our personal finance philosophy

Our personal finance philosophy [TPP#76]

Recently Hayley and I were filmed for a TV show where we were part of a fake game show. On this “game show” we had to answer questions to test how much we knew about the other persons spending habits.

It was an interesting exercise and we found we’re very similar and agree on most things when it comes to money. The experience got us thinking about the important personal finance philosophies that we follow.

What follows are a few best practices that we try and stick to. As with everything that I write about, these are our opinions of what works for us. Of course, every situation is different. So take away from this post what you will…

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Money doesn't create happiness

First off, something we’ve all heard, but don’t necessarily believe is that money doesn’t equal happiness.

If you’ve ever purchased a fancy new phone, you will have experienced this first hand. At first, you thought that shiny new phone was the best thing in the world. But very quickly you adapt and the phone becomes just a normal thing that you own. You’re actually no happier as a result of owning the phone. This is known as hedonic adaption.

For us, our income goals are modest (I recently wrote about why we don’t want to scale our business). Our priority is to own our own home, have enough to live comfortably and support ourselves (and future family). That’s it. We’re not particularly interested in owning fancy cars or a large home (can you imagine how hard it would be to clean).

Okay, now that that’s out of the way, let’s move on to some specific tactics…

Conscious spending

One of the most important ways we control our spending is by deciding where we’re going to save so that we can justify spending elsewhere. This is what Ramit Sethi describes in his book, I Will Teach You to be Rich, as “conscious spending”.

Conscious spending is about deciding where to save money so you can justify spending more elsewhereClick To Tweet

For example, we have no interest in owning flash cars. Instead, own very affordable cars that are cheap to run and maintain. We also don’t spend a lot on fancy things like TV’s (our current TV is tiny and about 8 years old) or game consoles. We don’t eat out a lot and prefer to take our own lunch to work.

Because we’ve decided to save in these areas, we don’t mind spending more in other areas, like travelling, going to CrossFit each week and buying healthier foods at the grocery store.

Chances are, you’re being a semi-conscious spender already. But it may be worth spending a bit more time thinking about how much you spend in different categories and making some firm commitments about what you will and won’t spend money on.

TIP: To see how I track spending, read more about how I use Pocketsmith for financial tracking.

Pay down debt (and don’t take on debt unless you absolutely have to)

Another big principal we place a lot of emphasis on is paying down debt. Fortunately, we actually don’t have any credit card debt, personal or student loans. Our only debt is the mortgage on our home which we’re trying to pay down as fast as we can.

For us, we avoid taking on additional debt at all costs. For starters, we’ll never finance a purchase using credit card debt or personal loans. If you don’t have the money to pay for something using cash you have now, you probably shouldn’t be buying it. If you really need that thing, you really have to ask whether the debt and subsequent interest is really worth it.

When I worked in mortgages a few years ago, it was shocking to me to realise just how many people have a few thousand dollars on a credit card or a casual $20,000 car loan.

The one exception we would make to this rule is when you can use the debt in a constructive way. For example, on house renovations that increase the value of the asset.

If you have some kind of short-term debt, I’d make it a top priority to pay this off as fast as you can. When you do, you’ll be amazed at how liberated you feel and the increase in income that comes from not paying off interest each week.

Use credit cards the “smart way”

So, because we don’t have credit card debt, we don’t use credit cards, right? Wrong!

The smart way to use a credit card (as long as you’re disciplined) is to put all your purchases on the card. That’s right, even a $3 coffee goes on the credit card. You then need to pay the entire balance of the card each month to avoid paying any interest. There are a few reasons this is a good idea:

  1. It improves your credit score. By actively using your credit line (compared to not using credit it all), you’ll build up good history as a borrower that’s proven he/she can pay back money quickly. This is useful if you ever DO need to borrow money for a business or property.
  2. You can earn rewards. We have a cash back card that allows us to accrue cash back points the more we use the card. That’s not to say we’ll go out and spend as much as we can. It means if we’re going to buy petrol and groceries anyway, why not put it on the card and earn a little something. Last year we earned over $600 in cash back which was essentially free money.
  3. Earn interest for longer. By not using your day to day available cash (because all spending is on a credit card), you can keep that cash in an interest-earning account for longer.
  4. Get other benefits like free travel insurance and purchase protection when you pay for trips or big-ticket items using the card.

To make this process easier to manage, we have an automatic payment set up each month to auto-pay the entire balance of our card. That way we never forget to pay and fall into the trap of paying interest. Imagine everything you buy being 25% more expensive… That’s essentially what you’re doing if you don’t pay off your card.

TIP: We’ve been using our card like this for a number of years. Now, each year when I have to pay the annual fees on the card, I simply call my bank and ask them to refund the fee. Because I’m a good customer, they always oblige.

Let me know what you think. What habits do you use to be more financially savvy? Let me know in the comments below.