The Magic of a Name – Becoming Master of your Money

When is a door not a door?  ….. When it is ajar.

I have long held an interest with stories of magic, from the Greek Tragedies to modern novels, I find the story telling a fascinating thing. One thing that I found throughout my time reading such novels has been the power of a name, from the famous story of Rumpelstiltskin, through a plethora of examples within religion and philosophy.  Central to Kabbalism is the notion of the True Name of God, and the wrestling of Jacob and the Angel is a well known story from The Book of Genesis; Socrates discussed the viewpoint of whether a name is simply an arbitrary thing, or is rather intrinsically part of the object that they signify in his work, the Cratylus.

This notion of naming holding power is something that many authors have explored through their works, and it is one that I see is true of more mundane things in our lives, and as such, in my personal opinion can be even more powerful as the results are that much more tangible.  Learning the true names of the things around you allow you to become their master, and control them on your path to freedom.

A simple example can be found when we look at a young person with no financial savvy, he works 40 hrs and earns say, $400 for his efforts, that he calls his ‘Paycheck’.  Because it has just one, simple name, and some of it can be spent, it all can be spent.  There is no measure of control through the power of the name.

Let’s take that same man, he has decided that he wants to buy a bike, it will cost him $200, so he decides to save $50 per week towards that, calling it his ‘savings’  by naming the money, he has the same ‘paycheck’ as before, but now his habits will change in that he can only spend $350 per week as the fund is taking up some of that money.  By finding the name, he has found a goal, and it is something that can be achieved.  It is a simplistic step, but having that crude definition of both an income and a savings liability each month the paradigm has changed significantly.

Thus far, it may seem that the post may be too trivial and too basic for many of the savvy readers here, and I can understand that, but the real purpose of this post is to make the more savvy really grasp the nuances of where they are failing when it comes to managing their finances, from this simple beginning where the young man first discovered the need for ‘savings’ we can see all sorts of opportunities to refine and improve our financial mastery.  Should money in an Emergency Fund be used for Opportunities of the Market or should you have both an Emergency Fund and an Opportunity Fund?

If you look at your Paycheck, or ideally, your total income including assets that you have acquired, most of you will have segmented it by external influence, rather than proactively naming it.  For example, the majority of people will have housing as their primary expense, be it a mortgage payment or a rent bill.  You know that you must make that payment each month, and therefore adjust around it, but what about something that is not ‘demanded of you’ what about a College 529 Plan if you have kids, or a retirement plan if your employer doesn’t provide one?

If you make $4000 per month, and pay out $1500 in rent, electric, phone, and internet – does that leave you $2500 for food, or is it $2500 for food plus ‘something intangible’?  If you are in that situation it is likely that you will spend a random amount on food, and also spend more on whims since you feel that you have an abundance of cash.  However, all you have in reality is an abundance of Cash Flow.

If instead, you make $4000 per month and pay out $1500 in rent, electric, phone, and internet, allot $500 to food, and assign $1000 to retirement, $250 to college savings for your kids, $250 to vacation spending, $500 to building an emergency fund, and suddenly you will find yourself feeling poor.  Your naming of these goals has allocated all of your money into achieving them, and it changes the way that you think about spending.

What happens, when you name everything, and become cash flow poor is a desire to not feel like that, suddenly, you can’t ‘afford’ to go out socializing or whatnot, and you start to think in all sorts of creative ways.  From an income perspective you become hungry again, you need that promotion, or that next deal to come through, so you push hard and aren’t complacent.  From a spending perspective you start looking at things that aren’t part of your goals and see how to improve them.  Can you shave your grocery budget downwards to free up more cash? Would it be wise to find a cheaper place to live, or bring on a flatmate?

By finding the Name for these things, and embracing the goals, you create hunger, desire, and ability to achieve goals. Ironically, you feel poor, but in reality each month you are become so much more wealthy than you would otherwise, and you have created the control you need for financial freedom.

