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Dave Ramsey's Smartvestor

Want Lasting Financial Peace? Start by Asking Yourself This Question

May 14th, 2018 | 2 min. read

By Mark Wayton

shoppinghabits

by Mark Wayton, Financial Adviser and Smartvestor Pro 

shoppinghabitsIt’s reasonable to think that gaining control of your finances starts with crunching numbers. How much you make, how much you spend, how much you save, etc. But, it should start with this question: What do you value?

I mean financially speaking, of course, as family, friends, faith and other personal things would surely top your list. When it comes to your money, do you value things like being able to comfortably pay your bills, save for your children’s college, give to charity, or save for retirement? Or, is it more important for you to have the nicest car and the latest phone, to go out to eat every night, or to frequently travel?

Why Your Values Should Dictate Your Spending

Each day, someone acts as decision-maker and master planner, who is responsible for allocating your paycheck or other source of income into a nice, neat allocation of needs versus wants. That person also may be responsible for setting aside some of this income for future uses, whether it’s a new home or retirement.

This sounds like a very important job that should be entrusted to a very important person. It is. And, it is your job, so it is critical you do it right. There will always be someone or something that wants your money, such as stores, restaurants and other forms of commerce. But, it is your money, and no one else should influence how you spend or save it.

Doesn’t it then make sense that all your purchases should add value to your life? If not, why are you purchasing them?

If you value a comfortable retirement, then it should be reflected in how you manage your money. Specifically, you should be spending less than you earn with the difference saved in a retirement account, like a 401(k) or IRA. What about travelling? If that’s something you value, I would expect to see you spend money on it.

Since you have a limited amount of money coming in every month, how you choose to spend it should be aligned with your values. A lot of people eat out absentmindedly and are shocked at how much money they spend on it each year. It follows then, if dining out isn’t important to you, then stop and allocate the money to an area of your life that you value more.

How to Align Your Spending Habits to Your Values

Sometimes we lose sight of what is important to us and what we really value. To stay on track, consider keeping a log of everything you spend money on. Tracking your spending for three months will provide a good snapshot of where your money is going. The longer you can keep track though, the more accurate your analysis afterwards will be.

Once you track your spending for three months, which is a quarter of a year, multiply these expenses by four to get an annual amount. Now, evaluate how you spend money in a year to see if you really get value from everything you buy. Would you feel better having saved $500 for college than having spent it on a new TV? Did that trip overseas keep you from saving into your 401(k), which may mean you have to work longer before you can retire? Have you even used that gym membership lately?

When you assess where your money is going, you can determine the value your spending habits bring to you. If you feel they aren’t adding value to your life, it’s time to make some important changes. This is when you start crunching numbers, figuring how much you can afford to allocate to the things you value most.

Of course, this isn’t necessarily as easy as it sounds. There are always going to be things that try to lead us financially astray. Here is the good news: each month brings us an opportunity to get it right and to make positive changes. So, what do you value?