Hello Financial Slacker readers. You may be wondering where I’ve been the last few weeks. I’m still here. I’ve just been busy creating a better life for myself.
And in between other projects, out-of-town swim meets, and a week in Northern California with the family, it’s been a hectic time.
But things seem to be settling back into a routine and I’m now able to dedicate some time to Financial Slacker once again.
My Background in Corporate Finance
Over these past few weeks, one thought has kept popping into my head.
What is the most important aspect of personal finance?
When I started Financial Slacker, my finance experience was primarily limited to the corporate world. In different jobs over twenty years, I had learned how to help companies make good financial, operational, and strategic decisions. I knew how to value businesses and how to forecast with accuracy how well companies would perform in the coming years.
But I hadn’t spent much time applying that same knowledge to personal finance. The skills, knowledge, and experience acquired during those twenty years has served me well. And while much of that wisdom can be applied to the personal finance world, there are some pretty big differences between corporate finance and personal finance.
Companies Need to Grow
Probably the greatest difference between corporate finance and personal finance is the underlying motivation.
In the corporate world, everything revolves around growth.
There’s a saying, “if you’re not growing in business, you’re dying.”
New companies are always sprouting up trying to take away your customers. And your customers are always trying to get more value for less money.
And if you don’t work hard to keep those customers happy, they’ll leave you.
Personal Finance Is About Creating a Better Life
But personal finance isn’t the same thing. Personal finance isn’t about growing your income stream so much as finding a balance between income and spending and using that balance to create a better life for yourself.
While more income is a good thing and certainly more passive income is even better, the most important factor in personal finance is about controlling your expenses. At least that’s what it’s been for me.
I’ve been fortunate to earn a good income for many years. Some years have been better than others, but generally we’ve had more income than expenses and as such have saved a considerable amount.
But I always struggled when it came to spending.
Stop Spending What You Earn
My spending was always tied to my income. If income was up, we could spend more. If it was down, we needed to cut back.
When you earn a decent income, there are probably things you’re spending money on that are well beyond the necessity level.
For instance vacations.
When I’m earning money, I don’t mind spending money on a nicer hotel room or dinner in a nicer restaurant. There are certainly less expensive options but if I have the money, I can choose to spend it in these areas.
And because I almost always had an income stream, I never stopped to think much about what it would be like without that income stream.
There’s Two Types of Spending – Essential and Discretionary
When I did stop and ask whether I could actually live off my savings if I no longer had an income, I had difficulty answering that question.
And the reason why I couldn’t answer the question was because I hadn’t separated essential spending from discretionary spending.
When I tried to determine how much I would need to have saved in order to live off my savings, the number was huge. And that’s because I wasn’t just including essential expenses but I was also including discretionary expenses.
By looking at my spending broken down into essential vs discretionary, it became clear that we had more than enough saved to pay for essential expenses and even a certain level of discretionary expenses.
It also became clear that we were continuing to work not to pay for essentials but to fund our discretionary lifestyle.
You’re Making a Choice to Work
Once you get to this point, your perspective on working changes. It no longer feels like you’re dependent on your job to survive. You’re not living paycheck to paycheck.
You are making a choice to continue working to pay for aspects of your life. But you know if work gets too bad, you can choose to pass on those luxuries and walk away.
It’s a great feeling of relief. And a feeling of empowerment. Knowing that you could walk away doesn’t mean you will quit. But it does mean it’s an option. As such, you’re now working on your own terms.
Readers, if you’re still working, how do you view your job? Are you working to pay for your essentials or are you working to fund a lifestyle?