Why personal finance is like driving a car
I drive about 2 1/2 hours a day every weekday. As long as the traffic isn’t too bad, I really don’t mind it too much. The longest portion of driving is to and from work. My ride in is a time to wake up, begin getting my thoughts together for what the day holds and thinking through what I need to accomplish. I even spend time in prayer sometimes just talking to God. I guess it’s my quiet place (Mark 6:31). My drive home is more of a time to forget the events of the work day and transition from “manager mode” to “Dad mode” (although these two roles seem to have quite a bit in common).
Since I have been blogging, I now often find myself seeing situations and relating them to personal finance. I notice people who drive expensive cars, people who drive “junker” cars, I notice stores and how many people are at them and restaurants and how many people are eating out.
The other day while driving, I began to think about how some of the things we do as good drivers are similar to the things we should be doing in personal finance. I’ll admit, I like analogies, as they often give you a different perspective on something and can often up your understanding of something to a different level. They frequently allow me to see a concept I wouldn’t normally see or recognize.
So oblige me here as I provide an analogy of why personal finance is like driving a car:
Before you start you need to know where you are going
How often do you get in your car, start the engine and begin driving, not knowing where you are going? I would venture to say that you don’t frequently do this if ever at all. When we get in our cars we are getting in to go somewhere, somewhere specific. We know where we want to go, about how long it will take to get there, and know all of the various turns, street names, and landmarks along the way. If we don’t know how to get there, we usually ask or use Google maps to plan the trip before we get in the car. Yes, I know you GPS people don’t have to do this…don’t rub it in…
How many of you have no destination in mind with regard to your personal finances? To be financially successful (often called wealthy) you need to know: where you are going, where you want to be, what your goals are, and how your going to get there.
Creating a financial plan will help you define these things. It will help you make the correct turns, follow the right streets and see the landmarks. It will serve as the map to make sure you end up at your desired destination.
Not following the rules can have consequences, sometimes dire
There are certain laws and rules all drivers are expected to follow. These laws and rules keep the traffic flowing and keep us from running into each other. The rules keep us from doing dumb things that could hurt ourselves or other drivers and can even earn us a nice expensive ticket when not followed.
Personal finance isn’t really that much different. There are basic rules and when not followed you can hurt yourself, your family, or your friends financially. These are things like not being able to pay the house payment and having it take, or not paying the power bill and having the power cut off. It could even be not having enough money to buy food or to take your sick child to the doctor.
Not following these rules like the rules of driving can result in “tickets”, in the form of heightened interest rates, late fees, dinged credit, or debt collectors calling every 30 minutes.
Here’s just a few of the simple personal finance rules you can follow to avoid consequences: Spend less than your earn, preferable 20% less, Avoid credit cards at all costs, pay yourself first by saving or investing in your retirement fund, and pay your bills on time to avoid late fees. For more “rules” and advice from more than 40 personal finance bloggers see the MOMA meme or read my series on getting control of your finances.
Keep your eyes on the road
How many of you drive looking at the hood of your car? I wouldn’t suspect many, as if you did you wouldn’t be driving long. When we drive we look at the road ahead right? Sure, in order to watch for upcoming turns, avoid unexpected obstacles and plan for things that might be coming.
The same concept applies to personal finance. You need to keep your eye on where you are going. You need to be able to anticipate and react to those upcoming turns and obstacles that are going to occur. The financial concepts that allow us to do this are an emergency fund and a budget. An emergency fund helps to deal with the unexpected turns and obstacles. It helps us react without wrecking and ending in in the debt ditch. The budget is our short term plan. It keeps us focused on the road ahead and helps us navigate the expected.
Don’t follow the driver in front of you
When driving, you never follow the driver in front of you, unless of course you know where they are going or you trust them. I mean, wouldn’t it be silly to follow the car in front of you that is doing 100mph+ and weaving in a out of traffic? You will most likely end up in the ditch with them by doing so. The same is true for the driver doing 20mph less than the speed limit
There are many people in this world managing their finances recklessly or far too safely. It amazes me how many people follow them. I mean credit card debt is a perfect example: “Well everyone else is using credit cards and in debt, it must be OK”.
Decide where you want to go, determine how you want to get there, follow the rules, and don’t follow any person you think may not know where they are going. Be your own driver, do what is comfortable and safe for you.
Routine Maintenance Is Required
Personal finance like cars requires the occasional routine maintenance. Review your finances often and look for areas where your money could be working harder. Look for areas where you are overspending on things you don’t need, and make adjustments. One really good example of this is people that have more than a paycheck or two worth of money in a standard old checking account. Last time I checked, mine was earning less than 1% interest. I only keep the money necessary to pay the bills there. I keep everything else in higher interest bearing ING Direct savings account.
If you have a 401k, make sure you are keeping an eye on your investment accounts. If your company offers new one’s, check them out. Don’t be afraid to move things around every so often. Don’t do it daily, but the occasional review every quarter is good.
Keep your financial plan up to date. As you progress towards your goals, things in your life will change that will effect your plan. Keep your plan up to date. I recommend re-visiting your plan yearly and make adjustments as necessary.
Keep that personal finance machine maintained and it will serve you well in the in the short and long run.