Editor’s note: This article was first published in July 2013. “This crisis” refers to the post-2008 crisis in Spain and its housing bust.
As we said in a previous article, financial education doesn’t begin with lessons about money and saving, but with a radical change in mindset that may not come easily at first, mostly because we’re surrounded by people who still see things very differently (read: What financial education really is).
1. Enjoy saving
It’s true that saving is one of the ingredients for getting to point B, but some would say we should turn saving into a goal, a challenge, to the point of enjoying every time we save and watch our account grow. I know many people don’t see the benefit of saving, only the pain of not having bought the thing they were looking forward to buying. That brings us to the next point.
2. Live below your means, but within your needs
Until now we’ve always said that, as far as possible, you should live below your means, regardless of how much money you have, but you should also live within your needs. In other words, when you’re about to buy something, ask yourself whether it’s a whim or a need. If it’s a need, go ahead; if it’s a whim, part of the learning process is letting it go. And be careful about thinking that changing your car is a need if your current one is in good condition and can get you from point A to point B just as well as the car you want to buy. You have to draw a clear line between whims and needs.
3. Watch out for relapses
It may sound like an addiction, but the truth is that we live in an extremely consumerist society, and yes, we’re addicted to consumption and overspending (or we were when money seemed to be in plentiful supply). Just as someone quitting smoking may think they’ll have just one cigarette and that’s it (and ends up smoking again), the same thing happens with financial education. Our nicotine is debt, especially credit card debt. “Using it once won’t hurt.” We use the credit card for an expensive whim, it knocks our savings plan off course, next month our goal looks a little further away, and we end up discouraged.
4. A raise or higher income doesn’t mean you should adapt to your new situation
If you’re an employee and get a raise, or you run a business and your income goes up, many people take the opportunity to adjust their lifestyle to their new level of income. NO: this is exactly when we should stick to our austerity plan, and instead of spending more, save more. These are the streaks we need to make the most of, because streaks (good and bad) tend to end, or unexpected setbacks come along.
5. Stop paying only the minimum on your debts (credit cards)
We said that the best investment was paying off debt, and the same applies to saving. If you have debts, especially credit card debt or personal loans, get rid of them before putting money into savings, because paying off your credit card debt is an investment that earns you more than 8%. For any financial plan, whether for saving or investing, debt is the first thing to clear. We’re not talking about paying off your mortgage, but about the toxic debts that charge interest above 5%.
6. Be wary of popular advice
I don’t know what things will look like in five years, but this crisis has taught you to recognize certain phrases in the future, such as “Real estate is the best investment because house prices always go up” or “Gold is a very profitable, safe investment and a safe haven.” Always be on the alert for these words, because even investments follow fashions, and when the fashion passes, we’re left with outdated clothes.
7. Bargain hunting isn’t for poor people, it’s for the future rich
Forget appearances and remember that many of the people who seem to have more than you actually just have more debt than you (there are always exceptions). There’s nothing wrong with using discount coupons or shopping during the sales.
Further reading
- Five steps to getting rich, by Charlie Munger
- The most profitable portfolio diversification for financial success
- Are you living beyond your means? Five warning signs
Featured image: David Reber from Kansas City, USA, CC BY-SA 2.0, via Wikimedia Commons.
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