Personal Finance Lessons for Financial Freedom and Abundance

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Wondering what it takes to be prosperous and live an abundant life? It starts with the right mindset and habits. Here are time-tested personal finance lessons for wealth-building. 

For many, money is a nagging source of fear and frustration. Many people feel enslaved by money and struggle with the belief that they can’t be the person they want to be, or live the life they want to live, without it.

Usually, income generation is the main area that people focus on when it comes to wealth-building. Though this is important, you have to move beyond the notion that the acquisition of more is the sole solution to your money woes.

The path to prosperity requires changing the way you think about money and replacing old belief systems with new ways of thinking and better habits. Here are time-tested personal finance lessons that will help you build wealth more effectively. 

Understand what money is and isn’t

In his essay “How to Make Wealth,” venture capitalist Paul Graham makes an insightful distinction between money and wealth:

“If you want to create wealth, it will help to understand what it is. Wealth is not the same thing as money ... Wealth is stuff we want: food, clothes, houses, cars, gadgets, travel to interesting places, and so on ... But if wealth is the important thing, why does everyone talk about making money? It is a kind of shorthand: money is a way of moving wealth, and in practice they are usually interchangeable. But they are not the same thing, and unless you plan to get rich by counterfeiting, talking about making money can make it harder to understand how to make money.”

— Paul Graham

A dollar has no worth of its own. It is nothing more than a piece of paper that acts as a medium of exchange. Instead of linking your self-worth to how many dollars you can accumulate, realize that nothing can be had in life without a cost — though that cost isn’t money but the value it stands for.

You can accomplish this by shifting your focus from money-making to wealth-building. Wealth comes by continuously creating things that are of value to someone else and exchanging them for something that is of value to you.

Instead of focusing on accumulating money, try to focus on ways to build wealth through value-adding activities. If you think of ways to use your skills to create valuable offerings, you can exchange them in return for the things you want or need.

This is not an easy mindset shift but it is a critical takeaway: your livelihood is not dependent on money but on the quality of your ideas.

Create a money-management system

If there is one area to master when it comes to money matters, that’s having a solid management system in place. This system should include eliminating recurring bills, automating payment of remaining bills, and setting up a savings strategy. These are the critical first steps in tackling your money woes because of the powerful psychology behind them. 

Decision Fatigue 

In The Paradox of Choice, author Barry Schwartz presents research that shows how having to make too many choices can be draining and even debilitating. Scaling back on the number of bills you have is a great way to simplify your finances because it cuts down on money-related tasks and decisions.

Moreover, automating bill payment and savings takes the tediousness out of money management so you don’t have to keep thinking about it.

Anticipation Anxiety

Psychology Today discusses how negative projections, or assuming the worst about an unknown outcome, leads to unnecessary suffering. By automating your bills you eliminate anxiety by exerting full control over the process, then removing bills from your daily list of concerns once the process is set up.

Anticipation anxiety is particularly challenging for those who have a history of poverty or money problems (for instance, if you grew up in a low-income household). Even if you don’t have a difficult financial history, you may dread going to the mailbox or cringe each time you get an invoice, which is undue stress that can be alleviated.  

First, ask your payees to convert to digital vs. paper statements so you stop getting anxious about the receipt of physical bills. Second, set up automatic bill pay so your invoices are paid automatically from your bank account without you having to think about it. Finally, start identifying and aggressively eliminating bills you simply did not need.

Eliminating bill clutter and putting your financial affairs on autopilot will work wonders for your emotional relationship with money, giving you the freedom and energy to tackle the more complex areas of your finances.

Let go of scarcity thinking

Scarcity mindset is a phrase that was popularized by Princeton psychologist Sharif Sendhik and Harvard economist Mullainathan Eldar in their book “Scarcity: The New Science of Having Less and How It Defines Our Lives.”

In it, they analyze the self-imposed burden we put on ourselves because of limited thinking, and provide some insight into how we might better manage scarce resources and increase our happiness in the process.

