2913: This Money Belief Is What Keeps Many People In Debt by Kelley Long of Financial Finesse

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[00:00:51] This is Optimal Finance Daily. This Money Belief Is What Keeps Many People In Debt.

[00:00:57] By Kelly Long of FinancialFinesse.com

[00:01:00] And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:05] Now let's get right to today's post and start optimizing your life.

[00:01:13] This Money Belief Is What Keeps Many People In Debt. By Kelly Long of FinancialFinesse.com

[00:01:21] One of the most interesting things I've learned from having the opportunity to discuss money with people from all walks of life

[00:01:28] is how much of an effect that our deep-seated money beliefs have on our financial outcomes.

[00:01:34] One of these beliefs is how we perceive whether or not we need to buy something.

[00:01:39] Some people buy what they can afford while others go with what they actually need.

[00:01:46] I know, because I used to embody this belief.

[00:01:50] Little Decisions That Are Actually A Big Deal

[00:01:53] Every day we make little decisions, like whether to take the bus or hail a cab,

[00:01:59] or whether to cook dinner versus ordering delivery,

[00:02:02] that aren't really just about time and or a willingness to go the tougher route.

[00:02:08] How you make these decisions is actually a key determinant of your financial situation.

[00:02:14] It's how even people who make hundreds of thousands of dollars per year end up riddled with debt and with very little savings.

[00:02:23] True story, I know people like this.

[00:02:26] What It Looks Like

[00:02:28] This really struck home with me recently,

[00:02:31] when I met up with friends who had taken the subway and walked about half a mile to the place we were meeting.

[00:02:37] A minor inconvenience versus just getting dropped off out front.

[00:02:41] These are people who could easily afford the $10 it would cost to hire a ride.

[00:02:48] But their mindset is, why spend the money if we don't have to?

[00:02:52] On the flip side, I've heard people joke that they're too poor to own a car,

[00:02:57] but not so poor that they have to ride the bus.

[00:03:00] The irony is that I own a car, and yet I take the bus all the time.

[00:03:05] Finding the economical way to accomplish life is not just about whether or not you can afford it,

[00:03:11] it's about spending according to what you need.

[00:03:15] It's a mindset.

[00:03:17] Why It's a Big Deal

[00:03:19] This may not seem like a big deal.

[00:03:21] Saving $10 here and there on transportation around a city is not going to make or break your ability to retire.

[00:03:27] But that mindset where your spending decisions are made by whether or not you can afford something,

[00:03:34] versus whether you really need to spend the money, is what's so dangerous.

[00:03:39] Many people use the affordability test when deciding what kind of car or house to buy.

[00:03:46] Just because you can squeeze $450 a month out of your budget in order to make a car payment,

[00:03:52] doesn't mean you need that nice of a car.

[00:03:56] Likewise, the feeling of being house poor often originates from someone buying what they think they can afford,

[00:04:03] which is really much more than they need.

[00:04:06] How this mindset had me living paycheck to paycheck until my 30s.

[00:04:11] I can get a little luxury on this, but that's only because I've been there.

[00:04:16] Until about the age of 32, I was caught in a loop of saving and spending that was keeping me on the edge financially,

[00:04:25] no matter how much or how little money I made.

[00:04:28] I lived in the nicest apartment I could afford and bought my last new car based literally on what I had left over in my bank account each month,

[00:04:37] not based on what would allow me to work towards other goals of escaping credit card debt and building up an emergency fund.

[00:04:45] What changed for me?

[00:04:48] The thing that revealed this psychology to me was when I found myself needing dental work

[00:04:54] that required an upfront payment in excess of $5,000, which of course I didn't have.

[00:05:00] Without a second thought, I charged it to a credit card,

[00:05:04] then started aggressively paying $300 per month towards the balance until it was gone.

[00:05:10] My aha moment was when I realized that I was able to find $300 per month towards a payment.

[00:05:17] But prior to that, I somehow didn't feel like I could afford to save that same amount.

[00:05:22] Once I paid that balance off, I immediately added an automatic deposit to my savings in the same amount,

[00:05:29] which eventually led to a real emergency fund.

[00:05:32] Seeing the balance of that account hit $1,000 led to a shift.

[00:05:38] Having a comma in my savings account relieved a burden of financial stress I didn't even know I was carrying.

[00:05:46] The key takeaway.

[00:05:48] It was a crucial lesson that translated to literally every other payment I had in my life.

[00:05:54] In the past, whenever I had a payment end, such as paying off my car loan,

[00:05:59] I always found a way to replace that payment, like moving into a more expensive apartment.

[00:06:04] If I could go back in time, I'd stop 30-year-old Kelly and tell her to instead stay in the cheaper apartment

[00:06:11] and stop paying for things just because she could afford them.

[00:06:15] And instead, talk to her about living within your means according to what you need

[00:06:20] versus what you want or can afford.

[00:06:23] The next time you find yourself making a financial decision with the reasoning that it's what you can afford,

[00:06:29] stop and ask yourself if it's also what you really need

[00:06:33] or if it might make more sense to keep that money in your pocket.

[00:06:37] The way I talk myself out of spending in these situations today

[00:06:40] is to remind myself that every dollar I don't spend today

[00:06:44] is a dollar that can help me stop working sooner.

[00:06:51] You just listened to the post titled,

[00:06:54] This Money Belief is What Keeps Many People in Debt by Kelly Long of FinancialFinesse.com

[00:07:00] And I'll be right back with my commentary.

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[00:08:35] I think the word afford is a very subjective and relative term.

[00:08:42] For instance, many people claim they can afford their mortgage because the bank looked at their

[00:08:47] finances and determined that they could afford to pay 30% of their income towards their housing

[00:08:53] costs.

[00:08:54] But as soon as the roof leaks or a pipe bursts, all of a sudden the home isn't so affordable

[00:09:01] because they have no savings to come to the rescue.

[00:09:04] My definition of affordability has changed drastically on my financial journey.

[00:09:10] When I was 28 and first started becoming financially literate, I was making about 80 grand per year.

[00:09:17] I was also 30 grand in high interest consumer debt and living paycheck to paycheck.

[00:09:23] At that time, I decided that I could not afford any discretionary spending.

[00:09:29] I treated my debt as an emergency and threw all my money at paying it off as quickly as possible,

[00:09:36] which led me to get out of that debt in 11 months.

[00:09:39] Then, as my income climbed, I saved and invested about 60% of my earnings

[00:09:44] and got myself to the financial position to quit my job a few years ago.

[00:09:49] Now, I make much less than 80 grand per year,

[00:09:53] but my assets are such that I can afford much more than I could when I had no assets and only debt.

[00:10:00] I tell you this to demonstrate that your income is not the only factor to determine if you can afford something.

[00:10:07] You have to look at the expense in the context of your entire financial picture.

[00:10:14] How much debt do you have?

[00:10:15] What are your other expenses?

[00:10:18] How much of a gap do you have between your income and expenses?

[00:10:22] And where are you in terms of savings and investments?

[00:10:26] But that should do it for today.

[00:10:28] Thank you for listening.

[00:10:29] And thank you if you've ever shared this show with someone.

[00:10:32] Have a great rest of your day and I'll see you tomorrow where your optimal life awaits.

[00:10:37] Let's.