Already, we can see the conflict, by using names to empower us financially we go from carefree to miserable, from happy go lucky to desperate for more money and less costs.  I think it is important to find a balance, because you can live too much for tomorrow and lose sight of today, but still, if you aren’t feeling hungry, or worried, wanting more then you aren’t pushing things hard enough.

The growth years

There are lots of talk about when you make the most money, and when your wealth grows the greatest.  Many studies state that people in their 50’s often earn the most in their lives, this is mainly due to them becoming ’empty nesters’, as their money draining kids run off into the world, freeing up disposable income and allowing that to be targeted on savings.  However, with the Millennial Syndrome that is striking America that old paradigm is changing, as more and more kids are staying at home longer.

When I talk about the growth years I talk about the years where you can really spin up massive amounts of income, either from employment, starting a side business, or full blown entrepreneurship, I see the growth years starting around 28-30 and ending around 40-45.  Play these years correctly and you can retire at the end of them.  The reason why these years are so critical is that they come down to virility, hunger, desire.  You have enough skill and experience in your field to operate at the highest level, yet also have enough need to press forward and achieve more.

Too much success too soon, without the discipline of naming your money is the worst possible thing that can happen to a career, and can mean that some of those key years are lost in complacency.  There is a saying, the full lion doesn’t need to hunt.

I personally experienced exactly this, unlike many personal finance bloggers who will say you must be frugal and conservative, invest in low cost index funds etc, but don’t focus on earning, I would say that is the only thing to worry about, is earning more.   If you can take every penny you have and lock it up into something with a ‘name’ you will have no pennies left, and you will feel that hunger, and you will take control of your short term, present day ability to the real ‘Growth Years’ and when doing so build a nest egg for financial independence that you can enjoy much sooner than the norm.

Back to the Wizardry Nonsense, and lets throw in the Kitchen Sink…

So, the trick is knowing the ‘true names’.  Imagine you had never seen a kitchen before, and were asked to design one, perhaps you decided you wanted a place to wash, and a place to cook.  So you install a sink and an oven.  What about storing your food?  Without knowing what the footprint of a perfect kitchen should be (which, by the way has a triangulated design between sink, stove and fridge for efficiency) you wouldn’t know what is missing from your plan.  This is exactly the same with creating financial plans and naming and therefore allocating your income.

Names that you need to master:

• Checking and Savings – enough money to live month to month when supplemented by income to avoid needing to touch Emergency funds.
• Emergency Fund – liquid assets, not in the market that can be used to protect your less liquid assets, EG enough cash to pay the mortgage for some time if you lose your job.
• Opportunity Fund – liquid assets, not in the market that are positioned in a way that you can leap on pricing opportunities for new assets, this should come after you have already acquired assets.
• Taxable Brokerage Accounts – Holding money in Stocks, Bonds and Cash within taxable accounts.
• Tax Advantaged Accounts – Retirement focused savings that are invested in a mix of assets, shifting from mainly equities to mainly fixed income once you have accumulated your target retirement amounts.
• Long term health care – distinct from your retirement savings, think about naming your health care costs and planning a way to fund them.
• College Savings – 529 plans are a great way to save for your kids college, and also are great estate planning tools.
• Travel/Discretionary funds – planning large trips or events, you should set aside money for them so you don’t cannibalize your other funds to implement them.
• Real Estate Funds – Money set aside for acquisition of personal and rental real estate.

So, next time you are feeling successful, think about these names, and decide if you have enough set aside for them, remember even if you have money funneling into all of them (which would be a great achievement) putting more in now means you can enjoy retirement that much sooner.  I know, many of them seem familiar, but how many of these are in the ‘someday/maybe’ file of your brain and not being built up?

The biggest threat to achieving Mastery of your money is complacency and the ‘entitlement’ that comes with minor success, if you are still going to work at a job you hate, you need to think about how entitled you are to a good life, and perhaps start naming your paycheck more strategically in order to create the life you want.