“It would be lovely to take several months off work and travel around the world, training with different groups in their dojang” – our friend Danny said.
Ben and I smile and nod approvingly. We are serving lunch at the Soo Bahk Do retreat in South Korea and know that many of the great masters of this martial art did exactly that: they left their jobs, travelled the world and trained. We are almost panting with wanderlust.
Just then Danny brings us back to earth with a thud.
“But it is very difficult to afford it, isn’t it?” – he added.
Just give me three-four years, I was thinking.
“Oh, I can do it” – Ben pipes in. “I am in a good position. I have no debt, we paid off our mortgage 10 years ago, we have couple of rental properties, savings and investments, and my wife’s business is doing really well. We have no children. It will be easy for me to stop working for six months and travel around.”
There and then, Ben warmed up my heart and made Danny’s jaw hit the ground.
And you know, it wasn’t even so much what Ben said; it was how he said it. Ben was:
- Happy without self-righteousness;
- Pleased without arrogance; and
- Generous beyond a fault.
Ben is undoubtedly wealthy. But this is not what impressed me so much. What I found really impressive was that Ben’s material wealth, his emotional wellbeing and his core values and beliefs (his life philosophy) were perfectly aligned in a happy and contented balance.
Put in a different way, Ben is not simply wealthy. He is in perfect financial health.
I wanted – I want this.
I want it because I yarn for the contented freedom Ben radiated.
I also want it because financial health is what makes wealth possible and sustainable in the long run.
Do you want an example of wealth without financial health?
Lottery winners. And if you ever wondered why many of them go broke within a short time after a win, it is because they have wealth without financial health.
If you want to build sustainable wealth you better make sure that you have achieved financial health first.
What is financial health?
Financial health is the balance between three aspects:
- Material wealth;
- Emotional wellbeing; and
- Life and money philosophy.
You can achieve financial health by making sure that your material wealth, your emotional wellbeing and your life and money philosophy are in alignment (are balanced).
Trouble is signalled by the possible imbalances of these three aspects. For example:
- When material wealth is not matched by emotional security we hoard, and can behave in greedy and miserly manner.
- Material wealth without sound life and money philosophy can be either un-sustainable or degenerate into selfishness and self-indulgence.
- Similarly, emotional security without material wealth foundation or sound life and money philosophy can be dreamy and even delusional.
Financial health: material wealth
I’ll never say that the material side of financial health doesn’t matter.
It does; in fact it matters a lot. Because without meeting certain standards of what we can call material wealth financial health is impossible.
You have mastered the material side of financial health when you:
Have positive monthly cash flow
Cash flow is the difference between what you earn and what you spend. For financial health it is important that you have a positive cash flow; in other words, it is important that you earn more than you spend.
If you earn less than you spend you are in what is known as debt financial profile. This is not healthy because it means that you are building debt.
To change you profile and move from ‘debt financial profile’ to ‘prosperity financial profile’ you need to examine both spending and earning.
Most personal finance expert will try to convince you that you are in a debt financial profile, or you have a negative cash flow and you earn less than you spend, because you spend too much. Please remember that it is also possible that you are simply not earning enough.
Whatever the reason for a negative cash flow, the first step towards financial health is to achieve a positive cash flow. Every month there should be money left in your account; this money can be saved and/or invested for the future.
Cash flow is the most important number in personal finance. Having positive cash flow means that you can build sustainable wealth; having a negative cash flow is the way to perdition.
What is your cash flow? Has it changed in the last six months?
Have positive net worth
You can also use it to calculate your net worth and update it regularly.
It is important for financial health that your net worth is positive and growing. Negative net worth is a cause for serious concern: this means that your liabilities (different kinds of debt) is more than the value of your possessions and assets.
What is your net worth? Has it changed in the last twelve months?
Have no (or very little) debt
There is no two ways about this: debt really can mess up with your financial health by eating away your positive cash flow and reducing your net worth.
Carrying a lot of consumer debt (this is all debt excluding your mortgage) also places you in a very precarious life situation: even a small change in your circumstances can have devastating effects on your life.
When we were in debt, I remember being terrified that I’ll lose my job or that I may need to take a pay cut. I was also agonising over the thought that I may get run over by a bus (this is why I still carry a lot of insurance).
