This is a continuation from part 1. I suggest reading that first in order to get some context.
I ended the last part of this story knowing that I needed to make a change. Knowing that you need to make a change is all well and good, but the hard part is knowing what that change should be. I didn’t exactly have a plan when I decided I need to make a change. Instead, I just started doing stuff.
In North America, our standard definition of success is measured in money. When you dig down into this a little bit, that doesn’t make a whole lot of sense, and so your first task is to change how you measure success. Once you realize that you shouldn’t be measuring success by how big your Scrooge McDuck money pool is, you can move onto the next part of changing your mindset, and that is about how you think of what money buys you.
The default thinking around money is that it buys you stuff. We need new stuff to be happy, right? Well, if you’re reading this, or if you’re trying to do this exercise yourself, chances are you’ve already realized that that’s not the case. So, if we shouldn’t think of money as a way to buy stuff, what do we do with it? Do we burn it? It makes for pretty crappy kindling.
We need to start thinking about money as a way to buy freedom. Freedom to do what we want, when we want, how we want. For most people who come to the conclusion that money can’t buy happiness, it’s because the more money they have, the more obligations they accumulate. More houses, more bills, etc.
If instead, we look at money as a way to buy our freedom from these obligations, we’re on a very different path. Instead of using that big raise to buy an expensive SUV, with monthly payments that will have you stuck doing whatever you’re doing just to pay it off, let’s instead put the money towards a fund that will quickly allow you to take a full year off work altogether.
The goal here isn’t to renounce money altogether and adopt an ascetic lifestyle. That works for very few people, because in order to be happy living an ascetic lifestyle, you need to be okay with living outside of society to some degree. For most of us, that’s not an option, because one of the pillars of happiness is an emotional happiness that comes from relationships.
First Action: Free Yourself From Stuff
Stuff leads not just to physical clutter, but mental clutter as well, and for the most part, it leads to greater obligations. More stuff, means higher bills, means you need to work harder, and don’t have the freedom to choose to do something different because of the risk of losing it all. More stuff, means more space, which means a bigger place to live, which means higher rent or longer term mortgage payments. Again, a loss of freedom. More stuff means a fear of losing said stuff, to theft, accidents, carelessness, whatever, which leads to additional mental baggage.
So, in short, getting rid of stuff will help you in almost every way possible.
Now, here’s my caution. I am not advocating minimalism.
In the past few years, it seems to me that a trend towards minimalism has emerged, and there seems to be a new blog about how few things you can live with every day
99 things. No, 50 things. No, 10 things. No I don’t own anything, I walk around naked all day in the forest!
All of these acts are meaningless. These all transform the acts of getting rid of stuff into goals in and of themselves. Which they’re not. You can read any number of blogs and books about minimalism and decide if that lifestyle is right for you, but for most people it’s not. Most people want certain creature comforts and that’s okay.
What I’m saying here is that there is a balance somewhere between the ultra minimalist lifestyles we see on certain blogs, and the overly consumerist lives that the majority of us live. The ultra minimalists are a great source of inspiration to see just how you can do with less, but I don’t think you should become one.
The goal of this exercise is simply to critically think about what you actually need in order to be happy. Do you need a four bedroom house with a two-car garage to be happy? Do you need a brand new expensive SUV? Do you need 3 different video game consoles, and a TV in every room?
If you’re having trouble answering those questions, just look at what the real cost of that is, and I’ll get to that in a minute.
The other way to look at it is the way I did. I looked back at a period of my life when I was truly happy, right after moving back home, with an entry level job, and a crappy apartment, and I looked at what I had in my life at that point that was necessary to my happiness. The answer isn’t nothing, but it also is quite far from the standard suburban goals many of us set for ourselves.
What’s the point of all this, I hear you asking? How is getting rid of stuff I’ve already paid for going to help me achieve financial happiness? Am I supposed to sell it?
