The Formula for Financial Sanity

Earn more.

Our income is not static. There are things we can do that push up our earnings. Things like getting a good education, and then getting further education or accreditation. Or diligently looking for work. Or finding a second job. Or starting your own business. Or making ourselves indispensable to our company. Or finding the convergence point of the world’s needs and my passions. Or investing.

Spend less than you earn.

This sounds so simple, but this is precisely where we come undone. In a culture where credit is handed out as liberally and pervasively as those Tiger wheel brochures at the traffic lights, we tend to accumulate more than we can cope with. The result is that we don’t live within our means.

In a book called ‘The Millionaire Next Door’, the point is made that the most wealthy people don’t look very wealthy because they have become so disciplined at living within their means. They spend far less than what they have. Many wealthy people earned far less than some higher-earners, but eventually accumulated far more assets, precisely because they spent relatively less.

Robert Kiyosaki in ‘Rich Kid, Smart Kid’ defines financial intelligence not as how much you make, but how much you keep and what you do with what you keep.

What happens when you earn more, and more importantly you spend less than you earn?

First benefit (of spending less than you earn): You’ll stress less.

When your outflow exceeds your inflow, the shortfall leads to your downfall.

Part of our downfall is the resulting emotional stress. The more month left at the end of your money, the more days of your life you spend stressing.

And few things erode your happiness and your relationships like stress. It’s not just our marriage – our kids pay a price too. Ellen Galinsky of the Families and Work Institute asked 1000 children: ‘If you were granted one wish about your parents, what would it be?’ The parents predicted the kids would say ‘spending more time with them’. They were wrong. The kids’ number one wish? That their parents be less tired and less stressed. Another study shows how the long-term psychological development of a child hinges in part on the stress-levels of their dads.

Second benefit: You can give more.

I am a big believer in the liberating power of generosity. Not only does it bless others and make me feel good, but it frees me from the tentacles of greed – giving money away is the surest sign that it is not money that has me, but me that has money.

Miserliness begets misery. If you achieve the elusive ‘financial freedom’ but then spend it all on your house, your assets and your family, you’re not free. You’re enslaved to greed.

On the other hand, generosity begets joy. On his recent sixth birthday, my boy Fynn asked for cash from all of his friends rather than presents. The result was that his wallet was loaded. I then spoke to him about the thrill of giving – and that the best time to learn to give is while he’s still young. He set aside one of his notes to give at church the next day. We then went to the Lego shop. (As a side note: this is not a usual occurrence. In fact, Fynn has never gone to any shop with his own wallet before.) He was beyond excited. For weeks, he’d paged through a Lego brochure he picked up somewhere – scheming which one he’d be able to buy. In the parking lot, we walked past a poor man selling really beat-up garden plants.

‘No thanks!’ I said. But Fynn tugged at my pants, and held up his wallet.

‘Daddy, let me buy those plants from that man.’ I didn’t stop him. And so he paid the man very generously for all his dying flowers. When I asked him what made him do it, he said ‘Dad, you told me about how good it feels to give, and as I walked past him, my heart exploded with wanting to help him. My heart feels so happy now.’ When Fynn got home later, it wasn’t the great Lego set he’d just bought that he ran up to Julie to tell her about – it was those dodgy flowers. That’s true financial freedom.

Third benefit: You can invest more.

Savings and investments are only possible when we actually have money left over to invest or save. Think of some of your income as seed and some as bread. By all means, eat the bread, but don’t eat the seed. Rather sow it into a long-term savings account, or some share. As Einstein said, ‘The way to wealth is to get compound interest working for you, not against you.’ Investing means that we’re no longer working for our money, rather our money is finally working for us.

How about you?

I know that much more could be said, but when a model becomes too complex, it is no longer memorable, helpful or transferable. This formula tries to get to the bedrock irreducibles of money management.