A Simple Formula For Financial Sobriety

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On Changing Financial Behaviors

By Rick Kahler MS CFP® ChFC CCIM www.KahlerFinancial.com

From time to time I offer financial courses through Community Education of the Black Hills. Classes on the fundamentals of making good investments and how to do your own financial planning usually fill quickly.

But, a class on “financial sobriety”—how to change your psychological behaviors around money and begin making wiser money decisions—had only one person sign up. Based on my 30 years of financial advising, this wasn’t a big surprise.

The Research

Research tells us 70% of US citizens have no savings and live month to month or are insolvent. Only 9% have saved over $100,000 and just 3% over $500,000. The stats for medical professionals are not so transparent.

Why is this? The simple answer is Americans have a significant resistance to saving, including some doctors, according to ME-P Editor-in-Chief, Dr. David Edward Marcinko FACFAS MBA CMP® www.CertifiedMedicalPlanner.org

Mathematically, the solution to this is very simple. Out of every dollar earned, do this: First, pay taxes. Second, save and invest 20% or more. Third, live on the rest. This formula has a high probability of successfully creating financial independence.

So, why are fewer than one in 10 Americans able to follow this simple formula? The answer to that isn’t so simple.

Psychological Responses

The first response to these options is often, “I can’t.” Non-savers tell themselves there is nowhere to cut. When put in context of maintaining their current lifestyle, this is true—and therein lies the problem. When you’re living month to month, becoming a saver inherently means either reducing your lifestyle or increasing your income.

Unfortunately, too many people vaguely intend to start saving when their income goes up. This is backwards. Focusing instead on reducing your lifestyle is what creates the habit of saving.

  • For some people, downsizing a lifestyle can mean switching kids from private to public schools or selling expensive cars and homes.
  • For others, downsizing can mean getting rid of cable TV, buying generic brands, and shopping at garage sales instead of Walmart. Most budgets have room for at least a few small cuts. We just can’t see the options, because our brains tell us that reducing our lifestyle will be a fate worse than death.

It may seem that a lifestyle reduction would be a lot easier for high income earner. Yet I’ve seen those earning $750,000 have as much trouble saving $10,000 a year as those earning $50,000. The self-talk and reasons why it’s impossible to cut spending are exactly the same.

Not about Money

It’s not about the money. It’s never about the money. It’s not that most non-savers don’t know the solution to saving more; it’s that they don’t like the solution. We cannot change what we refuse to confront.

It takes a lot of courage to admit you have to change and then take action to actually put a plan into motion. It can feel overwhelming, embarrassing, and fearful. It’s hard saying goodbye to the old lifestyle and the trappings we come to enjoy.

Adaptable Humans

Fortunately, the difficult times are temporary. Humans are very adaptable. Before long you will settle into the new “normal.” You will discover you can be just as happy with your new lifestyle as you were in the old. The anxiety of losing that lifestyle will be replaced with the satisfaction of watching your savings and investments grow, knowing you will someday be able to support yourself without working.

Assessment

Eventually, you will experience much less anxiety than you did when you were living in denial. Knowing you have enough savings to see you through a job loss or other financial calamity is a real anxiety buster.

You may even choose not to increase your lifestyle as your income increases. You’ll be too busy enjoying the financial serenity, satisfaction, and joy that comes with living on less than you earn and building financial independence.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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2 Responses

  1. More Financial Sobriety

    Congratulations! You’ve made the courageous decision to commit to financial sobriety. You’ve committed yourself to creating a spending plan, paying off your debt, creating an emergency fund, and fully funding your financial independence.

    This probably means you’ve made a conscious choice to downsize your lifestyle. You may be driving a cheaper car, eating out less, shopping less, and traveling less. You may have moved to a smaller house or even a more affordable city. You may have gone back to school to improve your future income.

    Whatever you’ve done, it took a lot of courage, focus, and hard work to put yourself on the road to financial sobriety. Here are some reminders to help you stay on that road:

    1. This lifestyle downgrade isn’t forever, especially if you are paying off debt. Someday the debt will be paid. You’ll have the joy of using some of those funds to expand your lifestyle and investing some in your financial independence, paying toward the future instead of the past.

    2. Relapse is certain and necessary. No one follows a spending plan to perfection, especially in the first few months. Remember, your plan is an estimate of the future and a work in progress. You don’t need to get everything right or do it perfectly. You will certainly miss an expense here and there, underestimate, and overestimate. You will probably need to refigure and readjust for the first year before you really hit your stride.

    3. Difficult emotions are to be expected. You may feel a host of emotions like fear, sadness, embarrassment, shame. You may have times of feeling hopeless and overwhelmed. Honor your emotions—they are real—but let go of the negative self-talk that often accompanies them. The land of financial sobriety is unfamiliar territory. It’s going to take you a while to become accustomed to this new way of being. Don’t berate or “should” on yourself. Let your dreams become bigger than your fear.

    4. Keep your eyes on the prize. No matter how poor your past financial decisions have been, tomorrow is a clean slate, a new day. The past does not define your future. Keep your focus on what you want your future to become and what you want to create with your life. Visualize that life of being debt-free and financially independent. Doing so will help reprogram your brain to gain more emotional impact from imagining future gains rather than present fulfillment. You can learn to gain more pleasure from paying an extra $100 on an outstanding loan and imagining a life free of debt than from buying a new pair of shoes.

    5. Progress comes in small steps. Remind yourself you are not where you were. Progress can seem painfully slow in the early days of reducing debt, building an emergency fund, or growing your 401(k). In my 20’s, I started an IRA with $50 a month. I remember looking at a statement that represented two years of investing and thinking I would never get anywhere at that rate. As the years went by, I was able to save more and more. It wasn’t until my 50’s that the compounding growth of my meager initial savings started snowballing. By then I had a sum that could support me with a modest lifestyle if I chose to quit working.

    This journey of financial sobriety is not easy. Like most things of value in life, it takes determination and persistence. Set your sights on creating a life worth living, then align your financial behaviors to support that vision. You’ll achieve success, and you’ll also enjoy the journey.

    Rick Kahler MS CFP® ChFC CCIM

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  2. Robin Williams’ Son Teaching Inmates About Financial Literacy

    In the interest of “giving something back,” the son of late actor Robin Williams has been partnering with San Quentin State Prison in California to teach inmates about financial literacy. The 32-year-old Zak Williams co-teaches the class with inmate Curtis Carroll, also known as “Wall Street.”

    According to TODAY, Williams became involved with the prison in October, upon the suggestion of his wife, Alex Mallick. The class is comprised of three parts: re-entry, which involves interview skills and developing a resume; personal finance, which cultivates an understanding of one’s own assets and liabilities; and retirement, which focuses on investment strategies. Williams told TODAY that emulating his father in giving back has helped him get past the grief of his father’s death, which took place one year ago yesterday.

    Source: WealthManagement.com and the Daily Brief for Aug 12, 2015

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