Furgality Versus Money Smart

A recent article at Sound Mind Investing piqued our interest here at CommercialInvestingCenter.com. The author, Matt Bell, pointed out (rightly so) that the savings and frugality craze of a few years ago, when the economy was at its worst, has given way to a resumption of consumerism. Keep in mind that we’re not using the term in a negative sense; consumerism is the engine that drives the wheels of commerce. Without consumerism, we’re all screwed, to be blunt about it.

But the point Mr. Bell made was a good one. The word “frugality” conjures up visions of dumpster diving and limiting oneself to a single square of toilet paper (thanks to Sheryl Crow for this hideous idea) per – err – instance. Like it or not, the majority of Americans can never be counted on to be frugal. It simply isn’t part of our national nature, and who wants it to be anyway? A frugal, timid outlook on life didn’t get us to the moon first or create the only modern superpower left standing.

Maybe, as Bell hypothesized, we should forget about being frugal and concentrate instead on money smartness. What is money smart? Well, we’re glad you asked, even if you really didn’t, because we’re going to tell you anyway. It’s that important an idea. Where frugality can be characterized by a single-minded obsession with spending as little as possible, no matter the consequences, money smart people create a long term environment of financial plenty.

We’ve always liked financial guru, Dave Ramsey, and his simple declaration that financial success and independence depends on you telling each dollar where it will go rather than letting them all fritter away into the black hole of “daily living.”

Here are a few things money smart people do:

1. Use a cash flow plan. Seriously, how can you ever hope to gain control of your finances if you operate on a “seat of the pants” mentality? You’ve got to know what you have coming in and what’s scheduled to go out. This means you need to have a good estimate of your current income and expenses and plan for future income and expenses. Likewise you should track actual income and expenses and compare it to your estimates. This is not difficult and doesn’t even take that much time once you have a system in place. Analyzing your cash flow can be the difference between financial peace and chaos.

2. Housing costs. This is a big one. Whether renting or buying, we often bite off more than we can chew, with disastrous results. In fact, the entire foreclosure crisis of the past several years could have been largely avoided if people kept their monthly housing costs to no more than 25% of gross income. If you’re spending 30%, 40%, or, heaven forbid, 50% on housing, Houston, you have a problem. A SERIOUS problem which needs to be fixed. Quickly.

3. Get rid of debt. Trite. Boring. Call it what you will but money smart people realize how critical it is to get rid of every other form of debt. Debt will antagonize you in the best of times, and in times of economic hardship can literally kill your financial life. One caveat we would make in this area is debt created when investing in income property. This particular type of debt – fixed-rate, long-term and tied to a piece of property you can rent out – is the single form of debt we believe to be acceptable and one that can even improve your return on investment in inflationary times, which are here to stay. Anything else, especially consumer debt like credit cards, should be avoided like day old sushi.

4. Get flexible. We’re not suggesting yoga here, though that might not be a bad idea. What we mean by flexibility is that you should view your expense categories as somewhat pliant. If you purposefully make the decision to spend more money in one area, offset the additional expense by paring down somewhere else. The important point to remember is it doesn’t work to make an increase here without making an adjustment there, unless, of course, you increase your income, which is another possibility.

This short list of money smart moves isn’t intended to be the final word on shaping your financial life. Think of it rather as a jumping off point meant to inspire creative thinking and a realization that the avoidance technique practiced by so many others is the surest path to personal economic disaster we know. A final word: building and maintaining an emergency fund at a level that would let you survive and pay all your bills for six months in the event of a true emergency – job loss or medical condition – is a REALLY good idea.

The Commercial Investing Center Team






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