Economics is the study of how people and societies make tradeoffs and prioritize goals in order to manage limited resources. The very essence of economics — and the dominating school of thought for many people — is the belief that there is only so much to go around. 

However, economists consistently fail to predict the big events that shape our society (like major recessions) so, believe it or not, they aren’t the most reliable resource for how to think about money or building wealth.

It’s one thing to be mindful of not exhausting your reserves, assets, and supplies — be they natural or man-made. It’s another thing to live in a state of perpetual worry that the only way to get yours is by taking from someone else.

If you operate under the belief that everything in life is limited or never enough (be it money, time, or relationships) then your thoughts, decisions, and actions, will be driven by a fear of lack.

From divorce rates to rampant war, some of the most significant societal challenges we face are driven by this fear. In fact, most of the recent financial crises (that economists weren't able to foresee) were also driven by fear. You can overcome this fear and establish a sense of security in two ways. 

First, by recognizing that you do have an unlimited supply of resources. With proper use, you have powerful internal tools like intelligence, resourcefulness, imagination, creativity, and drive, at your disposal anytime you need them

Second, by being clear on what’s actually a need. Your basic needs have a concrete means of fulfillment (e.g. hungry, eat, full). However, your wants can be never-ending. Often, insatiable urges are driven by unchecked wants that create a misperception of having too little. 

Of course, the reality is that we live in a world of haves and have-nots and for many, this presents a legitimate life or death situation. However, for those of us who live in first-world Western societies, this debilitating mindset is quite unnecessary upon consideration (and appreciation) of the great wealth we already have and the abundance of possibilities we often overlook.

Stop social climbing and comparison 

Social Comparison Theory, originally proposed by psychologist Leon Festinger in 1954, suggests that we feel bad when comparing ourselves to people better off than us and happier when we perceive ourselves to be better off relative to others.

The colloquial phrase for this is keeping up with the Joneses and it’s a major cause of debt and happiness. Comparing yourself to others not only prevents you from feeling content with the state that you are in (even when you are well-off), it also leads to irrational money decisions and overspending that can cause financial strain. 

A smart way to use Social Comparison Theory to your benefit is to live modestly and beneath your means. For instance, instead of getting a luxury apartment in the most expensive part of town as soon as you get a raise, you may choose to remain in your current neighborhood where your income goes very far relative to the local average.

It is well worth considering different ways this mental trick can be employed, particularly as it pertains to your finances. Quartz’s article “The best strategies for self-assessment, according to Buddhist and Stoic philosophy,” is a useful resource.

In short, don’t make unrealistic self-assessments by upward comparison. Using this happiness hack will force you to appreciate the progress you’ve made in life and continue to prioritize what matters, instead of constantly trying to play catch up.

Distinguish money fears from money problems 

In the quest to alleviate money problems don’t get confused about the battle you’re fighting. The key to clarity is to separate irrational fears from actual problems. Once you have them properly bucketed come up with a distinct set of tactics to address them.

Money problems are real-life threats (losing your job) that will have a detrimental impact on your financial state (not being able to pay rent) if you can't find a viable solution to it (getting a new job). Money fears are things that you continually tell yourself (I'm a failure because I don't make over $500,000) that are often untrue and only lead to a perpetual state of useless worrying.

Since money problems also add to money fears, it's important to address those first. Try to put yourself in a balanced financial state by tackling the things you should be worried about (like living below your means, getting rid of debt, and setting up an emergency fund). Then move on to eliminating the self-deprecating thoughts that keep you from fully realizing your potential.

You may appreciate some of the insights garnered from the book "How to Worry Less About Money" by John Armstrong. It can act as a starting point for formulating your personal finance strategy. One of the many useful quotes Armstrong curates in his book is:

Now the last swallows are departing, and the first gales of winter shake your roof, now is the time for sorting through your bank statements and receipts. On your way home from work look in at a junk shop and buy two wooden boxes large enough to hold A4 sheets of paper. And take yourself also, as the sun is setting, to a stationery supplier and get yourself a quantity of manila folders, the colour of hope. Dine early and lay all the pieces of paper before you on the carpet. Divide them, as the Gods divide the just from the unjust, into two piles. Arrange them by date. Work slowly. And when you are done, pour a libation to Apollo, who loves clarity and order. On the second night, consecrate your mind to calculation. On the third, devote yourself to the filling of forms. In this way you spread your work evenly across the season.”

