James and Kathy are a young married couple with two small children. They make a good income and live a good life. They have a good amount of cash in their bank accounts and pay their credit card bills in full every month. They’re saving up for retirement and college for their kids. Everything seems pretty good on the surface.
Kathy is more of a saver. And so whenever she has the opportunity, she lobbies for saving over spending. As a result of her efforts, they have been able to carve out a decent chunk of their income to be saved for the long term. And they’re seeing those accounts begin to grow. But even with these results, she never really feels like they’re actually saving enough.
James is the spender. When Kathy lobbies for saving, he makes the case for spending. He argues that they’re already saving plenty and are definitely in a much better position than most of their friends and peers. He believes they will be fine in the future. They work hard for their money and should enjoy it now while they’re young.
So every time they have some extra cash, they go round and round and have trouble making decisions. It’s the classic trigger for arguments. Neither of them have a solid reason behind what they’re arguing for aside from that’s just how they think it should be. Maybe it’s deep rooted in something they learned from their parents. Or maybe they saw something a friend was doing and subconsciously decided they wanted to do it too. Either way, they are letting their emotions and behavioral tendencies drive their decision making. And the friction doesn’t end after they make the decision. If they go with making a purchase, they tend to have buyer’s remorse, especially Kathy, because they second guess their illogical reasoning. If they go with saving, they start to wonder, especially James, if maybe they’re saving too much and not enjoying life.
For example, Kathy recently got a bonus from work. She excitedly told James the news and he immediately launched into his grand plans for using the cash to do that home renovation they’ve been talking about. The idea of this deflates Kathy’s excitement because she thinks they really need to keep the bonus in savings because they don’t have enough cash reserves for emergencies. This turns into an argument. Eventually, like a good married couple, they compromise. They will finance the home renovation with a home equity loan. And save the bonus in their savings account. Everybody wins…. for now.
A few months later, James’ car breaks down. And he needs a replacement and wants a new car. He builds a really good case to bring to Kathy and is able to convince her to go along with it primarily because he focuses in on the monthly payment instead of the actual cost. After all, this is how most decisions work in the typical American household. The question I have for you is — do you want to be the typical American household?
Andrew and Katie, on the other hand, have the exact same financial background as James and Kathy. They’re basically a mirror image, financially and philosophically, but with one exception. They have a formal financial plan. They’ve thought out what they want their ideal life to look like. And they’re actively using their money to make progress toward that life. They’re also confident that they have a good plan in place for the unexpected. That gives them peace of mind and allows them to focus on living their ideal life. And when financial decisions come up, they work through a very logical and unemotional process based on their plan.
They review their long term goals and values and make sure they’re on track. If changes are necessary, they make it happen immediately. They have very clear targets for baseline cash reserves for day-to-day spending and unexpected emergencies. And they save separately for bigger ticket un-budgeted goals and projects. This allows them to have clarity around which dollars are “off limits” and which dollars are fair game for spending. They have a priority list for big ticket items and as their extra savings grows, they get motivated to pull the trigger on the next priority.
Katie actually works with Kathy and is getting the exact same bonus. The difference is that Katie and Andrew work through the decision much more logically and purposefully. They know they are saving enough for long term goals. They’re confident that they have enough cash reserves for unexpected. They’re very clear on short term goals & projects and know exactly how much cash is available for these things In fact, they happen to have the exact same home remodel project on the top of their list of short term goals. They’ve been saving for it for several months and this bonus is exactly enough to get the account to the point where they can pull the trigger. So they do. Except they make the decision with no friction at all.
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