Sunday 5 June 2011

10 Steps to Financial Nirvana

If you have read 'Zen and the Art of Motorcycle Maintenance' you will know that ordinary activities can have extraordinary potential for enriching our lives. Over at Zen Habits, Leo Babauta has written in the past about the link between peace of mind, finances and a Zen approach to life. So I thought it might be useful to investigate the potential benefits that a 'Zen' approach might bring to our personal finance activities. Not that I know a great deal about Zen Buddhism, though - so Zen Masters please bear with me.

Many of you will probably be aware of the basic concepts of Zen (at least as they are understood in the West): simplicity, spirituality, living 'in the moment', meditation and detachment from personal possessions, to name a few. Above all, devotees appear to be unusually calm -  serene almost. Wouldn't it be an achievement to be so serene about our finances? So it might be useful to look at how a Zen approach might give us some practical guidance on improving our approach to personal finance.

1) Simplify and Declutter

Life can become just too complicated for your own good - as can your finances. Decluttering is a good way to start simplifying your life. Decluttering is an activity, which is an easier starting point than inactivity.

Decluttering a room (or just a corner) in your house can be a very satisfying activity. Clutter builds - mainly the result of deferred decisions. It takes a conscious decision to sort and clear out the 'stuff' by selling, giving away, recycling or disposing of objects that you no longer need or want.

The feeling of relief when a room is cleared has to be experienced to be believed. To me it is a kind of enlightenment. Just thinking about doing it won't work. As a quick exercise - if you are willing to investigate further  - look at a corner of the room that you are in that is untidy of cluttered.. Move everything that doesn't need to be there into another room or a box (to deal with later). Then sit down an look at the decluttered corner again. You should feel calmer.

In a similar way, most people's finances are over-complicated and untidy and do not have an underlying logic or objective. Can you describe your financial approach in one sentence? Do you even know what your overall financial situation is?

2) Be Still

Action begins with thought. Most of us probably realise that we don't give enough thought to our actions - particularly in the area of personal finance. We are creatures of impulse.

To think effectively we need to be still, which we rarely arein our daily lives. In fact, paradoxically, it takes quite a lot of conscious effort to stop and just think - there are so many distractions designed to fill every minute of our time: television, radio, the Internet, texts, Twitter. Yet many opportunities come during the day to just stop and be still.

If you like, you could try it for one minute now (why not? - what else are you going to do?). Just stop, get comfortable and start by listening to all the different the noises around you (I can hear a dog barking in the distance and the wind blowing through the trees). Try to smell your surroundings. Then concentrate on your breathing. All the time try to make your mind still and as clear as possible. You probably will find a great many distracting thoughts. Financial problems may be mixed up with other issues, such as relationships. Try to disentangle your greatest money concern and think about what practical steps you could take to deal with it.

3) Clear Your Mind

Your mind struggles to hold onto things that you need to do (or should do but haven't got around to), new ideas and projects or problems to deal with. If there is too much of this stuff flying around inside your head, your mind becomes overloaded - and you become stressed.

If you 'download' this information you will feel a similar relief to that achieved by decluttering a room. The tool I use for this is a small notebook that I keep by my bedside. In it I write down the things I have to do or want to do, or problems to resolve, organised in categories on separate pages. Periodically I review these - it is very satisfying to cross these entries out when I have dealt with them.

In this case we are focusing on finances, so you should identify the financial problems and decisions that are on your mind. However, as discussed below, finance will only be a relatively small part of what is flying around in your head. In many cases, the underlying financial problem may be more complex than the immediate issue: for example debt may be a symptom of another problem, such as poor financial planning.

4) Follow The Right Path 

You can't get to your destination unless you know what it is - and only you can identify it. When you have pinned down the day-to-day concerns and thoughts, you will be better able to think about what the point  of it all is.