Do you have any debt? What is it? What are your plans to pay it off?
Have a financial buffer
Most people dabbling in personal finance would call this one an ‘emergency fund’. I prefer to call it a ‘financial buffer’ because this is not only money for emergencies like buying a new fridge and repairing the car when it breaks.
This is the buffer that gives you financial stability in a very dynamic and rapidly changing labour market and economy.
There is a discussion about how large this should be. At the moment we keep enough cash to see us through roughly a year if we lose my salary.
You’d need to find your own level. Ask yourself the questions:
How much money per month do I need to live my life were I to lose some of my income streams?
How long would I need to recover the lost income?
How much will make me feel more secure about my finances?
Building a financial buffer can take a bit of time but is well worth it.
Do you have a financial buffer? For how long can you survive were you to lose some of your income?
Financially healthy people don’t rely for their income solely on their jobs/work and have investments.
There are variety of ways to invest; you just have to watch the doggy offers for ‘get rich quick’ schemes and reject them. On the other hand, if you are not familiar with some of the more traditional investment opportunities you can look into Exchange Traded Funds (ETFs) investing or seek to take much of the hassle and cost out of investing by choosing index funds investing.
You can also look to invest in bonds, stock and shares, property and mutual funds.
There are also many novel investment opportunities worth considering.
We, for instance, have invested in Nutmeg (a novel investing platform); have a small investing experiment with The House Crowd and invest in local small businesses. At the moment Nutmeg (and similar platforms) are not doing very well but we are sticking with them: I reckon my Nutmeg account will more than recover before too long.
Many, especially women, are nervous about investing. Don’t be! Just learn – or start by selecting an investing vehicle that requires little technical knowledge – and don’t be deceived by the highly codified (mathematical) appearance of investing. It is more common sense that mathematics anyway.
Just make sure the house you live in and your pension are not your only investments.
Do you have investments? What are you invested in?
Yes, for financial health you need to have savings (and this is different from the financial buffer which is not to be touched except in case of emergency or loss of income).
Make sure that you always have ready cash. One of the biggest mistake many people make is to save money so they can spend it.
Save to invest, not only to spend.
Do you have savings beyond your financial buffer? What do you use your savings for?
Have retirement provisions
For financial health make sure that you have sound retirement provisions.
We are expected to live longer and be un-able (or unwilling) to work for longer. This only makes it more important to ensure that in out later years we have regular and safe income sufficient for dignity in old age.
What is important here is to understand two points:
#1. In old age we don’t really need a ‘pension’; we need income.
#2. It is better to think about see the years of our ‘winter’ in terms of life-style design than ‘retirement’.
Simply put this means that you need to design the life you want, calculate how much income you need for it and set out to build regular and reliable income streams.
Have you made any retirement provisions? What are these?
Have several income streams
Financial health is not only about how much and what you have and keep. It is also about being in a financial situation that is stable and reproducible.
Having different income streams doesn’t necessarily mean that you make more money. It, however, makes your earnings more secure because:
#1. If one income stream fails you still will have what to live on
#2. You have the strategic space to replace the income stream
#3. You can continuously develop new, more profitable income streams
Lore has it that multi-millionaires have on average seven different income streams. We (are not multi-millionaires) and have six income streams.
How many income streams do you have? How are you going to expand these?
Bad stuff happens. And when it does, it is better to be safe than sorry.
Personal insurance – life, injury etc. –is a matter of personal circumstance and preference.
To be financially healthy you need house and car insurance (driving without car insurance is illegal in the UK anyway). Elementary, right?
Not so. It turns out that approximately 90% of the victims of the latest Manchester floods didn’t have house insurance.
Sometimes, money choices are hard. Sometimes we have to choose between paying for insurance and buying clothes and food. When it comes to your home it is wise to make insurance as high a priority as you could possibly do.
Do you carry insurance? What kind?
Financial health: emotional wellbeing
Normally, I’d be telling you that ‘emotions should be kept out of financial decisions’. I still believe that you have to take charge of your emotions when dealing with important financial matters.
Emotions as part of financial health are not like that; they don’t interfere with important decisions about money. They are about the way you feel about your life, about yourself, about money and about your future.
