 Financial Philosophies 6 Financial Philosophies to Live By I’m a believer that minimalism in general leads to less stress. The less material possessions enslaving your wallet, mind, and time the better. Below I lay out 6 simple personal financial philosophies to live by, which can increase your happiness in life and lead you towards financial independence. 1. Avoid DEBT 2. Save, Save, Save 3. Understand the power of compound interest 4. Diversify your income sources...get side hustles! 5. Don’t stress over timing the market 6. Invest in yourself...skills and education Financial Philosophy 1: Avoid DEBTUnderstand that taking on debt is a form of voluntary slavery. There are exceptions such as debt used for necessities, for instance, a mortgage. Debt is a trap that can suck the happiness from your soul. More debt often means more stress. Let’s face it, if you have a lot of debt, you’re probably living outside your means. For me free time is the ultimate form of wealth. Freedom to do what I want. Freedom to sleep in. Freedom to not be trapped in a job I hate. Freedom to travel. Freedom to live life on my terms. Having to work to make debt payments eats into my free time. This is why I AVOID debt. Ask yourself this. How many hours a week do you have to work to afford that $500 new car payment? Let’s say you make $15 an hour and work 40 hours a week, you are bringing in $600 a week before tax. For simplicity, figure you take home about $500 a week after tax. Is it really worth working a full week every month to pay for your vehicle? Unfortunately, debt is unavoidable in some cases. I had to take out a mortgage when I bought my house. Some of us have to take on debt to survive. Outside of debt used for survival, debt should be avoided at all costs. If you have outstanding debt, first pay off high interest credit cards. Next pay off car loans, unless you were lucky to get a 0% APR loan, just make sure that the debt doesn’t accrue and balloon at the end of the term. Once all high interest debt is paid off, start tackling your mortgage. Do you own your possessions or do they own you? Do you own your possessions or do they own you? Material possessions can turn into money traps.
Sometimes less is better. Minimalism can lead to happiness for some, but for most, simply living within your means and not overextending yourself can be a huge stress relief. Corporate America is here to suck you in and make you a voluntary slave to the system. They want you to spend money, even if it’s money you don’t have. Just borrow it they say. However the key to understand is that most debt is voluntary. You have a choice to break the mold and live life on your terms. The pursuit of happiness is the ultimate goal for most humans outside of survival. It’s up to you to decide what you value more. Debt shouldn’t be used to buy happiness. Financial Philosophy 2: Save, Save, Save My next philosophy is save, save, save! Outside of a huge windfall of money, decreasing your spending and or increasing your income is the only way to add to your wealth. First save up an emergency fund. The first step in savings is to establish an emergency fund. How much should you have in an emergency fund? Three to six months of expenses is considered adequate by most financial planners. However, I prefer to have a year's worth of expenses set aside in a savings account for added flexibility in case of hardship, such as a job loss. Next, reduce your spending. After you get an emergency fund set up, find ways to reduce your spending. Use your savings to start investing. Find ways to cut your expenses such as:
You get the idea. The key is to make expense cutting fun. Focus on the benefits and stress reduction aspects of doing so. The problem most of us fall into is that when they get a raise or find a better paying job, they often increase their spending in stride. If you get a $1,000 a month raise but immediately purchase a new house, boat, or new car, how much ahead are you really? In the example above regarding the $500 a month car payment, consider this. What if instead of paying $500 on a car payment, you found a way to save $500 a month? Assume you earned 7% per year in a well balanced mutual fund and contributed $500 per month.
