Today, I’ve teamed up with Shannon from The Heavy Purse and some amazing bloggers to talk about getting serious about your finances. You can find the other posts on The Heavy Purse site.
A lot of us tend to ignore our financial reality. Maybe this means you know you need to make more money to maintain your lifestyle, yet you keep adding more charges to your credit cards each month. Or perhaps it’s buying that new car on credit, getting a house that’s far too big, or splurging on that stunning dress, all while hoping it’ll somehow work out. Personally, I’ve never been an optimist with money. I had to work my way through college with various odd jobs just to pay the rent, and I always feared something might go wrong, so I constantly saved for emergencies.
As things improved financially, I started to feel more secure. Things got so much better that I lost track of how much I was actually earning. There was income from my day job, side gigs, and personal projects like freelance writing or selling belongings. I wasn’t sure how much I was spending either. I wasn’t crazy about buying unnecessary things—I thought my desires were reasonable, and I justified every expense because my basic needs were simple. But if I wanted to plan for my future, my vague approach to numbers was a problem.
I realized I was making a mistake. Even though I was earning well, I justified every expense because I felt I deserved it. I’d think, “I work so hard; I deserve a holiday four times a year,” or “I shouldn’t hesitate to buy that $500 gadget since I have money in the bank.” But simply staying in the green every month doesn’t mean you’re managing your finances properly.
Sure, it’s better than living beyond your means, but if your goal is financial independence, it requires more effort. You need to get real about your financial situation. Determine a number that allows you to live comfortably for the rest of your life. Set a safe withdrawal rate, typically under 4% a year, to ensure your investments will last.
For example, if you want to live on $30,000 a year, you need a $750,000 nest egg. That means living on $2,500 a month, and every $85 you spend takes you one day away from financial independence. Suddenly, that fancy dinner or expensive gadget looks different. You can still have it if you’re doing well, but opting out means reaching your goal one day sooner. While a day might seem insignificant, those days add up, and you could find yourself a month or even a year behind.
For me, getting financially real meant evaluating all expenses and deciding if they were worth working an extra day. Would skipping that trip to Europe be worth gaining a few months of freedom? If it meant spending time with loved ones, probably. If it was just about seeing new places that I could visit later when I’m financially independent, then maybe not.
You might think you’re managing well, but only by crunching the numbers can you see if you’re just okay or truly excelling. Every financial decision should be carefully considered to ensure it aligns with your principles and goals. Otherwise, spur-of-the-moment decisions can delay your progress.
What about you? When did you get financially real?