Personal finance is personal. The root reason that there is so much variety in how people handle (or don’t handle) their money is because we all have a slightly different constellation of values. What we value in life influences the kinds of goals we set for ourselves, and our individual goals will determine the tactics or strategies we choose to reach them. If you choose your tactics, like cutting expenses in certain areas or picking an account type, before examining your values and setting your goals, you will be acting inefficiently and may even give up on your system.
Take a few minutes to think about what few concepts you value most in life – what brings you the most joy, what you’re striving for, what you would do if you knew you had a short time to live. Then, if possible, identify how money relates to those values or add more that are money-specific.
David Bach has a wonderful exercise in Smart Couples Finish Rich on determining your top five money-related values by asking yourself the question “What is the purpose of money in your life?” Some examples of values are spirituality, balance, health, marriage, security, freedom, creativity, family, making a difference, fun, and happiness, but you should generate your own unique list. You can read the chapter on this exercise from his book on his website (it’s for everyone, not just couples).
Once you have determined your values, take an inventory of the goals you’re currently working toward and where your money is going. Do you see that your current financial practices are in harmony or in conflict with your values? If you have never examined this before, you are likely to find there is some room for improvement. Now you can set new goals that align with your values and start making changes to how you direct your cash flow to achieve those goals.
Here are some common values and examples of goals that someone with those values might set that have financial implications.
- Value: security; Goal: have a fully funded emergency fund, save for retirement
- Value: freedom; Goal: achieve financial independence ASAP by cutting living expenses and increasing income/savings rate
- Value: travel; Goal: save monthly for one big trip per year
- Value: homemaking; Goal: save a down payment, improve credit score
- Value: family; Goal: live on one income so one parent can be at home full-time
- Value: health; Goal: pay for a gym membership and healthy food by cutting expenses in other areas
- Value: helping others; Goal: give a certain amount of money each month to an organization
It may be the case that you are making a short-term sacrifice to be able to more fully align yourself with your values later, but it will be helpful for you to know that your dissonance has an end date. For example, perhaps ‘family’ is one of your top values, but you moved away from your family to attend grad school. That is a limited-time situation, and identifying ‘family’ as a top value lets you know that it is important to you to find long-term work near your family after you graduate. Perhaps you are in a phase of debt repayment, and it feels like all of the things you value are being neglected because you have to funnel everything possible toward paying off debt. In that case, what you are really doing is positioning your life to be even more in line with your values after you are done paying the debt because you will have much more control over your cash flow.
Some other useful questions to ask yourself alongside determining your values is to examine some other aspects of your personality that will affect how you view and handle money. Are you a spender or a saver? What is your risk tolerance? How important is it to you to live within your means? Your answers to these questions will greatly influence the tactics that you choose. For example, a spender and a saver might have the same goal of being financially secure by saving for retirement, but they will go about it in different ways because what comes naturally to the saver may need to be carefully orchestrated by the spender. Likewise, if two people have a goal of having a certain amount of money in savings in 10 years, but one is risk-averse and one embraces risk, the risk-averse person will likely have to commit to a higher savings rate (but she’ll be able to sleep at night).
Once you have a goal, you can pick one or more tactics or strategies that will help you achieve that goal. People often access personal finance at the level of tactics or goals instead of values, which is a mistake because not every tactic will maximally support each goal and value, and tactics are not necessarily appealing to all personalities. However, some tactics will support many different types of financial goals for a broad spectrum of personalities, which is why you will find them commonly discussed. Such tactics include tracking your spending, paying off debt, saving for the long-term, and having access to cash. But that doesn’t mean that you won’t need to come up with additional, less-used tactics to meet your goals.