by Shelley Seagler
According to British researcher Cliff Arnall, the third Monday of January is the most depressing day of the year. Arnall calls it, “Blue Monday.” While some make a reasonable argument that Arnall’s theory is based on pseudoscience, I personally wonder if Arnall may be on to something.
Think about it, you hit the middle of January and suddenly realize the holidays are long gone, credit card statements from holiday spending are coming in, and you’re not one step closer to your New Year’s Resolutions.
But if whipping yourself into financial shape is on the list of things you’d like to accomplish in 2013, don’t fall into despair. I’m here to help you get on track.
A while back, I read Mitch Anthony’s book, The New Retirementality: Planning Your Life and Living Your Dreams….at Any Age You Want. In it, Anthony offers a modified version of Maslow’s Hierarchy of Needs as a way to calculate necessary income for retirement. Although Anthony’s hierarchy is intended for retirement planning, his approach can easily be applied to help you to reevaluate and subsequently prioritize your current spending and saving.
Let’s look at how Anthony defines each level of income:
As with Maslow’s original, each level of Anthony’s hierarchy builds on the next. You can’t create safety income until you’ve covered your survival income. In other words, you don’t dare think about spending money on dream expenses until you’ve built a solid foundation.
Let’s look at some ways you can apply the concepts of the hierarchy to getting on the right track to financial success in 2013.
Survival Income Action Step: – Take some time to think about what your life would look like if you stripped away all of your discretionary expenses. Sure, it’s hard to imagine life without lattes, but you can do it!
Calculate how much money you need to cover your monthly survival expenses – this includes items like food, shelter, utilities, expenses to get to and from work, etc. It does not include items like cable, eating out, and new clothing. Focusing on just your essential needs allows you to look for areas where you can cut back and save.
Safety Income Action Step: Make a list of the biggest financial risks you face. Your list might include things like loss of employment or an unexpected health event. Next, determine how you would pay for each unexpected crisis. Create a plan for how to increase your savings. Next, look for areas where you can transfer risk to an insurance company? For example, would disability insurance be an affordable solution to help minimize the risk of losing your income due to an injury?
Freedom Income Action Step: Make a listof the activities and indulgences that bring joy into your life. Keep in mind, some of these things may not have a cost associated with them. Spending time with family, walking, etc. should be pretty cheap activities. Other things like travel, golf, say spas, fine dining, etc. can be quite costly.
A key to your financial success is simply understanding that unless you have unlimited funds, you can’t do and have everything you want. Set a budget for your freedom expenses and then prioritize what you’d most like to do. Ask yourself questions like, “Would I rather have two fantastic trips this year or eat out five or six times a week?”
Gift Income Action Step: In one way this is simple; don’t buy gifts that you can’t afford. People who care about you will understand – and people who don’t care about you don’t deserve your gifts. Where the issue of gifting gets a little more complicated is when it comes to charitable donations. You may have causes and charities that connect with your heart and align with your sense of purpose that you’d like to donate to. My recommendation is to always cover your survival and safety expenses first. After you have your foundational expenses are covered, perhaps you would find greater reward in gifting than you would in some of the items in you listed as freedom expenses. Once again, financial success comes down to prioritizing how you spend every dollar.
Dream Income Action Step: Spend some time dreaming about what you would do (or have) if money wasn’t a consideration. For many people, fulfilling items on the dream list may require extra education, career change, part-time work, and/or a long planning period. But it’s good to A) have dreams and B) understand that unless you have everything else covered, these things should stay on the dream list.
What I like so much about Anthony’s hierarchy is that it offers a guideline to help keep spending and saving in perspective. How often are you tempted to spend your money on the things you want before you take care of what you need? If you focus on building the foundation, covering one level of expenses before you move on to the next, you’ll surely be on your way to creating a brighter future.