Tuesday, December 30, 2014

Get Rid of Financial Stress with a Little Financial Space

by Geraud Staton

The holiday season has passed and I am afraid to look at my bank account. This isn't abnormal, unfortunately. We are a society that loves Christmas! But, it's not just Christmas and Hanukkah. It isn't just the gift giving and the hosting of family dinners. There are the friends that have come into town after being away for a year. Naturally, we have to meet them for drinks. It is the fact that we are out of work between Christmas and New Year's, so for a week we're sitting around the house with nothing to do. And even if we have to work, many of our friends are off, so we join them when they ask us out to lunch or for a drink or to go to karaoke. And with every outing our spending goes up by another $20, $40, or $100. And then, suddenly you're worried about your finances again. You're a little more stressed going into the new year.

The problem is that it doesn't only happen once per year. Your finances are fine one day. The next day you find out your car needs brakes. Suddenly, you no longer have a buffer. If anything else goes wrong you're going to have to dip into your savings. Worse, you may have to use those credit cards you promised not to touch. 

Surprise medical bill? Leak in the roof? Job interview? Whatever it is, you are once again stressed about money when, on paper, you should be doing fine.

It is a concept that I call Financial Space. 

We all have our own ideas about what financial security and financial freedom are. It's one of the things my life has been dedicated to for the past couple of years. My personal idea of financial security is "being able to afford my basic expenses using passive income." We all know that even the most passive income isn't actually passive, but that's a matter of semantics. In essence, I don't want to HAVE to work in order to pay my bills, 

But, I realized that on my trek to financial security, and eventually to financial freedom, I am not exactly financially comfortable. Why is that? Why don't I feel good about my financial status?

I lack financial space. And I have always lacked financial space. If I make $20k a year, I live just fine, and I have about $20k in expenses per year. When I art career picked up and I started making an additional $10k, my expenses suddenly went up that much as well. At one point I was proud to not have cable. The moment my wife and I could afford it, we suddenly had cable. We started taking two big trips a year instead of one small one. I'm sure that, kept unchecked, if we started making $400,000 a year, our expenses would balloon up to $399,994 a year. And then we'd wonder why we didn't have any savings!

We aren't an anomaly. There is a theory called Parkinson's Law. In essence, Parkinson's Law says that the amount of space or time we give something is exactly how much it will take up. So, if you tell a subordinate that they have 3 days to complete an assignment, they will likely take 3 days to do that assignment. If you tell them they have 1 day, they will do the assignment in 1. And, it is important to note that both versions of the task will be done equally well.

There are many variations of the law. "If you wait until the last minute, it only takes a minute to do" is one of the favorites of people who waited until the last minute in school to do their papers and still managed to get an A on them! The truth is, they probably would have gotten an A even if they had started early, but they probably would have just worked on the paper longer.

So, how does this apply to my sense of Financial Space? It's simple. I spend what I make. And then, because life is unpredictable and things are constantly happening, I get a financial hit. This will happen to me, and to you, for the rest of our lives. Because my financial belt is tight, surprises hurt. Maybe you're smart enough that you have a little savings aside and can weather these financial snafus, but you're going to spend the rest of the month worrying that there could be something else out there that will take you over the edge. 

That is, unless you have some financial space. Financial space is making $100,000 a year but only spending $80,000 a year. Financial space is bringing in $40,000 and only spending $32,000 of it. A lack of financial space is earning $300,000 a year and spending $295,987 of it!

How much you earn doesn't matter. It's all about how much of it you spend. Period. 

Whether you're looking at your personal finances or your company's finances, financial space is important if you want to alleviate a major stress point in your life. 

Though I don't often make New Year's Resolutions, this epiphany about financial space has come at an opportune time. So, it is my desire to ensure that I create more financial space in both my business and personal life. Yes, financial security is only a few steps away, but there is no reason to be stressed for the whole trip. It would be like driving your car on a long trip and only getting an 8th of a tank of gas at a time!

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