The question of happiness is always an interesting one. It’s highly subjective, to begin with. What makes one person happy, might not move the needle for another. I think one thing we can all agree on, however, is that happiness tends to show up most frequently when stress is well managed. So, often the things, people, activities, or circumstances that help reduce our stress directly correlate to a higher perceived level of personal happiness and satisfaction at any given moment.
And what can stress us out more than money? No matter how much you make or how high your net worth, not having a feeling of comfort or confidence in your finances—and your future—can take quite the emotional toll. Who can blame us, after all? Money dictates what we can or can’t do in life. It can either grant us freedom and choice, or limit us.
Sometimes things completely out of our control can trigger money stress--think a market plunge, rising inflation, or a pandemic. Sound familiar? Better yet, feel familiar?
But other times, the stress is self-induced by poor personal decisions, an inability to communicate well with our partner or spouse, or even just a lack of knowledge surrounding your finances.
In this new year, I personally want to see all my clients, family, and friends enjoy all the happiness and joy they deserve, so I’ve put together some personal suggestions on how to tweak your systems, mindset, and approach to money management to reduce stress and enhance your relationship with your money.
The “Red Wine” Discussion
I like to encourage a 5-minute exercise that melds mindfulness and finance. I refer to it as a "red wine" discussion. While intended for couples, the exercise is equally effective for individuals.
The practice involves sitting in a calm environment—maybe with some calming background music, but otherwise distraction-free— and making financial dreams a bit more tangible. For two minutes, with pen and paper in hand, each person allows their mind to explore their financial aspirations, then writes them down along the way. Write down everything from the small to the extravagant. There are no rules! Include everything you want to do, accomplish, have, see, and experience. From a plate of pasta at the local Italian joint to a week in Italy, no experiences are off limits.
In reality this practice sounds fun, but it may be harder than it sounds. We rarely permit ourselves to dream in our practical worlds. It can take time to develop this dreaming “muscle,” so grant yourself some grace at first. Or repeat the exercise if you feel more comfortable after the first trial run.
For couples, doing the exercise together is essential. Discuss your lists together afterward. One individual doing this can lead to what appears to be a one-sided list of wants. Instead, the date-night activity and conversation strengthen your financial relationship.
After reviewing each other’s wish lists, sort them into what can be done within a year, what can be done within 3-5 years, and what qualifies as more long-term. See what commonalities there are and focus on shared objectives. If something is very important to one person, then make the effort to accommodate it, and hopefully the other spouse will reciprocate next time the pendulum swings.
From “I Wish” to “How To”
With written financial aspirations in hand, it's all about mindset. It's time to adopt the mentality that it can be achieved. Transition the discussion from "I wish" to "how to." This is still a calm and low-pressure exercise, so it isn't time to get into specific details. Instead, you'll take a broad view of your financial situation. The details are less important than adopting the mindset and finding the willingness to achieve. Maybe it means increasing income or reducing expenses. Sometimes it is allocating savings differently or adjusting life priorities. Identify the areas that can be optimized, and dive into that minutia another day.
Don’t Worry About a Budget. Do This Instead.
I know this sounds counterintuitive coming from your advisor, but I find that the act of simply making a budget stresses people out. Even the word “budget” can be overwhelming for some.
Instead, look at what is coming in on a monthly basis and examine roughly what has been going out. If you have a negative net result, then you certainly need to review your expenses more carefully, specifically with the idea of immediate cutbacks in mind. More than likely you will have a positive delta, so the key then is to save a “safe” percentage of that delta and try to increase that savings portion throughout the year.
In the process of evaluating your expenses, group them first into Core Expenses and Variable Expenses. Core Expenses are fixed costs like the mortgage, car payments, tuition, etc. But they also include Variable Expenses, or expenses that fluctuate, too such as utilities, fuel for cars, groceries, and entertainment. These expenses that fluctuate can be worked on a bit in some circumstances—shopping around for a better car insurance rate, for example—but they reoccur every month.
Then, look at Discretionary Expenses, which are pure spending and consumption. This can’t be removed, but it can be narrowed to better fit your today and the one you envision tomorrow. Maybe you take a less costly vacation or postpone it a year?
The key is to build reserves around this equation:
Inflows – Outflows = Leftover
I encourage you to keep 1 month of your outflows in your checking. Make this your ‘zero’ balance. Then, build short-term savings to about 2 months (more if you have interrupted or uneven inflows) in savings or money market accounts. The idea is for you to accomplish 3 things here:
1) Protect a core tenant of wealth accumulation. Earn interest, do not pay it!
2) Use these savings buckets as an indicator for yourself, sort of like a buoy in the water for how to safely navigate your journey. If you have far less savings in these buckets after a few months, it is an indicator you may need to dial it back for a bit. Less discussion and simple, clear evidence can go a long way. If there is excess, move it to your investment portfolio. Put your money to work for you in order to outpace inflation and continue building wealth.
3) Avoid short-term debts and paying capital gains taxes. What tends to happen is that investors will often liquidate funds to pay for too much excess. But, liquidating securities to pay down debts creates a capital gains liability, adding a layer of taxation to the interest already being paid on the debt.
Financial Anxiety Affects More Than Your Bottom Line
The key is to reduce financial anxiety in order to make more room for the things, events, and experiences in life that fill your cup and bring whatever your definition of the proverbial “happiness” may be. Less to worry about and more to enjoy. Certainly, that’s something that could enhance everyone’s life a little more. Permit yourself to dream and be a better steward of your cash flow to permit these dreams to become your reality!