What can Canberra teach us about money management?
Updated: Sep 11, 2018
At the time of writing this article, Scott Morrison is the new Prime Minister of Australia. Who it is by the time you read it however I have no idea. We’ve had 7 Prime Ministers in 10 years. Four of them even got the job without the public voting them in. The general consensus for anyone outside of Parliament House is this is more about politicians advancing their own careers than it is the good of the country.
It seems to many, politician’s blustering aside, that there’s no long term gain to be had from all this chopping and changing. When the party in power can’t make their collective mind up on what policy they stand for, what they believe in and who should lead then it seems any decision that might benefit the country is hard to come by.
Of course, with different points of view what the ‘right’ decision is won’t ever be a simple answer. For generations we’ve had a democracy that swings from right to left, different parties in power depending on the public view at the time. This last 10 years however has not seen the public get behind one party for any length of time that would allow many big, long lasting decisions to be made.
Really, how can we get behind these politicians who can’t even get behind their own party members. This last party room spill has seen the two members of the liberal party, Malcolm Turnbull & Julie Bishop, who had some of the highest public approvals within the government, gone from the party.
It would seem that, until these politicians can sort themselves out, we the public have little control on who runs the country. Small majorities, minor parties being relied upon and the chance of overturned decisions due to infighting or new government means all we can do is vote because we must and hope we get past this political age of indecision.
All this has got me thinking about the chopping and changing we let happen in our day to day lives. The ‘new and shiny’ must have now, the ‘easy meal’ takeaway and worst of all the ‘put it on the card so I don’t miss out’.
If you believe the experiences you have in life shape who you are as a person then you need to to understand money management doesn’t just affect your wealth, it affects who you are to become.
Consider the below that was provided by Moneysoft, our money management software provider of choice.
“A few years ago two economics professors, Steven Venti of Dartmouth and David Wise of Harvard University, studied the issue of income versus wealth for the national bureau of economic research,using social, security lifetime earnings and net income assessments for 3,992 households whose heads are near retirement age. What they found was that:
There is a huge variation in wealth at every income level. Many low income families have almost nothing. But the same is true of many high income families
Income alone does not explain wealth discrepancies. Some of the lowest earning households had managed to accumulate significant wealth. In fact, income differences explained as little as 5% of wealth dispersion
What the researchers called ‘chance events’ i.e. Inheritances, unexpected expenses, marital status, number of children all accounted for only 4% of wealth dispersion
Investment choices explained about 7% of the variations
In other words, the vast majority of the differences in wealth had nothing to do with income, chance events or investment choices. According to Venti and Wise the major determinant of wealth creation was simply based on how much individuals chose to save. Those who made it a priority to save built wealth, regardless of their income level, individual circumstances,or choice of investment. And while life can be unfair and sometimes deals devastating blows, it would seem that the people who survive and thrive tend to be the ones who have a plan and stick to it.”
Business Day, December 1, 2006. Research reference: Choice, Chance and Wealth Dispersion at Retirement, U.S. National Bureau of Economic Research, 2001.
The problem with all this is, for a lot of people, saving for the sake of saving just doesn’t work. Think back to our politicians, saving is the ‘public approval’ of money management. If you’ve not allocated money to something in particular then often it has no psychological value. Saving quickly loses it’s spot in our financial ‘party room’ decisions. It generally doesn’t take too long for those new clothes, nights out and holidays put on the credit card to seem like much better ideas than putting money in the bank.
Spending is easy, many find it enjoyable. The old advice of ‘save first, spend what’s left’ often goes the same way as the new year's resolution to exercise more - great for a couple of weeks, then it gets boring, then it gets forgotten.
Why not try something different and ‘give every dollar a job’. Get specific about it. Make it your financial ‘policy’. This way you’re not just saving for the sake of it. This way you could be
Putting money aside to live on for three months after a child is born
Buying this year's Christmas presents without using the credit card.
Paying for a December 2019 Fiji holiday early
Paying of a house by April 1 2029
You see, without planning, it’s easy for our money management to be like a political party without a clear understanding of what it’s ideals are. A little over here, a bit over there, a ‘captain’s call’ when we walk past something on sale.
Sure, the ‘right decision’ won’t always be simple. If however you take some time to think about what’s really important to you, now and in the future, you’ll be able to better plan using your money for things that truly make you happy.
Spending on the things that jump out in front of you is harder to do when you know the money you’d need to spend is allocated to something you care about more than that impulse buy.
Will your priorities change over time? Will there be long term goals that change? More than likely. However, if you’ve been contributing to those goals and your priorities change just consider it a ‘change in government’. A policy change to reflect the current environment. The good news is that the money you’d allocated to the previous goal can instead be used for what has become more important.
‘Saving money’ without thought of what it’s for is just denying yourself a purchase of something. Think of money put away in the bank as already being spent on your goals and long term happiness. Because when it comes to your managing your money, your vote counts.