Which is more important: Financial Peace or Financial Independence? Are they the same? Almost all finance books are written about making more or spending less. But more often than not, there is a prerequisite goal that needs to be addressed before the others are even necessary. The fundamental assumption financial experts make is that either making more, spending less, or some combination will put you in a better place financially. And much of that is true. But what is missing is often the goal. The goal of most literature is to maximize wealth instead of well being. How many people do you know that become more anxious about money the more they make? I know millionaires who have trouble sleeping at night due to worries about money. I know individuals who have very little money but seem more content than I am with much less. Ironically, I’m sure many wealthy individuals would trade their current situations for a carefree time in college when they had no money but rarely worried about it.
I think Dave Ramsey may have had this one right. Financial Peace is a better goal than maximizing wealth. Being able to sleep at night because you don’t worry about money is better than having millions in the bank. I’m not saying that we should give all our money away and be beggars but I am saying that if a win for you is making more money and you draw your self worth from how many money points you have; you will forever be in a position to worry about your money. If that is where your security and hope are found, it will be impossible to accumulate enough to have true peace.
Psychology > Math
Psychology is more important than math in most financial situations. Most people understand the basic concepts of income vs. expenses or calories in vs. calories out. Knowledge is often not what is lacking, but what is lacking is a clear set of goals, habits and path toward a financially peaceful lifestyle. Finance majors and economist will argue about the percentages of gain when it comes to paying off a house early or getting a tax refund but what is often missed is the psychology or the peace that is gained.
How do you handle risk? Try taking a look at your finances through the lens of what allows you to sleep at night. How to you manage financial risk in a way that gives you peace? For myself, my goal is not only financial independence, but financial peace. I think for many people financial independence is an aspect of their long term desires but it needs to be only part of the whole. What good is it if you have more money saved than you can ever spend but are still worried about it. For me, I try and manage risk in several ways. The first for me is working toward drawing contentment from what I have and not what I don’t have. That is not something they teach in risk management 101 but for me it is where it starts. The second aspect is to minimize the expenses it takes to make me happy. I combine this goal with the idea of a lower impact lifestyle. And that may turn out to be the end goal of all my writing.
How I’m Searching for Financial Peace
For me, minimizing my expenses typically means I am consuming less and treading lighter on the planet. But financially, it means driving down the income risk and pressure that an inflated lifestyle brings. Think of a professional athlete making 2.5m a year. If the lifestyle matches the income there is significant pressure and risk to continue making that salary. The same can be said for the family making 100k. If they are used to living on 100k, then there is a lot of pressure to maintain that income. It is very easy for a well educated, intelligent person to make 20k. In fact, most upper middle class individuals know how to make 100k or more if they wanted to live that lifestyle. If you want to quit your job or dislike your industry or end up quite specialized (like most people at that income level) you often trap yourself into working more. If you live contently on 20k there are millions of income streams or jobs that bring in that amount. You don’t have to worry about losing the job you currently have because it is very easy to find another one to support a simple lifestyle. For me, I don’t even have to worry about disliking my job because if it ever starts to not be fun there are a lot of other really exciting activities that easily bring in over the base level of expenses it takes my family to run. Even among high income earners, income related pressure is immense. I know several individuals who feel trapped in a job they dislike but it is the only way they know how to make enough money to support the high levels of expenditures their families expect.
For me, getting out of debt is a major aspect of both risk mitigation and relaxation. When you owe someone or someone owes you money it changes the relationship. There is a variable level of stress that comes with borrowing money and it affects individuals differently. The marketing in our culture has normalized debt but for me it still elicits the feeling of ‘loss of control’. How would you feel if you had no payments of any kind? Would you feel more relaxed? For most people, getting rid of debt can be the single most peaceful thing they do.
The other way I choose peace over wealth is how I spend my money. And by this I mean leaning heavily towards sending on experiences rather than buying more things. Experiences are an appreciating asset with little risk. Most of us can fondly remember a cool trip, awesome events or doing something special with our family. And what is neat is these memories get fonder over time, we tend to remember the best parts or laugh about the bad ones. What entertains me about it is how stories grow and evolve over time. Compare that to the brand new cell phone you bought five years ago. Can you even remember it? Is it in a trash can? What about the one 10 years ago? Compare that to a trip. Can you remember a trip you took 10 years ago?
Does your stuff make you worry?
I think a real life example for me would be when I decided to save up and get a fancy bike. I love to ride bicycles and I made a deal with myself that I would get an inexpensive bike and once I had ridden 1,000 miles I’d pony up and get a fancy one. So the day came and I bought a nice used carbon fiber Trek. It was light and sexy and I was proud to have it. I rode it all around town for a few days. But, it didn’t take me long before I realized that it made me uncomfortable leaving it out in the rain at night or locked up downtown during the day. It was a fancy bike and I got a great deal on it but simply having something that expensive sitting outside left me feeling anxious. It was nice to ride but I actually ended up selling it because I realized that it was not worth the cost of owning it and all that came with it. Do you own anything that you feel owns you? I like what the wise man Andy says about the stuff money buys: “I don’t want to own anything that I would feel bad lending out.” Translation: What things in your life are you so attached to that it would make you anxious to lend out?
Finally, I feel like I must mention one last aspect of financial peace. For me, systematic giving on a monthly basis has been an incredible exercise in how I view money. Setting aside money to give to others every month as been a challenging but rewarding opportunity. I enjoy having control and giving to others cedes a little bit of that control. But it also reminds me on a consistent and regular basis that I am very fortunate and there are a lot of other people and organizations that could benefit from strategic giving. So for me, giving money away is an important part of the financial peace puzzle.
So, what is your goal with money? What does it accomplish for you? Does it make you more relaxed or more anxious? Do you think financial peace is better than financial independence?