Find financial balance with the 3 basic money groups
Posted
Apr 04 2008, 09:54 AM
by
Karen Datko
This post comes from Trent Hamm at partner blog The Simple Dollar.
Recently I was leafing through Jonathan Pond's very good personal-finance book, "Grow Your Money," which I had reviewed a while back. In it, he makes the astute statement that everyone puts their money into three basic groups: necessities, luxuries and saving for the future. The more I thought about that statement, the more profound I thought it was, because it provides a framework for the financial problems ailing many Americans.
Obviously, the pile that will get you in the best shape over the long term is the "saving for the future" pile, but people's failure to do that is only part of the problem. The reason so many Americans are in poor financial shape is that they put more than they should into one of these areas to the detriment of others.
Let me show you what I mean.
Some put money in the luxuries pile instead of saving for the future. These people often argue that you only live once and that you're wasting your time saving for the future when you could be enjoying the high life now. They know they're spending money on luxuries. The catch is that they just don't care. I was in that group of people not too long ago.
Others confuse the necessities pile with the luxuries pile. They identify things like HD televisions and cell phones as necessities in their lives when the truth is that most of these things are luxuries. Several of my friends are in this group. They're barely squeezing by and they are putting little money away. They continually tell me that they're living "bare bones" as they surf the Web on their G3 cell phone.
The recipe I've found for success with the three money groups is this:
Go through everything in the necessities pile and determine if it’s really a necessity. Go through every bit of your spending for a while and figure out whether you really need each item. I'm not suggesting going without the item, but merely determining whether you truly need it for day-to-day life. Is that cell phone a necessity? For some people it may be, but are the unlimited text messages or the Web-access features? Is that giant television a necessity? Is a case of beer or a $20 bottle of wine a necessity? (They both are often included as "food" for some people.)
When you start asking hard questions like that, it often becomes clear that many things in life are luxuries. Also, you begin to find that frugality is pretty cool. It shrinks the cost of many things in your necessities pile.
Try to keep a balance between luxuries and saving for the future. If you bring home $1,000 a week and spend $400 on the things that are truly necessities (mortgage, insurance, food), that leaves $600. Put $300 of that away and spend the other $300 on the things that bring you pleasure -- good food, good drink, technology goodies and so forth.
Financial discipline is not about denying yourself everything enjoyable in life. It's about finding a balance between the things you enjoy now and the things you’ll need later. It's also about finding value in the luxuries in your life rather than treating them as things you naturally do.
Other articles of interest at The Simple Dollar.
"Five-minute finances No. 16: Cancel the channels you don't watch"
"10 things any college student can do to prepare for success in life"
"Personal finance and families: How much detail should the kids know?"
