Money Management Strategy — What Really Matters Most?

Does income matter when pursuing a money management strategy?

Money Management Strategy A big income always helps, doesn’t it? The reality, though, is that having a big income is not the key to winning financial freedom early in life.

A worker earning the median U.S. income today (about $42,000) brings home a paycheck providing twice the buying power of her counterpart from 1950. If that worker limits herself to enjoying the same level of material comfort as her counterpart from five decades back, she can direct 50 percent of her income to saving. If she splits her Productivity Bonus into two piles, using half to support higher spending and half to support higher saving, she can save 25 percent of her income. These are large saving percentages, saving percentages only a small number of Americans achieve.

Let’s assume that it is possible for you to accumulate all of the assets needed to finance a middle-class retirement over the course of the 40-year work and earning stage of your life (age 25 to age 65) by saving 10 percent of your income. Let’s ignore a number of complications that need to be considered when putting together an actual retirement plan but not for purposes of making the point at issue here. More than doubling your savings rate would cut the amount of time needed to finance your retirement in half. Saving 20 percent rather than 10 percent, you should be able to do the job in 20 years rather than 40 years. That’s retirement at age 45!

Is it possible? It is. I have conversed with scores of people in the Financial Freedom Discussion-Board Community who retired in their late 30s or early 40s. They did not do it by saving 10 percent of their incomes. They saved more than that. It’s how much you save that really matters, not how much you earn.

One of the complicating factors I ignored in the discussion above is that compounding would not have had as much time to work its magic at age 45 as it would have had at age 65. Another is that most of us do not earn enough when we first enter the workforce to be able to save 20 percent. So early retirement is tougher to pull off than the scenario set forth above suggests.

The underlying point, though, is a valid one. Direct a big portion of your Productivity Bonus to saving, and you can aim to retire a whole bunch sooner than when you turn 65. And once you begin directing your money management strategy efforts to an early retirement rather than to the conventional kind, you will find yourself far more motivated to save than you ever were before. There’s a good chance you will end up saving a good bit more than 20 percent.

It’s entirely possible to earn a big income and yet make little progress with your money management strategy. It’s also possible to earn a moderate income and win financial freedom remarkably early in life.

Does intelligence matter when pursuing a money management strategy?

Not as much as you might think.

Managing Your Money

My experience is that those with an average level of intelligence have almost as much hope of winning financial freedom early in life as do the super-brains.

It takes some intelligence to save and invest effectively. First, you need to be smart enough to be able to earn some money to save and invest. Then you need to be smart enough to recognize the importance of holding onto enough of what you earn so that over time you can let your money begin working for you and you can become gradually less dependent on a paycheck to cover the costs of living. Putting together a savings plan and an investment plan takes a certain measure of intelligence too, of course. Intelligence is generally a plus, just as you would expect it to be.

But I have seen very smart people do an extremely poor job of managing their money, and I have seen people possessing an average amount of intelligence (me, for instance!) do a great job of it. It’s not intelligence that separates the sheep from the goats.

One problem with possessing too much intelligence is that it can lead to overconfidence. None of us is forced to become an effective saver in the way that we are forced to go to school or forced to get a job. For many of us, it’s an early experience of financial vulnerability that causes us to realize that we need to protect our future by saving.

Those with a good bit of confidence in their intelligence are less likely to experience those feelings of financial vulnerability. They feel that they can count on getting good jobs whenever they need them. It’s true that good jobs are generally available to the highly intelligent. But having a good job and a good income often does not translate into becoming financially free early in life. Unless you learn to pursue an effective money management strategy, you can earn a high income for many years and never make much progress on attaining your financial freedom goals.

Another factor is that those with a high level of intelligence often possess a strong ability to rationalize. That can be deadly to a quest for financial freedom. The moderately intelligent person who recognizes how thoughtless spending does harm to his hopes of realizing his money management strategy goals is better off than the high-IQ person who rationalizes self-destructive spending habits.

Those with lots of smarts can make investing more complicated than it needs to be. I get the sense that lots of moderately intelligent people are intimidated by the investing prowess that those who can throw big words around claim for themselves. Big words don’t pay the electric bill. The key to investing success is avoiding the self-destructive emotions of fear and greed. My experience in the Financial Freedom Community is that the best insights are offered by those who don’t make claims to knowing it all but who are just aiming to make sense of things for themselves (and who by doing so often provide a lot of help to a lot of others).

High intelligence is obviously a big plus in many areas of life. If you have it, consider yourself blessed. But if you don’t think of yourself as being a brain, please don’t see that as an obstacle to your hopes of winning financial freedom early in life. We have heard in our community stories of all sorts of people achieving financial freedom remarkably early in life, some of them very smart indeed and some only moderately so. If you are smart enough to see the importance of aiming for financial freedom early in life, you are probably smart enough to put together and implement an effective money management strategy.

Does age matter when pursuing a money management strategy?

Probably not too much.

Talking Over Money Problems

Do today’s young workers have as good a shot at winning financial freedom early in life as do those who came immediately before them?Or is the window of opportunity closing now that a good number of Baby Boomers have had the chance to fly through it?

My view is that today’s young workers face larger risks in their quests for financial freedom, but that they also enjoy greater opportunities. The key to doing well is not taking the conventional wisdom on money management strategy on faith. You need to question stale ideas on saving and investing and career growth. You need to become clear in your own mind as to what goals it is you are seeking to achieve with your work efforts and you need to craft a written plan for making progress on them.

Go with the flow, and there’s a good chance you are going to get washed down the rapids. Think strategically, and there are options available to you that were not open to middle-class workers of any earlier time. Get smart!

