Neurotic Behaviour and How it Affects Your Financial Freedom- Pete Wargent

If you think about it, although a lot of doom and gloom has been predicted for years after year after year in Australia by various pundits, we never got a recession, and nor have we even had one for well over two decades.

Not only are we fortunate enough to live in a developed country which is (in my opinion at any rate) the best in the world, we live in one in which there is a job for most people who want one and where there has been no recession for years and years.

In the context of both history and the world today, it’s a wonderful time and place to be.

Outstanding stuff, but too many people in Australia continue to feel unfulfilled. Why?

Neurotic behaviours

Dr. Alexander Elder, trading expert and professional psychiatrist, once noted that caged animals develop all manner of neurotic behaviours.

Too many people in modern society, he argued, have effectively trapped themselves in corporate cages, and the neurotic behaviour they most commonly develop in response is reflected in the earn-and-spend cycle.

The reason for this occurring, believes Elder, is that a message which we are taught and is reinforced since childhood is that more successful people have more expensive things.

I was reading the other day that the average wedding in Australia now costs around $50,000.

$50,000!

If ever there was any proof that in today’s society we are largely grappling with first world problems, that is it.

And new automobile sales have been tracking at remarkably high levels for a country allegedly teetering on the brink of a recession (that’s because we’re we never were).

Now I don’t particularly care what people spend on weddings, or for that matter, anything else. And I don’t generally expect people to be as miserly as me and get married on the beach for $200.

For my money, I was never going to spend $50,000 on a wedding 5 years ago with 95% mortages so widely available and amazing opportunities in Sydney’s inner west. That $50,000 is now worth $250,000.

Whatever.

Regardless this is just one of a thousand examples of how society and advertising has conned us in the small matter of only a few decades into believing that the things we own are a worthy measure of success.

The post-war era in the developed world has been an economic story charting the great triumph of consumerism.

A crap-load of stuff which people never needed before has apparently become ‘essential’ to living an abundant life.[sam id=40 codes=’true’]

A person who drives a Mercedes is more worthy than someone who drives a Lexus, who in turn is a far more refined person than one who drives a Ford Laser. Almost by definition, someone who drives a Ferrari must be very special indeed!

Unfortunately this earn-and-spend mentality keeps people trapped and totally reliant upon their corporate parents.

It’s amazing how often people say that it is impossible for them to imagine quitting their job, because they have become totally dependent upon the monthly pay cheque.

But who really dictates how we must live in a free country? No-one. No-one at all!

“Keeping up with the Joneses…”

Advertisers have become all too aware on our weaknesses in this regard and implore us to buy their expensive wares.

It is almost becoming an unachievable goal in Australia to watch a full free-to-air movie since there as so many wretched commercial breaks – seemingly around every 10 minutes – that films go on for hours and hours.

But what are the advertisers really selling?

Can it really be clothing, food, shelter and means of transport?

No, it certainly can’t be that, because most adult Australians who want to be are employed and most of us can easily afford all of these things.

What the advertisers are really flogging us is self-esteem.

We have been sold a huge dummy in life which increasingly would have us believe that what we have is more important than who we are.

The salient problem with the keeping up with the Joneses mentality is that it’s a game that can’t be won.

For one thing, the friends in our social circle just don’t have the common decency to stay put – just like us, they aspire to move up in to the higher social echelons and they are sucked into playing the same game.

And for another, however good a car or house you have, someone will always have a better one.

The route to financial freedom begins with removing that hard-wired link between consumer expenditure and self-esteem.

I’d suggest that you don’t even worry about what the Joneses say about what car you drive, whether or not you stay in 5 star hotels on holiday, or the lack of designer clothes you wear – they’ll likely be so deeply engrossed in their own travails that they probably won’t even notice anyway.

Earnings

You may have read in the past week or so that there is a proposal afoot which will remove the necessity for all adult Australians to lodge tax returns.

This is a good step.

Other countries don’t require this costly administrative burden and nor should we.

This is a progressive proposal, but since the rules we currently have dictate that we all must have been through the process, it should be a very straightforward exercise to calculate how much gross income you have earned in your adult life.

Do the exercise.

I did it myself the other day for my basic salary income excluding bonuses and share options for the ages 18-32:

It tends to add up to quite a lot, and a million dollars gets earned surprisingly quickly in Australia.

OK, so we know that some of the dollars go in tax, but what about the rest?

I’ve was fortunate enough to work out that spending it all is not smart, so I piled it into shares and property. Better still I worked out how to us significant leverage and the bank’s money to get ahead, using margin loans and investment property mortgages.

But I also do know that it’s all too easy to get stuck on the rat-wheel of the earning and spending cycle.

To become financially free, it’s vital to break free from this and be different from the herd.

If you are hooked on ever-increasing spending, then the goal of financial freedom is an impossible one.

How do we elect to get off the wheel?

Step 1 – Use cash and reduce expenditure

One useful tip is to use cash rather than credit cards or online transfers for as many of your expenditures as possible.

This makes the transaction feel ‘more real’ and has a surprisingly material effect on spending habits.

In fact, why not cut your credit cards up and throw them in the bin unless you genuinely do need them for some reason?

Identify the minimum level of expenditure which feels comfortable for you. Then stick to it.

Step 2 – Pay off bad debt

Step 2 is to pay off all of your bad debt.

It might take a while. Depends how much you’ve built up to buy stuff.

Step 3 – Invest

The third step is to invest your savings in income-producing, appreciating investments until you reach the point at which your passive income exceeds your new, lower level of expenditure.

Set yourself a retirement goal income and then the required equity essentially calculates itself, based off say an average 5% return.

Once you have built equity of over, say, $1.5 to $2 million, you will find that you suddenly have more choices than you ever imagined.

Remember that dividend income comes with franking credits attached, so $100,000 of dividend income is far superior than an equivalent salary income.

Step 4 – Break the link between work and income

Now this is the hardest part: breaking the link between paid employment – your job – and earning income.

We are taught almost since birth how we should get onto the earn-and-spend rat-wheel, so making the decision to get off it again is definitely not easy, and only truly dedicated persons will manage it.

The simplest way I know of is to build up a savings buffer which you can live on for at least a year, and then simply make that decision to escape from full-time employment.

It helps, of course, if you done Step 3 first, which is to build a large portfolio of appreciating and income-producing investments.

Then you can take some time to work out how to turn your passion into your new business income.

It’s not an easy step to take, but it certainly forces you to find the answers.

You can always do some temporary or contract work if you need a little extra income to tide you over.

It’s often said that financial freedom starts in the mind.

This is indeed partly true, but financial freedom also starts in the bank account: the lower your annual expenditure is, the easier the goal of financial freedom becomes.

So the real starting point and for many the hardest step of all is shunning the earn-and-spend rat-wheel.

The rest of it takes time, but will discipline, patience and a resolve to continue no matter what obstacles life throws in your path, it will certainly be achieved.

[post_ender]



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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