Well, you can, but chances are, you won’t make much on it compared to what you paid for it. The goal here isn’t to use your stuff to make money. The goal is to force you to think about what your stuff really means to you, and to create mental space that’s free of clutter as well.
I started going through my house room by room and emptying it of “stuff” I didn’t need. Some I sold, some I threw away, most I gave away. Once I’d done the clean up, and I had made peace with living in a more minimalist aesthetic, a natural mental block was created. Adding new stuff to the house was now completely opposed to the exercise I had just gone through, and I didn’t want to undo what I had just done.
Second Action: Understand How You’re Spending Your Money
Once you’ve freed up your physical and mental space of clutter, the next step is to take your first real “financial” step.
To do this, I had to actually take finances in hand, and not let external pressure dictate how I was going to worry about spending my money. Forget about my buddies buying the fancy new cars or the big houses. No, I was going to ground my spending habits in my own reality.
The only way to do this was to understand what I was currently spending money on. This means tracking all expenses going back far enough to get a feel for how you operate. I went back a year. I used Mint.com, but you can use any budgeting software, or just a spreadsheet.
Take a look at how you spend your money on a monthly basis. Some of the numbers might shock you. For instance, I was a little bit shocked to find out that after paying my mortgage, my next biggest monthly expense was dining out. Ahead of groceries, shopping, utilities, and everything else.
Just having this information is a good start. But it is just a start.
Third Action: Identify what makes you happy
So, now that you’ve cleared your physical space of clutter, and you understand how you’re spending your money, the next question is the big one: How much money do you really need to be happy?
That sounds like a really big question, but at its core, it’s one you need to understand if you’re going to have any hope of finding financial happiness. I went about it by comparing my current spending patterns to how I was spending when I was living in the crappy apartment, making way less money, but still being happy. From this view, the places where spending had taken off became immediately clear.
For example, I realized that paying close to $100 per month for cable wasn’t really contributing to my happiness. Or buying really expensive bottles of scotch just because I could. Instead, I looked back at what I was spending money on when I was happier and looked to see if I could go back to that.
Some of those things just won’t work, because life circumstances change. For instance, when I was living the bachelor lifestyle, my grocery bill was next to nothing. Now that I try to cook for two on a regular basis, food costs will go up. However, on the flip side, that also means that my restaurant expenses should have been going down.
Based on this exercise, I was able to figure out what my Minimum Expenses to Live a Happy Life (MELHL) would be.
Fourth Action: Create a budget
Once the exercise of figuring out what your Minimum Expenses to Live a Happy Life (MELHL) is done, the next exercise is really easy: Create a budget.
It always blows my mind just how much is written about personal finance and budgeting. The amount of time that has been spent teaching people how to budget astounds me. Creating a budget is simply about making a decision about how much you’re going to spend on specific items over a given period of time, and tracking that on a regular basis.
In my case, I use a monthly budget that’s based on my MELHL. In the vast majority of cases, these expenses will be less than your current income. If it’s not, go back to your minimum expenses and ask yourself if that’s really the minimum you need to be happy or if you are including stuff just because you’re used to having it.
If you’re still coming in over your income, you need to start looking for ways to increase your income right now. I might write about that some day, but that’s beyond the scope of this piece. For now, I’m just going to assume your income exceeds your minimum viable expenses.
If that’s the case, then you should have a surplus in your budget. That’s when things start to get fun, because that surplus can be used to hit your goals or milestones.
Fifth Action: Set Milestones
In order to be truly financially happy, I believe that you need to have financial milestones, and that you need to hit those milestones. My budget is my roadmap for hitting those milestones.
At one point, I had written a version of this post, where I shared my own milestones. I removed those because, frankly, milestones and goals are deeply personal, and mine are different than yours, and yours are different than Sally’s. The important point is not what those milestones are, but rather that you have them: car paid off, completely debt free, saved up for retirement, enough money to take a year off, whatever!
Hopefully, though, my experience above, can help you examine your relationship with money, and find your own happiness.
Image courtesy of Chi King.