You have mastered the emotional side of financial health when:
You are happy with the life you have
Most of us spend most of our lives sacrificing the life we have for the life of our dreams. I’m all for dreams and have many dreams myself. Still, I believe that it is important for my financial health to be happy with the life I have.
So, sit down with a pen and paper and write the happy story of your life.
What do you need and want in your life to be happy?
Now, get up and change things!
Great! You are a step further towards financial health.
You don’t worry about money
Gosh, I used to worry about money all the time.
When I didn’t have much I worried about making some. When I had money I worried about losing it all. When we were in debt, I worried about losing everything. After we paid our debt off, I worried about…
You get it, right. Worrying about money has very little to do with the material side of your wealth. To get rid of the worry, you have to learn to control your emotions.
You don’t fear the future
We fear what we don’t know and/or have no control over. We don’t know our future and have limited control over most of the events I it. Still, it’s useful to prepare to the best of our ability and to develop the level of flexibility necessary to navigate the future.
You see, I don’t fear the future any longer; not because my hedging is perfect but because I have become aware of my capacity to adapt to different circumstances.
Then again, where the future is concerned sometimes it is better to be sorry than safe.
You are excited about getting out of bed. Every morning
You know these morning when you just don’t want to get out of bed because your dreams are so much better and your reality is too muddled?
I have them and you probably do as well.
Still, your mornings shouldn’t be like that. Quite the reverse: for emotional wellbeing and financial health you should wake up every morning feeling excited anticipation of the new day.
Achieving this may need some changes. If your job is getting you down, change it. If your life is out of kilter, get back into balance.
Just get the sizzle of your life back into it.
You can treat yourself without regret
I’ve always had a bit of a problem with treating myself. If you are anything like me, you don’t dare to buy any treats for yourself; when you do, you do it with regret; and end up begrudging the great time everyone else but you is having (and feeling used if you are paying for it).
You should stop. Learn to treat yourself to what makes your heart sing without regret. I’m not talking sapphire rings and pearl earrings here; a beautiful and simple bouquet of flowers will do.
It is not only your life that will be better but also the lives of the ones you love.
You have fun with abandon
When we focus on achieving financial goals – or goals related to career, work and business – often we forget to have fun.
Financially healthy people keep their lives in balance and don’t ignore the Cinderella rule of personal finance: they have fun and budget for it.
You are contented
When you are full of angst is when you make bad mistakes, misjudge situations and upset the people around you.
This is why achieving emotional contentment is important.
Financial health: life and money philosophy
I’m a great believer in knowledge and knowing.
For financial health, however, knowledge and knowing are not enough: you need wisdom and action.
This side of financial health – your life and money philosophy – is about comprehension, values and core beliefs.
You have mastered the philosophical side of financial health when you recognise that:
#1. Work is for life, life is not for work
#2. You should learn to work smart not hard
#3. You should control money and not let money control you
#4. Money is the nourishment of your life
#5. Money is a vehicle for good and should be used to make the world a better place
#6. What matters is how much money you keep not how much money you make
#7. You should save to invest, not just to spend
#8. Opportunities are everywhere; you just have to recognise them and act
#9. You should learn to love your problems because there is no problem without a solution
#10. Scared money makes no money
#11. Capital comes in many forms including culture and learning
#12. You should aim to increase your cloth rather than put up with a tight and uncomfortable coat
#13. You should dream big without fear of disappointment or ridicule
#14. You don’t plan your life according to where you are today but according to where you wish to be in a decade
#15. It is more important to learn how to spend money wisely than learning how to save it
#16. You should master your wants because there is little you could do about your needs
Now that you know what financial health is, why it is good for you and your wealth and how to become financially healthy let me ask you a question:
“How financially healthy are you?”
If you realised that your financial health leaves much to be desired don’t despair: just start targeting each of the points under wealth, emotional wellbeing and life, and money philosophy.
Regretfully, I cannot advise you what to tackle first. People pull out of financial trouble in different ways. You want to know about me?
Well, I’d start with the life and money philosophy anytime. You see, for me understanding, value and belief are the forces that induce me into action.
You still may prefer a different approach.
Last but not least, this turned out to be a long post. Looking at it closely, I realise that this is the closest I’ll get to writing The Money Principle Manifesto.
Hope you enjoy it and find it useful. Speak soon.