I have seen it many times. Folks who are well educated, have great families, a great job earning a good income, yet they’re miserable. How could that be possible?
They’re caught in the success trap.
I was one of those people. After business school, I got a great job in consulting. I was advancing rapidly and soon found myself working for a private equity-backed healthcare company. Things seemed great, but after about 10 years, I started to feel the burn out. Too many all-nighters. Too much travel. Sure, the money was good, but work was all I had, and it wasn’t enough.
I wound up leaving a high level job and relocating my family. I took another corporate job, but that wasn’t any better. In fact, it was worse. The environment was stifling. The primary goal of most everyone there was to get laid off and get a severance package. That’s not great for morale. Plus, I was in an unfamiliar industry. So much of what I knew was no longer relevant, and now there was so much I didn’t know.
So I left that role and started a small business. In hindsight, I’m not sure I was running towards something as much as I was running away from something. In any event, this was around the start of the Great Recession. Companies weren’t looking to expand programs, but instead were retracting. It was tough going for my little start-up.
Fast forward a few years. Before the original concept for the company could take off, I started getting consulting work. And then the consulting work led to a full-time position. The offer of full time employment with a regular salary was too much to pass up, so I took the job.
I had come full circle.
Once you start making (and spending) money, it’s hard to give that up. In the beginning, the income you can generate from a new business will pale in comparison to what you can make in a corporate job. This makes sense. When you start a business, it’s brand new. Whereas, when you take a job, you have been working on the product (yourself) for many years. It’s only natural that initially you are more valuable as an employee than as an employer.
One way out of the success trap is to save and build a large enough capital base to achieve financial independence. And the first step in saving enough is creating (and living) within a budget.
When Ms. Financial Slacker and I were right out of school, we were given a book from a relative. It was called the Millionaire Next Door. It’s an easy read and I highly recommend it. The premise is to save and invest when you’re young and that will allow you to retire later in life. Good advice, but we found it hard to follow.
Instead, like most other folks, we spent what we earned. Starting out we lived in an apartment. Then we started making more money, so we bought a new car. And then another. And then we bought a house. And then we put in a pool. Next came kids and a bigger house. Then private school, more new cars, a country club membership. A second country club membership. And vacations every year.
We didn’t live beyond our means. We paid our credit cards every month and even put money into retirement accounts. For our ages, we actually had a pretty decent amount of money saved.
But in order to escape this success trap, you need get off that spending track.
I am guilty of rarely having lived within a budget. As a household, we have earned a pretty good income for most years and as such, we have been informal in our budgeting process. This means we play it by ear.
The problem with this approach is that it allows too much emotion into the decision making. It makes purchasing decisions much less analytical. The result – I tend to stress over purchases and can never truly enjoy them. In fact, I usually dread making any large purchases.
And I think one of the main reasons I dread buying things is that I never truly know if we can afford them. Maybe we could afford even more.
Without a spending budget, you never know what you can and cannot afford.
So then the question becomes, if I need a budget to be truly free to spend without guilt, how do I come up with a budget.
Over the years, I have learned to create very accurate cash forecasts. Whether it’s projecting the performance of an acquisition or building an integrated financial model that captures all the operating, investing, and financing cash flows, when managing a business, you must know your cash position at all times.
The same applies to the individual managing their own personal finances. And it’s even more important in a down economy.
Let’s face it. The most interesting thing about money is making it. Everything else is boring. Budgeting is an especially challenging topic.
But as much fun as earning more income can be, you will have ups and downs, and the key to growing your investment capital and getting off the success trap is saving.
Just like a company, cash is king. On this site, we refer to that cash as financial slack. And having adequate financial slack in a down market is imperative.
The first step in creating financial slack is to create and start living within a budget.