Does cutting down on spending sometimes have a negative effect? This was the question I was asked by a student in our Centonomy class yesterday. They had just done an exercise where they had to role play being the Objective Financial Advisor to somebody who was in a bind. One of the options they came up with for their client, was to move out of home to a cheaper place. Easier said than done. Imagine that was you and the glaring solutions to some of your challenges is to get a cheaper place to live in. What was now being challenged is whether some of these moves can make you worse off in the long term because you feel like a failure and generally pessimistic about life? The student had a point but like everything else the options we may choose need to be put into perspective. Let’s first accept that reality may at times mean we make these tough decisions. And we will face different types of these decisions depending on our circumstances.
Ken and Mary are a young couple who when they got married, bought a house. That is a common aspiration for many families. Keeping up with the mortgage payment was not easy but they did it. They were both working and only had themselves to look at. Everything changed when they got children. They had sort of planned for one child but got blessed with twins. Reality checked in. Food, milk, formula, diapers, domestic help for not one but two children became more important than their emotional attachment to owning their own home. They were also thinking about long term expenses like school fees. It was also cheaper to rent a similar place rather than pay a mortgage because of our interest rates and property prices, rent is still cheaper on a month to month cash flow basis. They sold their house. They considered renting it, but it would not have covered their mortgage payment. Right now this move has provided finances they need to handle their unexpected expenses plus as difficult as it may sound, it did come with some peace of mind.
Ken and Mary did the right thing. Many of us do not want to face this tough decision and prefer to live in denial. We get scared of how it will look, what we will feel about it and even go the extremes of continuous borrowing to save face. I think in different ways these kinds of tough decisions are part of the package. But it is not forever. It does not mean Ken and Mary will never own a home. In time they will earn more money, get a better grasp on their expenses and may even buy a better one. This discipline that they have started with so early will set the stage for them to achieve a lot of things financially.
Let’s have a look at a different scenario, Lucy and Mutua did the same thing but for another reason. They had bought an apartment and spent time furnishing it really well. It was their dream. Great furniture, plasma screen TV, bright colors on the wall, some art work etc. It looked like something from a magazine. The kind of place that you are just happy to come home to everyday. In our classes we get people thinking about ways to generate additional income and something must have struck a chord within them. They wanted to create the kind of wealth that enables them to sustain their lives whether they are working or not. That was the goal. Their apartment was also in an area where there was high demand for serviced units. They did their research and because of the way they had furnished the apartment, it would be able to attract a premium. They experimented and put the word out. In less than a month there was an offer to lease it for eight months. The income would cover their mortgage and rent expense for the place they would move into. Their home would be essentially paying for itself leaving them with extra funds to invest elsewhere. They moved, leaving behind their furniture. They could afford to live there but a bigger vision, allowed them to make this sacrifice.
At the end of the day, that’s the key to the answer that my student asked. Whatever move that you may need to make, what are you doing it for? What is the objective? It may be a situation that you need to resolve like Ken and Mary but it could also be for the bigger picture you have for yourself. In my experience constant cutting back just for the sake of doing what you have been told is right does not have much success. There has to be a goal, vision or end in mind. I have met people who have crossed that thin line between prudent management of money and a scarcity mentality. If your mind is constantly focused on scaling down, you do not have time to see the other side of the coin, which is the opportunities to actually generate more income.
Don’t get so scared of spending or losing that you can’t even make decisions to grow, invest or take risks. Cutting down expenses is fine, just don’t cut down on your mindset. Do what is necessary, what is prudent, what makes sense right now but look beyond the circumstances. Practically speaking if your income is not increasing your strategy to keep up with the rising cost of living and investments, your solution cannot be to cut expenses forever. Always question what you want to achieve and whether the move you are about to make is a step in the right direction towards that objective. Sometimes two steps back are actually ten steps forward.
Waceke, runs Personal Finance and Wealth Creation Courses. For details do get in touch at email@example.com. | Facebook/Waceke Nduati| Twitter@cekenduati