Financial Independence, spending habits, neurotransmitters, and what you can start doing today

Today’s Say What Wednesday question is from Paul;

“Hey fellas! I think you guys are doing a great a job. Always a fun listen.

Question; I was wondering your thoughts on the world of FI (financial independence) which is getting more momentum, to the likes of Mr Money Mustache and other FIRE? Have you taken a similar approach to these people with your own personal finance, having savings rates as high as or higher than 50% of total take home income?”

For those who don’t know:

1. Financial Independence Retire Early (FIRE)
   • i.e. Save and invest most of your income now

I really like the idea of Financial Independence and employ it myself to avoid the hedonic treadmill creep. I set a base living standard and then invest everything I earn on top of this figure.

Whilst I was PAYG a little while ago I was saving between 50-60% of my income and investing it, with a decent chunk being salary sacrificed. I’ve been in the process of setting up a new business in the past 18 months which put a dint in the ability to save, but hope to get back to that level shortly. I always reinvest income from investments – starts to make up a larger component of your income.

Keeping things simple – It is hard to get to that point – But with one simple trick you can start working in the right direction. It starts with, ‘How to not care about what I have, or how I relate to others’

Where it comes from – Spending habits – Shopping, cars, etc.

1. Dopamine – Reward system – Buying something is the easiest way to get this
2. Serotonin – Status symbols – feeling higher up in the social picking order
3. Money provides both of these thing – But only in what others can see
   • Dopamine is easier to do. Focus on savings every month and get your hit of dopamine when you achieve the target
   • Serotonin is harder to do. It does require a bit more self-confidence (self-esteem) to be happy not chasing the way out through buying things. If you’re constantly looking at what other people have you’ll always be unhappy – there is always someone else with more.
4. Why you can never really tell who has real wealth just by looking at them (or if it is funded through debt and cashflow)
   • Met a guy who owns a helicopter, every time I saw him he was in old sneakers, old t-shirt.

What you can do

1. Play a game – You can think of it as tricking people – turn the game around and as long as you know are making yourself wealthy, and not others buying their stuff it can work.
2. Endowment effect – Put more value to what you already own
   • Turn it into thinking about Keeping your money – put a premium on your spending habits
     • Essentials – 0%
     • Non-essentials – Gross the price up by a factor:
       • Example – New TV is $3,000 – Life of TV is 10 years
       • Earn 7% on that over the same time – is the TV worth $6,000?
       • Thinking in terms of future value and opportunity cost
     • To part with it, the item better be worth it

Conclusion

You don’t have to live like a pauper – enjoy your life with great experiences. But, just next time you’re looking at a big splurge on something, gross up the value and see if it is still worth it!