The first rule of personal financial management is to spend less than you earn! It sounds really easy and makes sense… so why are so many of us in debt?
To begin to understand why it is so easy to spend more than we earn, have a chat with your grandparents, or someone else from that generation who love to talk about the “good old days before computers and the internet“, you could learn something quite fundamental about financial management.
I am blessed to have a grandmother who was born in the late 1920’s and who is still with us. She has seen a lot of change in her life time, and I asked her how the family managed their money. To cut a very long story short (talking a lot runs in the family) this is what she told me.
“My Dad would come home from work each week with his pay packet and sit with my mother at the table and he would hand over what was left over – after he had taken what he wanted. It was up to my mother to pay all the bills from what she had left. She would carefully divide the cash up and put into the various jars for rent, food and other bills. My sister and I would anxiously wait to see if there was a coin or two left for us, most times there wasn’t but sometimes we were lucky. It wasn’t an easy life, we didn’t have much, but my mother always managed to put food on the table and shoes on our feet.”
“When we got married and had a family and came to New Zealand, your granddad and I followed the same system but this time instead of putting cash in jars, we used a bank account”. Then we drew money out when we needed to.”
So what can we learn from this little history lesson?
- The system was simple, cash came into the household and cash went out.
- The family had a ‘banker’ who was in charge of the finances.
- My grandmother (and her mother) knew exactly how much money they had at any one time and where it was being spent. In other words they had a budget and they stuck to it.
How can we apply this in our age of electronic banking and credit cards?
First of all you need to understand why it is so easy to spend more than we earn, and yes, credit cards, interest free deals and the like do get most of the blame.
Our brain doesn’t help either. The brain loves pleasure and let’s face it, buying nice things from food to gadgets to cars is very exciting and enjoyable (well for most of us anyway). Our brain goes, yes, yes, yes, buy it! And credit lets us do it even though we don’t have the money right now to pay for it. So… the pain of paying is separated from the pleasure of buying.
Secondly, in our wonderful world of technology, we generally don’t see our hard earned cash. It goes straight into a bank account, and we use various cards and electronic means to pay for what we want.
We no longer have the same awareness of money (spending or earning) that they did in my Grandmother’s day (this is called abstraction of money by the way). Transactions have become easier but the awareness has faded.
So, what we need to do is bring the awareness of our money back to the front of our mind.. We do that by tracking our income and expenses, which is the second rule of personal financial management…… more on this in a future blog.
Then you will understand that, It’s easy to get ahead financially, just spend less than you earn!
http://www.mymoneyseeker.com Lynda Moore