Personal Finance Back to Basics: Boundaries (Part 4)

Having clear boundaries is essential to a healthy, balanced lifestyle. A boundary is a personal property line that marks those things for which we are responsible. In other words, boundaries define who we are and who we are not.

~ Dr. Henry Cloud and Dr. John Townsend (from this book)

This is a post about financial boundaries. I’m sharing some things that are part of my family’s daily life that keeps us away from harm. As I don’t want to be too preachy, I’ll keep this post short with a lot of links for you to learn more.

Boundary 1: No debt, or rather, no bad debt

I don’t mean bad debt in the business sense but the type of debt that is damaging to your life. Top examples off the top of my head are:

• Credit card debt that can’t be paid fully in < 1 month: such debt will incur around 3% interest per month or 36% interest per year. This is one of the quickest ways to be buried in debt.
• Personal loans from institutions: these are personal loans from banks or from one’s employer, which are usually due in 1 year or less. If you can afford to pay the loan in less than a year, then why not just wait?
• Personal loans from loan sharks: common sense, no point elaborating.

Some debts are necessarily bad depending on the person’s context. Some examples are:

• House mortgage: while there are exceptions, most people will find it unrealistic to buy a place of their own without getting a mortgage. But please still be careful. For example, think twice if you have to use a collateral that doesn’t belong to you (like your relative’s house).
• Car loan: personally, I still prefer being able to buy a car and pay it in full. But coming from a country where public transportation is horrible, I can understand why one will buy a car even if it means a car loan. Of course, this doesn’t apply to Singapore.
• Business loan: it is a normal practice in corporate finance to take on debt and use it for financial leverage. This is why investors look at the businesses’ debt-to-equity ratio. But this is a balancing act, too much debt is obviously still bad for the company. (Also read: What Is Considered a Good Net Debt-to-Equity Ratio?)

Now if you are in debt and are willing to do what it takes to get out of it, please check out Dave Ramsey’s Debt Snowball Method. If you think you lack the self-control to follow Dave Ramsey’s method, get help! I don’t know companies in Singapore who help people get out of debt at the moment, but an example in the Philippines would be the EnRich™ Getting Out of Debt (GOOD) program by PFA.

Being debt-free is very empowering. Personal finance advocates sometimes refer to this as financial freedom. You’ll be surprised when you achieve this, for it truly feels like you’ve been set free!

Boundary 2: Live below your means

“Living below our means” is a phrase that we hear many times from financial advisors, mentors, preachers, pastors, etc. So I will not elaborate on this. The main point is not to spend more than what you can afford. Unfortunately, the ability to incur debt has enabled us to spend on things we can’t afford.

I highly, highly, highly recommend this message from Andy Stanley talking about this topic. He shares that we live in a backward culture where our income dictates our expenses! But if we spend below our means, then what we get is a financial breathing room. We can all agree that life is better with breathing room.

Level 1 tips:

• Understand your expenses through daily tracking
• Compute how much over your income you are spending (if this is you, then you’re probably in debt)
• Commit to reduce certain expense categories by analyzing your expense records
• Store your savings in a separate non-ATM and non-checking account. Create extra inconveniences before you can tap into that money.
• Try to enjoy it.

Level 2 tips:

• Set a target threshold, 70% of your monthly income for example
• Repeat the above level 1 tips

Level 3 tips:

• Set a target standard of living and be content with it.
• Don’t try to increase your standard of living even when your income increases
• Invest the extra funds to achieve your financial goals sooner.

Boundary 3: Delayed Gratification

I may be forcing the “boundary” word with this one, but it is something I recommend living by.

Delayed gratification, or deferred gratification, describes the process that the subject undergoes when the subject resists the temptation of an immediate reward in preference for a later reward. Generally, delayed gratification is associated with resisting a smaller but more immediate reward in order to receive a larger or more enduring reward later. A growing body of literature has linked the ability to delay gratification to a host of other positive outcomes, including academic success, physical health, psychological health, and social competence. ~ Source: Wikipedia

I cannot emphasize enough how much delayed gratification has contributed to many of the achievements, successes, and blessings that I have in my life. The process isn’t easy but it does get easier. The key is to focus on the goal—the financial goals that I talked about. If you do, you’ll often find the sadness of enduring turned into a joy that you can’t help but anticipate.

Therefore, since we are surrounded by such a huge crowd of witnesses to the life of faith, let us strip off every weight that slows us down, especially the sin that so easily trips us up. And let us run with endurance the race God has set before us. We do this by keeping our eyes on Jesus, the champion who initiates and perfects our faith. Because of the joy awaiting** **him, he endured the cross, disregarding its shame. Now he is seated in the place of honor beside God’s throne. ~ Hebrews 12:1-2 NLT (emphasis mine)

Jesus himself practiced delayed gratification. He was willing to endure the cross, disregarding its shame, because of the joy that he set his eyes on. And that joy is us. Similarly, I have found that the strongest motivators that help me endure or resist temptation (to spend or buy stuff I don’t need) are my loved ones.

Closing Thoughts

There are some of the top boundaries in my opinion, but there are many other important principles to live by. If you want to continually be better, then continually learn, seek counsel, and advise.

Now that these are settled, let’s move on to what we’ve all been waiting for — investing.