Set forth below are three arguments for why today’s young workers are doomed and three arguments for why today’s young workers are likely to end up doing just fine.

Doom Argument #1: Both stocks and real estate are overvalued. Even young workers with the discipline to save will not be able to earn the sorts of returns they need to win financial freedom early in life.

Doom Argument #2: Jobs are moving overseas, where workers are willing to work for less. Ordinary workers are no longer in a position to demand good salaries or good working conditions or good success paths.

Doom Argument #3: The Baby Boomers have the numbers advantage and the influence advantage. They will craft laws to benefit themselves.

How to Manage Money

Zoom Argument #1: Attitude is the most important thing. If you are positive and determined and creative, you will be able to move mountains.

Zoom Argument #2: Doom and Gloom stories are as old as the hills. Let them pull you down, and they become self-fulfilling prophecies. Ignore them now, and you will laugh at them after you make your way to the other side.

Zoom Argument #3: Life has continued to improve for most middle-class workers for a long time now, despite all sorts of bad stuff that has always caused some to despair for the next generation.

Does personality type matter when pursuing a money management strategy?

Yes, to some extent. But probably not as much as some believe.

Does budgeting matter when pursuing a money management strategy?

Yes. Planning is the key to making good things happen with your money management strategy.

If you were to take a survey of all the people who have won their financial freedom early in life, my guess is that you would find that the their distinguishing characteristic is that they budget. It’s not that they have great willpower and force themselves to budget. It’s that they think of budgeting differently than most others. Most successful savers enjoy keeping budgets.

Most unsuccessful savers think of a budget as a piece of paper with numbers on it that barks out commands at them. If that sounds like you, please try to get that idea out of your head. I don’t like the idea of having a piece of paper with numbers on it barking commands at me any more than you like the idea of having one bark commands at you. I probably wouldn’t even be able to keep to my budget if it were not for my wife’s gentle (!) suggestions that I make an effort to do so.

The power of a budget is in how it enhances your understanding of where your money is going. Those who don’t keep budgets think they possess a rough idea of what they spend money on. Test them, and you almost always find that their impressions are far from the mark. Budgets are not command tools. They are teaching tools. They tell you what you need to know to make your life a success.

It doesn’t seem like it should make such a big difference to the success of a money management strategy to write things down on paper. It does, though. There is something that happens in the act of writing things on paper that causes you to remember them. The act of writing on paper takes a vague notion that is drifting through your consciousness and gives it concrete and permanent substance. Budgets don’t force you to do anything you don’t want to do. They guide you to where you want to go.

Money Management Plan

I believe in budgets. Most of those who keep budgets manage their money at least reasonably well. Most of those who do not do not. Budgets matter more than intelligence. Budgets matter more than income. Begin keeping a budget and you’ll be greatly increasing your odds of enjoying a successful money management strategy.

Does luck matter when pursuing a money management strategy?

Yes. You need to be lucky enough to have the sorts of life experiences that help you discover the importance of planning to an effective money management strategy.

Few early retirees attribute their success to luck. A poll taken at the Early Retirement Forum shows that only 16 percent of us say that it is luck or an inheritance that permitted us to do what so few manage to do. We prefer to credit our love of planning and our frugal lifestyle for our successful money management strategy.

Planning is the key, in my view. Still, I like the comments of the community member who asked whether luck played a role in our transformation into good planners. That’s what newcomers to our movement need to hear about.

Success follows from planning. The inclination to plan is generally not something that is willed. Some have it and others do not because some enjoyed life circumstances that caused them to learn of the benefits of planning while others did not.

Luck really is an important factor in the success of a money management strategy, in other words.

I was lucky that I lost my dream job at age 35. Losing that job pissed me off. Getting pissed off provided me with the motivation to seek out new ways to advance in my career.

I decided that the thing to do was not to try to find better jobs and work harder. I learned from that experience that, no matter how good a job I found and no matter how hard I worked at it, it could be taken from me because of developments beyond my control. To gain the power to steer my future course, I needed money in the bank. The path to being able to spend the hours of my days doing the work I loved was overcoming dependence on a paycheck to cover my costs of staying alive.

Strategies for Managing Money

The luckiest day of my life was the day I lost the job I loved with all my heart. That’s a hard sort of luck. It was an okay way for me to learn the importance of financial planning because it happened to me at age 35. If it happens to you at age 45 or at age 55, you might not ever come to feel about it the way that I came to feel about it after the passage of some time.

We need ways to teach people the lessons without them having go through the life experiences that caused us to learn them.The conventional money management strategy advice doesn’t do it. We’ve all heard 180 times how we should put aside 10 percent for a rainy day and pay ourselves first and all that other jizz-jazz. The people who say that stuff are well-intentioned. But the words do not hit the mark. Those sorts of sermons do not cause too many to get religion.

Our task is to figure out what does work. What sorts of arguments hit people where they live? What sorts of stories make people stop for a moment and really think through what it is they are doing when they elect not to save? What words prompt constructive actions? What calculations help people see quickly that they possess a power to win financial freedom many years sooner than they now realize is possible?

Financial freedom comes to those who get smart about money. The first step to getting smart is experiencing that flip-of-the-light-switch moment where the true nature of the financial freedom quest–that the idea is not to engage in a boring exercise in being responsible but in a liberating exercise in gaining the power to call the shots about your own future–becomes clear.

Those of us who experienced that flash of insight early in life really have been in an important sense luckier than most other middle-class workers. Our task now is to figure out how to spread the luck far and wide.