The family finances – Financial Psychology part 1

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It’s a scary thing putting your family finances out there for all to see, but in the interests of encouraging others, I have developed a five part family finances series.

Part 1 – Financial psychology

Part 2 – The year of austerity budget and the new normal

Part 3 – Where to from here now that our income has been halved

Part 4 – Net worth tracking

Part 5 – Retirement planning

So the starting point for us:

We were both in the public service in middle to senior management levels. I’m not prepared to disclose our family income, but suffice to say that in household surveys we were always ticking the $250 000 and over box – and it was substantially over.

We moved in together with our blended family of seven in 2009, both reeling financially from two divorces with some superannuation and a mortgage of $350k against a house now worth about $700k.

Then we kind of financially dicked around a bit. We put in a new pool (above ground, but with a fancy deck); renovated some rooms, bought a second hand seven seater car and I realised mid-way through 2014 that we were still sitting at $140k on the mortgage some five years later, and had only managed to get through just over $200k, despite our reasonable income earning reality.

So – the year of austerity was born. Just like Greece, we decided to cut back on expenses and knock over the mortgage within a year. I can happily report that we have achieved our goal, which has enabled me to take the next year off work and spend some more time with my children, as well as potentially go back to work after that on a part time basis.

So what was the psychological shift that enabled us to make the transition? I read Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence by Joe Dominguez and Vicki Robin and in a nutshell, I realised that each time I purchased a new item of clothing, something new for the house or bought a convenience meal that I was trading my life hours for money.

The premise is this: everyone only has a certain number of life hours available to them. Each time you purchase something, you are trading some life hours away. EG I could buy this nice $200 shirt that will bring me immediate pleasure, and perhaps the next two to three times that I wear it; but to get that enjoyment, I have to work for four hours (of half a day) to net that kind of cash. You add this up over a whole wardrobe, a new car, brand new kitchen appliances – you get my drift and you realise that you will need to work for most of your life to achieve short-lived consumption happiness.

The other thing I realised is that purchasing new things each pay day is like being on crack cocaine. It feels good at the time, and even the first few times that you use or wear your new thing – but then the “thing” you have purchased becomes a part of your new “normal” and you find yourself still craving for more. This is called hedonic happiness – short lived, but leaves you wanting for more. And it’s insatiable.

So the shift in gears in my mind has been two-fold:

  1. Each time I want to buy something, I think about is it worth the life hours – adding an extra half day/year/five years to my working life; and
  2. Is this purchase just for hedonistic reasons, or is it something that we actually need.

What have you learned about your financial self?

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