For most of us the goal will be to live a good, happy, interesting life and to care for out loved ones. Although money is actually secondary to most people's goals, it often is (mistakenly, in my view) seen as a goal in itself. One reason may be that money is easier to measure than happiness,

Most people need to think more about what they want their finances to deliver in the future. What do they need? What do they want? What can they do without? These are actually big questions - for example: Could they make do with a lot less money that they have now? How would their lifestyle have to change to require less money?

5) Respect the Rhythm of Life

When did you last feel the rhythm of  your heartbeat? You are probably unaware of it for most of your life: it is constant yet unspectacular, day after day. Similarly the seasons come, go and return again; the tides rise and fall. Yes, there are sometimes spectacular events - thunderstorms, earthquakes, hurricanes - but after these the steady rhythm of life returns.

Consistent with this natural rhythm is an approach to money that is based on a steady rhythm of finance - investments that produce regular, predictable income, rather than trying to guess at major changes in share prices (aka 'investing for growth'). Think 'compound interest', rather than looking for the next 'ten-bagger'.

6) Think, Then Act

You are judged by your actions, not your thoughts. So just thinking about getting your finances in order is not enough - you need to do something about it. You don't have to do everything at once. One step at a time; but you will have to plan the overall journey.

7) The Yin and Yang of Finance

In my mind, there is a fundamental duality to any financial strategy:
  • the 'yin' of investing/saving: made up of a relatively small number of decisions on what investments to purchase or sell
  • the 'yang' of spending: a large number of decisions on what to buy or what to spend money on
Together, they form a whole that should be in harmonious balance and help to arrive at your chosen financial destination. However, if you ignore the area of spending, it is unlikely you will arrive.

In fact, the more you can rein in your spending urge, the quicker you are likely to achieve your financial goals, as I have pointed in the concept of Wealth Potential:

                        Wealth Potential = Income - Expenditure

The Wealth Potential is the surplus cash you have to save or invest. So the greater this is, the faster your wealth can grow.

8) Be Congruent

This is another way of saying 'to thine own self be true' or 'be consistent'. If you are clear what your overall destination is (in other words, your financial objectives) then everything you say and every action you make should nudge you closer to that destination. Everyone around you should be clear (through your actions and statements) what your priorities are. Just thinking something 'inconguent' should trigger off a mental alarm bell.

For example, if you want to retire early then you need to have a plan to achieve that, which will probably include:
  • maximise your earnings
  • minimise your expenditure
That means for the dozens of daily expenditure decisions that you make, you will need to run this simple test (until it becomes second nature): does this bring me closer to my goal? Another way to think about this is that every day you have the ability to affirm your life goals.

9) Be In The Moment

This is perhaps the hardest of the Zen concepts - the idea that you only actually live in the present: the past is a memory and the future is a dream. So enjoy the present moment fully, even if you are doing something mundane, mechanical or even unpleasant.

To 'be in the moment' you cannot hurry, so you need to give yourself a little more time. And to make time you will need to eliminate those activities that are not contributing to your goals. So, give yourself more time to spend time on what is important.

In the context of this article, reviewing your finances should be one of those activities. Make time to do it unhurriedly. For example, I have 40 or so different investments and savings accounts. If I sit quietly and consider them, I can almost hear them humming away producing income. Plus some lumps of cash will be crying out to be invested more productively.

10) Achieve (Financial) Nirvana

I'm using a bit of 'poetic licence' here but we can all try to envisage our own nirvana or 'state of enlightenement'.  Hopefully, if we have followed the principles above, we can hope to achieve at least financial nirvana.

Being not quite enlightened yet, I interpret nirvana a bit more materialistically than is usual, so for me and my family it consists of:
  • good health
  • happiness and friendship
  • security - both physical and financial
  • a degree of comfort
  • mental stimulation
  • satisfaction of achievement
Whilst finance comes a bit below some of the other factors in importance, it is still a crucial element, as money is a great facilitator.

Good luck on your own journey!

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

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