“You’ll never achieve financial independence if you spend all your money.” – BB&T Website
In last week’s insight, Don’t Let The Future Own Your Income, we discussed the importance of saving money early. Unfortunately, the trend in America is moving in the opposite direction of spending excessively, but why is this the case? One big reason, we are not intentional and focused about our spending. David Allen’s book Getting Things Done has been enormously influential in how I organize my life, structure my work day and track and execute on my projects and tasks. In the book he discusses the importance of creating and focusing on very clearly defined outcomes (emphasis mine).
The May 1957 issue of Scientific American contained an article describing the discovery of the reticular formation at the base of the brain. The reticular formation is the switch that turns on your perception of ideas and data, the thing that keeps you asleep even when music’s playing but wakes you if a special little baby cries in another room.
Just like a computer, your brain has a search function – but it’s even more phenomenal than a computer’s. It seems to be programmed by what we focus on and, more primarily, what we identify with. We notice only what matches our internal belief systems and identified contexts. If you’re an optometrist, for example, you’ll tend to notice people wearing eyeglasses across a crowded room; if you’re a building contractor, you may notice the room’s physical details. If you focus on the color red right now and then just glance around your environment, if there is any red at all, you’ll see even the tiniest bits of it.
The implications of how this filtering works – how we are unconsciously made conscious of information – could fill a weeklong seminar. Suffice it to say that something automatic and extraordinary happens in your mind when you create and focus on a clear picture of what you want.
What David Allen is describing is the reticular activating system (RAS). For a classic example of how the RAS works, just think back to when you bought your last car. Did you notice how all of a sudden you began to see the same make and model everywhere on the roads, whereas you might not have even been aware of its existence prior to doing your research for the purchase? There is only so much data your mind can focus on at once, and the RAS is a miraculous filtering mechanism for differentiating what is truly meaningful from all the other noise.
One of the most fascinating things about this is that you can intentionally (or unintentionally) train your mind on what to filter out and what to focus on. Doing so is a powerful exercise in behavior modification and habit formation, and it also highlights the importance of what we allow our minds to dwell on. In the same way this can be a positive thing, the way the RAS functions also implies that cycles of negativity can take hold leading to detrimental behavior patterns. This has wide ranging implications for all areas of our life: our relationships, our jobs, our spirituality, our eating habits…and yes, even our finances. Along those lines, budgeting is perhaps the clearest example of how we can use this insight to our advantage to create better money-related outcomes.
I have long believed that creating and adhering to a budget is one of the most powerful financial disciplines, because it serves as a foundation for all other money-related decisions. Simply put, knowledge is power, and those of us who budget know more about where our money is going than those of us who don’t. This leads to more control, less waste and an increase in financial freedom. That’s right…while many would consider a budget to be restrictive, it is actually quite freeing because it takes the guesswork out of spending decisions and provides a foundation for systematically building out savings and investments. It increases the odds that you won’t spend all your money, which is the first step to financial independence.
Put another way, the discipline of budgeting creates clearer vision, and clearer vision leads to proper action. The mind becomes trained over time to recognize how that appetizer and extra drink adds to the final bill at the restaurant, how the true cost of that new SUV includes interest, insurance, registration and increased fuel consumption, and how that new piece of furniture affects how much you can afford to spend on that upcoming vacation. Purchases, both large and small, move from being haphazard and compulsive to fitting within a clearly defined plan. Spending, as a result, becomes more intentional and (ironically) more enjoyable.
One tool we recommend and use personally for budgeting is called Mvelopes, which, as the name suggests, is based on the long standing envelope system of cash management. While that might sound archaic, the beauty of Mvelopes is that it takes the powerful simplicity of the envelope system and it places it cleanly into the context of our modern, credit-based, tech-heavy environment. The system links securely to checking, savings, credit card, mortgage and investment accounts so all your financial activity is pulled in electronically as it occurs. Its intuitive layout allows you to create the specific envelope structure you desire, to set a spending plan and then to track the activity and balance in each envelope in real time. All of this is available online and on your mobile device via the Mvelopes app, and for most users’ needs the free subscription model is perfectly adequate.
The problem of living beyond our means with an addiction to spending is perhaps symptomatic of the real underlying problem of a lack of proper budgeting. A recent Gallup poll showed that less than one-third of households in the US operate on a budget. We’d certainly hope to see that statistic significantly higher amongst our client base and encourage everyone to take advantage of software like Mvelopes to make this a reality.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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