Many of us experience financial stress. Funny enough, it usually has very little correlation with the amount of money you make. I’ve met many people in high income jobs who are still unable to get their finances in check. That’s why it is imperative to start developing your financial discipline during your 20’s and 30’s when your income is, hopefully, at the lowest it will ever be. By approaching your finances in a certain way you’ll be more than prepared for financial independence in the future.
What prevent us from saving money?
The problem is that human nature is evolutionarily hardwired to live in the present and maximize current utility. So, as our incomes increase, we correspondingly increase our spending limit and continue to live life in the moment. By living up to our income, we lead lives of full consumption, no savings, no excess to invest and eventually fall into a cyclical lifestyle of financial struggles until we end up in the first world poverty trap.
So how do we fix this? We’ll, it all starts with financial discipline and resisting the urge to getting caught up in the consumer race. People put off getting their finances in order because they think the next pay raise will put them in a better situation to save and invest for the future. Whatever the income, they think it’s too difficult to save and could not possibly spend less.
In most cases, these beliefs are wrong. Regardless of how much you make, the highest priority should be to ensure that a certain percentage of income is being saved. Setting up even the most basic of budgets can save you from financial stress for years to come. However, for the vast majority of people, the biggest obstacle to implementing a financial plan comes down to one thing…discipline.
A history of high spending is a behavior pattern that is difficult to change. However, any improvement in productivity, efficiency or lifestyle change can be achieved more easily if you make it easier to implement. Lower the barrier to resistance and you can greatly increase your chance of successfully implementing the changes you set out to implement. With that concept in mind, rather than relying on your own self discipline to save money, make it easier for yourself and set it up so you don’t have to.
I’ve found that one such method that lowers the barrier to saving is setting up two bank accounts. Use one account as a catch all for your income streams and set up an automatic monthly transfer that funds 20% of your income to the second account for savings and investments. Sure, 20% may sound like a lot, but the funny thing about spending up to your income is that you’ll end up spending less if your income is less. in essence, you’re artificially creating an environment in which you deceive yourself into believing you’re working with less money each month.
If you plan on implementing the two bank account system, you do need to follow one simple rules. Don’t touch the money! The money accumulating in this account should be used for investing and, if the need ever arises, times of extreme financial stress. Creating this cushion of funds is the very key to breaking the cycle and setting yourself up for accumulating wealth in the future.
Setting yourself up for financial independence is no easy task, but starting in your 20’s or 30’s gives you a much longer runway and can make it a lot easier later in life. Even if it is through self deceptive means, making an effort to set aside a certain amount of money each month is imperative. The beauty is that it eventually clicks and you’ll suddenly want to save more and start investing. At that point, you’ll understand the importance of striving to live a financially stress free life.