I recently saw the statistics that 60 % of baby boomers are more afraid of running out of money in their retirement than they are afraid of death. Millennials are buying cryptocurrencies, often using their credit cards, with hopes of become overnight millionaires.
Over 70% of businesses fail within the first 5 years because of cash flow problems.
From my personal experience and observations, awareness of your money habits, planning your financial future, and having financial discipline are the most critical factors for creating a comfortable retirement.
As Robert Kiyosaki once said, “It’s not how much money you make that matters most, but how much money you keep. How hard it works for you and how many generations you keep it for.”
Making a good living does not automatically put you in the “more than enough” or “affluent” category. Because it’s not just about how much you earn but also what you do with what you earn. Do I hear “Yes”?
Now let’s go over different ways you can choose to manage your competing financial priorities.
If you want to become financially independent, one of the most important skills you must acquire is managing your money intentionally, so that regardless of your current income, you become richer every month and every year.
How do you accomplish this?
By managing your competing financial priorities while saving and growing your money.
When it comes to managing your financial priorities, it’s a good idea to be aware of the three human biases that may affect you financial choices and decisions.
- The Present Bias
As a human being, you are wired to take care of immediate needs first, making sure your essential requirements for food, shelter and security are met. So it’s understandable that when current, short-term financial needs and goals compete for your attention, saving for the future gets neglected. For example, when you focus on car and home repairs, your kids’ day-care or private school, or a new heating/cooling system, your long-term savings for big purchases such as education, financial emergencies, or retirement go to the back burner.
The famous Hierarchy of Human Needs by psychologist Abraham Maslow outlines the progression of human needs and human awareness as we ascend from meeting our immediate survival needs to the need to feel fulfilled and self-actualized.
We like to say: “Live in the moment”, right?
Right, but not when it comes to your money; with money you must be intentional.
Most people have difficulty envisioning distant events. It’s easy to envision, associate with and express immediate financial needs. This is something that financial professionals refer to as “the present bias.” The “present bias” makes you handle competing financial goals by assigning your highest priority to immediate needs and nearest goals, and overlooking the long-term financial priorities.
- The Availability Bias
The availability bias is another mental pitfall when you are very comfortable with your current available income and assume that you will always have it. So, why bother thinking about long term financial goals?
While this bias pertains to all humans, it’s especially common among new entrepreneurs and famous sports figures, who often go through feast/famine experiences and some end-up in financial ruin. Many of the currently well-off folks treat their businesses or contracts as their piggy banks that are available to cover any and all desires.
- The Busy-bee Bias
The busy-bee bias is very common among highly paid professionals who are so busy making money that they don’t make time to plan how they can grow it, let alone how they can make their money work for them!
These people rely heavily on the easily available information and often don’t do their due diligence on the accuracy of the advice and integrity of the source from which they receive their financial advice. As the result, they put more value on the easily available solutions rather than more strategic ones and end up disappointed.
The tendencies and biases I have mentioned often cause people to spend everything they are currently earning. They want to enjoy their money to the fullest while they can, or save and invest first for their family’s educational goals, rather than diversifying their savings across different financial priorities like planning their financial future, retirement, health-related needs, and creating financial independence.
More often than not, goals like buying a new car or a house, financing private school or college tuition for your kids, become top priorities relative to retirement or financial independence goals. However, you don’t want to burden your kids by depending on their financial support when you get older, right?
So, how can you manage competing financial priorities, the immediate and the upcoming ones? The solution may be as simple as asking yourself if the financial priorities you’re focusing on now are really the most important ones, given your overall goals in life, not only your immediate needs.
Here are two simple questions you can ask yourself:
- What are my short and long term priorities in life?
- What are my core values that help me experience more joy and fulfillment in life?
The answers to these questions will help you sort out your financial priorities.
For example, one of my core values is FREEDOM. I can be content driving an older car, leading a modest lifestyle and wearing stylish but not necessarily designer clothes and shoes. However, I am willing to do whatever it takes to achieve financial independence so that I can have the Freedom of Choice in my life.
Now, pause and write down answers to the two questions above.
Share your experiences in the comments. I would love to know how you manage your competing financial priorities.
And here’s the recording of the mini-class on this topic
To Your Health, Wealth, and Freedom!