10 Financial Assumptions That Need To Be Challenged

My goal is to challenge assumptions. If there is one persistent theme of Simple Economist, it would be that we need to challenge ourselves and constantly question the status quo. This post is certainly full of references that contain detailed explanations for many of the individual topics. The article will help bring together many different ways we need to challenge the financial assumptions that we are exposed to on a consistent basis.

debtI’m sure you have had it happen. I’m sure there has been a time where you cringed after hearing a comment, news report, or had a family member or friend make a statement based on a faulty assumption. The misinformed (or toxic way of thinking) that is used for rationalizing or marginalizing unwise choices can be tough to be around. I honestly think that is what drives me to write and publish my thoughts each week. I just see so much (often in myself) inefficiency, misinformation, and faulty assumption, that it motivates my need to organize my thoughts and put them down on paper. Do you ever question popular financial assumptions?

Spending More Will Make You Happier
I’ve tried this one many times before. I’ve thought about the items just out of reach, that, if obtained, would bring full joy to my life. No one really plans to waste time and energy keeping up with the Joneses, but we have all done it a time or two. So, will spending make us happy? Certainly there is a place where spending brings us joy, but the joy diminishes after we reach a certain point. And to be honest, almost all the readers here at SE have already reached that point. Instead, the goal should really be to find our actual bliss point of personal consumption. We all know that luxury is just another drug and we don’t really make any progress running on the hedonic treadmill. Spend time with people. Sooner or later we will all realize that relationships are more important than money.

The More You Earn, The More You Spend
It seems to be the trend all around us. People tend to spend 110% of their income no matter how much they make. There is almost a subtle societal expectation to spend near your pay-grade. But, it doesn’t need to be that way. You don’t need to spend more to be happier.

My proposal is to decouple spending from income. We are incredibly adaptable creatures and adapt to comfort (and discomfort) quickly. When we inevitably get raises over time, it is unnecessary to simultaneously increase our outflow. Since I’ve been writing, I’ve learned about millions of people that have learned to spend their income efficiently instead of just spending everything they earn. As an example of one, our family has personally been able to optimize our expenses each year and actually reduced our income needs in each of the past five years. That also includes periods of increased income and cash flow, buying (and paying off) a new home, and having multiple children.

I Don’t Have Time To Plan/Budget/Organize
We have all been given the same amount of time. There are certainly seasons we face where it feels like we do not have enough time. The bigger issue, however, is simply determining our priorities and making time for them. You have time to develop a strategy and financial plan. In fact, you will make financial decisions whether you actually plan them out or not. With correct prioritization, you can make time to organize your financial picture and put together a system that will actually save you time (and money) each month. You must make time for it.

Everything Is Getting More Expensive
We can all name a few things that have become more expensive over the years but we often fail to consider all the items we use daily that are actually becoming significantly less expensive. Thanks to Moore’s Law, anything we utilize that contains processing power (increasingly everything we own) continues to get cheaper and more powerful every two years. From real estate, to food, to airline travel, we have so many different things in our lives that continue to decline in price relative to our incomes. In fact, I would argue that we are all getting richer.

Debt is Bad / Debt is Good
There are certainly degrees of good and bad debt. While I personally tend to avoid personal and business debt, I certainly understand situations where its use can be very helpful. Debt has its fair share of detractors- and more people get in trouble with it than utilize it efficiently- but it is disingenuous to categorically assume all debt is bad. I have worked with far more people who have had negative debt related experiences than positive ones, but I also know people who have enjoyed borrowing money.

Borrowing money certainly has its place in society but most Americans are extremely inefficient with their debt loads. Debt is typically attached to the strings of increased risk and most individuals could benefit from a reduction of both. In theory, leverage spreads the risk of our consumption to other parties, but the transfer of risk often incurs stress and unintended consequences. In my quest for simplicity, I’ve decided that debt is actually quite unnecessary to live a happy, healthy life.

You Need a Credit Card / Credit Score
For most people, credit cards and credit scores are drivers of unwise decisions. They can be used to our advantage, but many financial leaders make it seem like they are completely necessary to live a normal life. That is simply false. We personally do not actively use credit cards and our credit score will probably go away in a few years because we don’t need credit. If you have money (instead of debt), it is not very hard to get a competent bank to let you borrow more if the time arrises, even if you have a credit score of zero. People lived thousands of years without these products and who knows if they will even be relevant in twenty years.

Spending More on Food Makes You Healthier
This is one of those strange paradoxes. There are certainly healthy foods that are expensive. And there are plenty of unhealthy foods that are highly processed and dwarf their natural neighbors in their price and ingredient list. In our own experience and tracking, we have noticed that whole, unprocessed foods tend to be very inexpensive. In fact, raw vegetables constantly rank as one of the least expensive (per lb) items most individuals can buy. Moving toward a real food and plant based diet would be beneficial for almost all individuals in the developed world. Simple food is not expensive.

Healthy Food is Expensive
To begin, we are in a unique place in history where we actually only need to spend a tiny portion of our income on food. If we were to make the average family income of around 50k, we would only spend about 7% a year on our luxurious grocery shopping. In fact, we have shown that you can easily feed a family healthy food on $200 a month. Again, simple food is not expensive.

Constraints Limit Freedom
As paradoxical as it may seem, setting limits and developing systems will positively impact your life. Constraining our diets, spending decisions, and unhealthy relationships will make us healthier, happier, and better positioned for the future. Although a cash flow plan (or budget) is often viewed as the bane of personal financial planning, a properly and honestly constructed one can actually be quite freeing. It works in relationships as well. If you want a healthy marriage, you certainly have to limit your interactions with other members of the opposite sex. If you want your kids to live healthy lives, you must certainly have wise rules to keep them safe. Properly used constraints can help us expand our comfort zone and our personal freedom.

A Car Is the Pinnacle of Transportation
Americans spend lots of money on vehicles. Cars are typically the most expensive things we buy that go down in value. Overall, we place way too much emphasis on the metal box that forces us to sit for all of our transportation needs. Instead, consider planning your life with car-free or car-lite lifestyles as an option. As MMM put it: “A bicycle is an automatic life-balancing machine. It is a money-printing fountain of youth. You can’t really make any rational decisions about life, finance, or rational planning unless you have the context of bicycle transportation as part of your frame of reference.” Seriously, ride a bike.

Honestly, we are just scratching the surface here. There are so many financial assumptions that need to be challenged! We must take the time to learn about ourselves and plan our actions to maximize our personal fulfillment. What about you? Do you disagree with these assumptions? Agree? What else needs to be challenged?

Comments are closed.