Financial Philosophy 3: Understand the power of compound interest There is a reason bankers are rich. It’s because they are earning interest from debt you are paying them. If you are in debt, you are doing yourself a disservice. It’s time to flip the script on the bankers and start earning instead of paying. When I originally purchased my $120,000 home in 2010, I took out a $96,000 mortgage at 5.25% interest rate equating to a monthly payment of $530. I decided to do the math and found out that if I made the $530 payment for 30 years, I would end up paying $94,841 in interest alone. My $120,000 house would really have cost me $214,841. I decided that I needed to pay the house off as soon as possible. It took me several years to pay off the house, but I still ended up paying almost $20,000 in interest. It’s better than $94,841, but still, that $20,000 that could have been in my wallet. When you earn interest, it’s just the opposite. Here’s a quick example of how compound money works. Think of every dollar you have saved as like an employee who is working for you. The more dollars or employees you have working for you, the more money you can potentially earn. Let’s assume your investments earn 8% per year. Below is an example showing how compounding works. Year 1: $1,000,000 x 8% = $80,000 earned for the year Year 2: $1,080,000 x 8% = $86,400 earned for the year Year 3: $1,166,400 x 8% = $93,312 earned for the year Year 4: $1,259,712 x 8% = $100,777 earned for the year Year 5: $1,360,489 x 8% = $108,839 earned for the year At the end of the year 5 your money would have grown to $1,469,328. In year 10, you would have more than doubled your money to $2,158,925. By year 20, your $1,000,000 would have grown to $4,660,957. You can see how these numbers can really grow as your next egg builds. The more money or employees you have working for you, the more money you will earn. Financial Philosophy 4: Diversify your income sources...get side hustles! Treat your employment as you would an investment strategy and diversify your income sources. Having as many side hustles as possible will help spread out the risk in your earning potential in case of a job loss. This may not be feasible for everyone, but even a few extra hundred dollars a month can make a difference. Nobody likes to be dependent on a job. Losing your job can lead to a lot of stress, especially if you’re strapped with debt. The more sources of income you have, the more peace of mind you have if you lose one of them. In my 20s, I worked Monday through Friday for a financial consulting firm 8:30am to 5:30pm. When I got home at 5:45pm, I would hook up a trailer to my truck and proceed to mow 1 or 2 lawns per evening until sunlight ran out. I did this for 10 years. The benefits of this were that I developed a steady source of income and got in really good physical shape from all the physical work. Mowing lawns was my gym membership. The main drawback was that it really ate into my personal social life. I didn’t have a steady girlfriend. I missed a lot of concerts, sporting events, and late nights at the local bar with friends. But the sacrifice paid off in the long run. Mowing lawns also led to more opportunities like laying sod and small landscape renovations. On some occasions I would clear $500 working for 4 hours on Saturday morning. This side hustle helped me pay off my mortgage early. The real trick to a side hustle is to focus on the benefits and block the negatives out of your mind. Having negative thoughts in your mind leads to nothing but unhappiness and loss of focus. The problem with side hustles is that most of us are limited by time. Finding a side hustle that can make you money in your sleep would be ideal, but it’s not realistic for everyone. One of the biggest things to look for in a side hustle is flexibility of time commitments.
Financial Philosophy 5: Don’t stress over timing the market When investing in the stock and bond markets, my philosophy is this: You can’t control the market, so why stress about it? Market timing is a waste of time for 99% of people. Why try to beat the market ups and downs? Nobody has a crystal ball. What the 1% of people that have temporarily timed the market successfully aren’t telling you is the ten times they failed and lost their shirt. Let’s face it. The stock market is sort of like a giant casino. The allure of making a 10 to 1 or 100 to 1 home run investment can be exciting. But thinking about and studying the market won’t change its direction. Yes you can analyze undervalued companies by combing through financial statements and valuation metrics. But market pricing is so efficient now that it’s like finding a needle in a haystack. Your time and energy is probably better spent on side hustles and making more money to invest. Instead of market timing, focus on asset allocation. Asset allocation means dividing your investments to assets that are negatively correlated. This means that their values will move in opposite directions during bull and bear markets. A properly allocated portfolio will minimize the risk of losing the value of your investments when markets decline. Everyone’s risk tolerance is different and there is no right or wrong answer. Historically, stock and bonds values have moved in opposite directions. When stocks decline, bond values have tended to go up in price and vice versa. This is why investors choose allocations like:
You get the idea. I have ignored real estate, cash and other assets in the above scenario for simplicity. It’s important to remember that there is no guarantee that the past will predict the future, but we can use the past to anticipate and prepare for the future. Financial Philosophy #6: Invest in yourself Saving the best for last. Perhaps the best financial philosophy is to invest in yourself. What do I mean by, “invest in yourself?” I mean investing the time to learn new skills and further your education. Investing in yourself is also about developing daily habits and routines that make you a better person. Reach out to people in your community or on social media offering to work for them for free in order to gain real life experience in whatever interests you. If you like photography, ask a well established wedding photographer if you can hold their camera bag during a few of their bookings. If you like accounting, ask a local CPA if you can shadow them. If you want to be a chef, ask a local restaurant if you can clean the kitchen while observing. You’d be surprised how many people would find this flattering and willing to help. You’d also be surprised how much and how fast you learn a skill that interests you. This also builds what I call social capital. The way employers are hiring is changing. The days of paper or PDF resumes are dying. Employers want to see real life skills. Taking action is the first step. It’s as simple as that. Baby steps are ok. Investing in yourself in the best recession proof thing you can do. ConclusionStrengthen your mindset and make your journey to financial independence a fun one.
1. Avoid DEBT 2. Save, Save, Save 3. Understand the power of compound interest 4. Diversify your income sources...Get side hustles! 5. Don’t stress over timing the market 6. Invest in yourself...skills and education
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AuthorDaniel is a CFP® with over 15 years of accounting, tax, and financial planning experience. 
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