Downgrade Now and Upgrade to Financial Independence Later

by | Aug 16, 2010 | Healthy Money Relationships, Life Aspiration Planning, Weekly Column | 2 comments

Recently I was explaining to one of my staff members that I had decided to drop one of my two fitness studio memberships and save about $40 a month. She said, “So you’ve chosen to “downgrade your lifestyle to upgrade your future.”

It was a perfect phrase for the process of achieving financial independence.

People who become financially independent successfully internalize the future financial benefits of living frugally now. They understand that building financial security means never living the maximum lifestyle you can afford. Most successful financial frugalists have learned to live on less than 75% of their take-home pay.

Unfortunately, according to a survey published by Jean Chatzky, only 30% of Americans put anything toward building financial independence. In their senior years, the 70% who aren’t saving will find themselves completely reliant on government welfare, families, or the charity of strangers for their survival.

This fact quickly puts into perspective why so many Americans are embracing larger government and expanding government entitlements. Unfortunately, the retirement that government welfare will provide isn’t exactly going to be golden.

Spending less today and investing that savings to provide for your future makes perfect sense. Why, then, do only three out of every ten Americans do it?

Psychologists tell us it’s because our brains are wired for instant gratification. There’s an immediate emotional reward in planning a shopping excursion, finding the perfect pair of shoes on sale, walking out of the store with them, and rushing home to try them on in front of your own mirror.

Making an online deposit to your IRA just doesn’t get the dopamine flowing in the same way.

One way to help you save is to trick your brain by learning to visualize today the reward you will receive tomorrow. What does financial independence mean to you? A paid-off house, travel, time to spend in your garden or with kids and grandkids? Take time to visualize clearly what your version of financial independence would be like. I have very successful clients who have actually clipped pictures representing their financial independence and taped them to their bathroom mirrors. Sound hokey? Not to one client who did this and went from having nothing to accumulating a net worth of $20 million.

Beginning to invest in your future will almost certainly mean downgrading your current lifestyle, significantly increasing your income, or both. The goal is to invest enough money to build a nest egg that, at retirement, will provide you a desirable lifestyle for the rest of your life.

To get started, you will first want to pay off all consumer debt and then never borrow again for consumer purchases. Set up savings accounts for future cars, vacations, repairs, medical expenses, and gifts. In addition, begin investing 10% to 50% of your take-home pay. The older you are, the higher percentage you will need. The best place to begin is a retirement account like an IRA, 401k, or 403b.

This will mean reducing your current expenditures on housing, car payments, vacations, eating out, and similar expenses. When possible, reduce rather than eliminate. Pay attention to which parts of your current lifestyle really matter to you, and be creative in finding ways to keep them.

Will this be challenging? Of course. Will it pay off? Done properly and consciously, absolutely.

The more clearly you can imagine a financially independent future, the easier it will be to make conscious, frugal choices in the present. You won’t be depriving yourself, you will be investing in yourself. Downgrading your present lifestyle to upgrade your future is the surest way to make your dreams come true.

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