Out of the Swamp

Jonathan Clements

WE CAN MEASURE OUR financial progress by the size of our net worth. But that’s hardly the only gauge. Equally important, I’d argue, is the evolution in how we think about money—and how we use it to improve our lives.

What does this journey look like? I picture it as having five stages:

1. Head above water. This is when you emerge from the primordial financial swamp and begin to walk upright. You have credit card debt, student loans and a few overdraft fees to your name. But you’re determined to do better.

You knuckle down and become more disciplined about paying the bills on time, monitoring your checking account balance and sending the credit card company more than the minimum. You even start setting aside a little money every month in a savings account.

To be sure, you live in a haze of financial misconceptions—that everything will be better if you get that next promotion, that the big brokerage firms hold the key to investment success, that a spanking new BMW will bring endless happiness. Still, you’ve taken the first rudimentary steps in the right direction, and that feels surprisingly good.

2. Thinking about tomorrow. A friend bought a house and that seems like a smart thing to do, so you shovel even more money into your savings account, with an eye to amassing a down payment. You’ve heard it’s tough to get a mortgage if you have too much debt, so you also start paying a little extra every month on your student loans.

During your lunch hour, you look at real estate listings on the internet. But you also peruse various shopping sites. There are so many things you want, so many things that would surely improve your life. Sometimes you impulsively buy, sometimes you pause long enough to summon the willpower to resist.

It took two years, but you finally sign up for the 401(k). You scan the list of investment options. It seems risky to put your entire contribution in the top performer, so you hedge your bets, splitting your money between the two funds with the best five-year records.

3. Hitting the accelerator. You now own a house, and you’re putting $75 extra toward the loan’s principal every month. You also own five funds in your 401(k), because the first two didn’t work out so well, and you’re saving 12% of your paycheck. You and your spouse also have Roth IRAs, plus a 529 for the kid.

Things are definitely looking up. Your total investments are now north of $100,000 and you marvel at how much you make when the stock market has a good year. All the glittering prizes still catch your eye—the latest smartphones, this year’s hot car models, the neighbor’s $80,000 kitchen renovation. But adding extra cash to your portfolio, and watching it grow, is somehow more alluring.

4. Ahead of the game. All those years of doing the right thing have left you far wealthier than your friends—not that they know it—and you’re on the cusp of financial freedom. You are debt-free and have pretty much enough to retire. Because your nest egg is so plump, you ditch your life and disability insurance, and you figure there’s no need to buy long-term-care coverage.

There are still things you want—special trips to see your adult children, more time for projects you’re passionate about—but you don’t want much else. A lifetime of disappointing purchases, which have left you with a basement full of regrets, has taught you that spending often doesn’t buy happiness. In fact, you sense that perhaps you’ve grown too careful with money.

Your investing prowess has undoubtedly improved. You dumped your broker after a disastrous two years, you no longer own any actively managed funds and you haven’t bought an individual stock in years. Everything is in index funds, though maybe it’s too many index funds and maybe you second-guess your investment mix a little too often.

Indeed, you struggle with a few nagging doubts. Do you really have enough socked away—and how can you take what you have and make your life even better?

5. Hardly a second thought. It isn’t all puppies and rainbows. Pesky reminders of your mortality crop up with increasing frequency. Still, you now have the wherewithal to devote your days to things you love—and you do so without paying much heed to money.

You spend as you wish, look at your portfolio every so often, and occasionally send checks to your adult children and your favorite charity. Indeed, giving is among your greatest pleasures (though you can’t, alas, interest anybody in your basement’s clutter).

No doubt you could save $10 on the weekly grocery bill if you paid more attention. No doubt you eat out perhaps a little too often. No doubt your investment mix could be fine-tuned. But let’s face it: It probably wouldn’t make a whole lot of difference—and, at this juncture, who needs the worry?

Follow Jonathan on Twitter @ClementsMoney and on FacebookHis recent articles include Working LateHouse Rules and Price Still Slight. Jonathan’s latest book: From Here to Financial Happiness.

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