. This would result in a an appropriate diet and exercise plan that is catered specifically for them. One size does not fit all!
It’s the same with finance. We know what it takes, the road to financial success is pretty straight forward, and there are many tools and strategies along the way and these can be confusing. However, even before employing any of these tools and strategies we need to step back and examine what brought you to your current financial position in the first place. If you’re financially sound and are doing well, my advice would be to keep doing what you’re doing. If, however, you’re not happy about your current financial situation and would like to change it, you have to do some soul searching. How do you feel about our current financial status? Do you know your financial personality? What moulded it? Is it working for or against you? What do you have to do to change it and can you? Sounds touchy-feely? Maybe, but I can tell you if you don’t answer these questions, then it wouldn’t matter how much money you amass you will do with it what you usually do and end up right where you are.
We must understand our relationship with money before we start spending or saving. We have to figure out what it is we want. Life planning is financial planning and money is a key component. Holding constant your philosophical approach to money, you will agree, I don’t want to seem dramatic, but I will anyway, that next to air, money is crucial for our existence today. You simply can’t function effectively in today’s world without having money. From meeting your basic needs (food, shelter, clothing) to fulfilling our life’s dream (your calling) we NEED money.
If money is so important to our existence, it is astonishing that we don’t spend the time understanding the relationship we have with it and how to manage it effectively. Do you think it’s a coincidence that those who have money always seem to have and those who don’t, never have enough? It’s the mindset that determines one’s success with money. Having and keeping money starts in your head. It’s 80% of the work. The other 20% is the strategies and techniques and that’s covered in the hundreds of personal finance books and websites out there. Lottery winners are the classic example of how important having the right mindset is to being financially successful. The National Endowment for Financial Education cites research which showed that 70 percent of people who suddenly received a large sum of money (lottery winners) lost it within a few years.
I urge you to take some time and think about what your mindset is when it comes to money. Try answering the questions below. There is no cookie cutter tool or strategy for financial success, it is specific to you. Understanding your mindset about money is the first step on the road to financial success.
- What is your first recollection about money?
- What did you learn about money while growing up and from whom/where?
- How was money treated in your home? Was it discussed openly or was it taboo to bring it up?
- When you were younger was money important to you?
- Did you ever thing about how you will get money?
- Did you think you deserve to have money?
- What does money represent to you?
- Today, when you have to make a financial decision what are your main sources of information?
I would love to hear from you. Let me know if these were easy or hard questions for you to answer. What did you learn from going through this process?
I will deconstruct and discuss the components of the “secret formula” in later posts, stay tuned!