—  Virgil

Virgil, an ancient Roman poet, is illustrating the key to establishing a healthy relationship with money: mindfulness. Virgil advises us to approach matters of money with great care and detail. It shouldn't be an afterthought but worthy of your utmost attention.

Worrying about money won’t get you far. It is only after developing a growth mindset, and converting that negative energy into a thoughtful process for understanding your financial state, that you will see progress.

Develop your wealth-building strategy

An important lesson for wealth-building is having a clear vision of where you want to be financially and putting a strategy in place for getting there. Here are three methods to accomplish this: 

Be specific about what you want  

If you want to build wealth you need to be as specific as possible about what you want to earn (and why) so you can organize all of your business or professional activities around that goal. Knowing the what and why not only keeps you focused but it serves as a strong emotional and motivational driver towards success. 

Knowing the what and why will provide you with a higher goal to peg your efforts to. It’ll also empower you with the raw data you need to make smart decisions about how you spend your resources.

If you are a professional your strategy may require a plan for rising within your organization so you can hit a certain income goal, whereas entrepreneurs may seek a certain growth rate for their business. Regardless of the path, knowing what you want to earn and why precedes the how.  

Pay attention to your financials 

Many smart and successful people don't know where they stand financially. Sometimes they don’t understand their cash flow and other times they haven’t determined where they want to be wealth-wise.

Neglecting your financial state typically leads to a whole host of personal finance issues such as feast and famine cycles where one month it seems like you are thriving and the next the coffers have completely dried and you’re scrambling to make ends meet.

It’s important to incorporate at least some basic accounting into your personal finance routine so you are aware of your financial health and can make adjustments for the better. If you aren't good at accounting or don't want this to take up a disproportionate amount of time there’s still no excuse for not tracking your financials. There is no shortage of apps and services that make it easy to manage and monitor your financials. 

Master the art of creating wealth  

The secret to rapid wealth creation is to serve others through the creation of ideas and solutions that meet needs, fulfill desires and solve problems people are willing to pay for. It doesn’t matter if you are an entrepreneur or work for someone else, a service mentality will make you invaluable to others and create high demand for your work. 

Money and opportunity flow quickly and more easily to those who create something of value for others. For example, when you start a business your goal is to make something that someone else wants. Money then comes to you from your customers in exchange for what you created for them. This money allows you to go out and get what you want (i.e create wealth for yourself).  

To make it even more clear: whatever your profession, learn how to add value and you’ll put yourself in a better position to earn more and build wealth as a result. 

Balance money with meaning

One of the greatest dilemmas in the quest for wealth is how to balance meaning with the pursuit of money. The question of whether money buys happiness does not have a definitive answer. Wealth is not defined by money, but by the richness of life. Though, there’s no denying that quality of life is largely determined by economic prosperity.

Our notoriously tumultuous relationship with money is often rooted in confusion around its role: the muddled lines between whether it is merely a means to an end or an end itself, and whether it has inherent value or is solely one of many mediums of exchange.

Moreover, our insatiable thirst for money is driven by all that it symbolizes — security, identity, liberty — yet propels us to make difficult tradeoffs that jeopardize the very lifestyle we claim we need money to obtain.

Businesses often prey on money anxieties and financial discontent by taking advantage of consumer fears, insecurities, unfulfilled desires, and far-off aspirations to influence them to purchase products that provide an artificial and temporary sense of status.

They deliberately write stories and scripts that showcase a more fabulous, glamorous, and luxurious lifestyle. And they invite consumers to exchange money for the opportunity to live vicariously through the fantastical images they convey.

You’d be a fool to believe that money doesn't play a critical role in life. However, the remedy to your money challenges and the requisite for building lasting wealth is to gain clarity on what money is and isn’t and what it can and can’t do for you.