Did you give any thought to your personal financial philosophy from the last article: a) most toys wins; b) a penny saved/earned; c) make a lot/give a lot away? If you are like most, you probably inherited your philosophy from your parents.
I grew up with a “most toys wins” philosophy. When I was young I asked my dad how long a year was and he said, “Twelve payments.” This became very interesting when I married someone who was raised with a different philosophy.
Nan and I dated through our four years of college before we got married. Because I had a full-time job and lived at home while attending college part-time in the evenings, I had plenty of money for dates. Before we dated she never ate popcorn or candy at the movie theater. While we dated I took her out for steak dinners, bought her jewelry and perfume, paid her way to church conventions, etc. She loved it at the time. After we returned from our honeymoon and “blended” balance sheets, she fell into a minor state of shock.
At the time I was making payments on two sports cars. I had over $6,000 in credit card debt. I had borrowed money from my parents to update my business wardrobe, and to finance our honeymoon in Rio de Janeiro. Nan’s dad raised her with a penny-saved perspective and my approach to money wasn’t acceptable, notwithstanding the great spendthrift times we had while dating. Adding to her misfortune, shortly after we married I told her I’d like to apply to our church college, quit the great jobs we had, and move to Southern California.
The next year was quite a change. We worked together under a penny-saved austerity program to tighten our budget and prepare for the move. During those twelve months we considered it splurging to simply get an ice cream and designer coffee at the mall. By knuckling down on expenses, saving almost every discretionary dollar, and selling some assets before the move, we managed in twelve months to pay off all the debt and have $10,000 in reserves for the move.
Most financial mistakes are made by simply focusing on the budget rather than its impact on the balance sheet. The budget is a financial statement that records expected income, expenses, and what is left over. When all income is not spent, it builds the balance sheet (building wealth). The balance sheet is a financial statement that records what is owned (assets), owed (liabilities) and the resulting net worth. When more income is spent than earned, it detracts from the balance sheet by creating a liability (payments on two sports cars, credit card debt, notes to parents, etc.).
The financial mistake comes from thinking I can afford the payment (the impact on the budget) without considering the impact on the balance sheet (going in debt and reducing net worth). Wealth is what is reflected as the bottom line of the balance sheet (net worth).
Managing this dynamic, and the interaction between these two financial statements is a best practice for building wealth. As stewards of God’s wealth we need to manage both to be truly effective.
Regardless of the philosophy you were raised with, take heart: it can change over time to meet changing circumstances.
Craig Kuhlman is an executive vice president and chief trust officer for a financial institution and has more than 30 years of financial counseling experience with bank and investment clients.