What does it mean to live a rich life?
Money personality and financial coach Ramit Sethi asks people that every day — and all too often, he gets exactly the same answer: I want to do what I want, when I want.
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While strong money management could unlock that desire, Sethi said in an interview with Moneywise that particular response is “generic” and “just words” that don’t reflect a person’s aspirations.
Instead of setting financial freedom as a goal, he encourages people to lay out their deep desires and to come up with a financial plan for how to achieve them.
What’s the point in the daily grind?
Once you enter the workforce, it’s easy to fall into the daily grind of eat, sleep, work, repeat.
“We work 40 plus hours a week, we agonize over how much money we have in our checking account, we worry about all these phrases like 401(k)s and expense ratios, and yet we've never actually thought: What's it all for?” Sethi said.
“What is the point of earning this money?”
It is easy to get caught up in financial milestones such as buying a car, paying off your student debt, buying a house and maxing out your tax advantaged retirement accounts.
While those are all respectable and important money goals, Sethi says a lot of Americans “have never actually thought about” how they really want to spend their money.
“What I want to hear from people are vivid specifics that fit them like a glove,” he said. “I want to hear somebody saying: ‘I want to go to Italy for two-and-a-half weeks with my kids, my spouse and my parents. I see us sitting and watching the sunset over the Colosseum, drinking Italian wine and enjoying quality family time.’
“Now, that is a vivid vision, and we can use money to get you there. But just saying: ‘I want to do what I want, when I want’ — those are just words.”
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How to get what you want
Before you set out to pursue your desires, you have to get in the right mindset. For Sethi, this means being specific in your financial goal-setting. If you’ve always dreamed of buying season tickets for your favorite sports team, or taking your family on vacation to Europe once a year, you must have a plan to manage your finances to make it happen.
Sethi encourages people to engage with his conscious spending plan, which is quite similar to the popular 50/30/20 budgeting method (with the key difference being that he separates savings and investments. He suggests you divide your monthly income into four categories:
50-60% on fixed costs (housing, utilities, gas, groceries etc.)
5-10% on savings (long-term emergency fund, vacations, gifts)
5-10% on investments (post-tax retirement savings, stocks)
20-35% on guilt-free spending (dining out, movies, fun)
If your financial goal is significant, you may be tempted to reallocate some money away from savings and investments toward your discretionary spending. While that might provide happiness in the short-term, keep in mind that one day you’ll stop working and the more money you have saved and invested for retirement, the more financially secure your golden years will be.
Instead, Sethi advises people to be more cutthroat about their discretionary spending. If you don’t need two cars, sell one. If you’re renting out storage space for stuff you never use (and likely never will), end your lease and sell your clutter. And check your subscriptions because you might be paying for a streaming or delivery service that you never use.
There are other money hacks to consider. You could look for a new job that offers a higher pay rate to help you achieve your goals faster, get a side hustle or even rent out a room or a parking spot to generate some passive income.
If your dream is to travel, consider opening a travel credit card to help you save on flights and hotels.
There are many ways to achieve your financial goals — as long as you have a specific target to aim at.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.