Business and finance are probably right up there with your favorite things, like going to the dentist. I get it. Just like going to the dentist, knowing this stuff is necessary. Unlike the dentist, I can promise that reading this post won’t be (physically) painful or uncomfortable. So here’s hoping you’ll stick with me for the few minutes it’ll take you to read to the end...
Why Knowing both Business and Personal Finance Is Important for Professionals
My passion is helping professionals, especially therapists in private practice, do well. This requires of you three things, from easiest to hardest:
- You have to be able to help people with something they want help with. If you’re a therapist, that one’s straightforward – people all around us are in pain, so no matter what your specialty, there are plenty of people who want your help. If you’re in some other discipline, you’ve also been trained to help people with things they want help with.
- You need a long enough “runway” for your practice to take off. You have to have enough saved up or coming in from other sources, relative to how much you need to survive plus how much you need to launch your practice. Once you’ve launched your practice, it still helps to be good with personal finance, so you don’t need as much income and can weather slow months.
- You need to know how to run a small business. If you’re in private practice, you can’t not run a business. You can only run it well or poorly. The thing is that you spent years learning your profession, whether it’s therapy or something else. Running a business? Not so much.
At first glance, personal finance may seem disconnected from running a practice, but it’s really all part of one (financial) system.
- How much you need to support your family informs how much you need to charge clients.
- Your ability to control spending at home translates to a similar ability in your practice.
- What’s left over after you cover business expenses determines what goes into your personal account.
I didn’t always know this stuff. Neither of my parents ever owned a business. They had both come from poverty, and with decades of hard work, frugality, and a bit of luck, managed to scrape their way into the middle class.
As for me? When I turned 30, I got my physics PhD and moved to the US for a post-doc. Business? Finance (personal or otherwise)? Nope. That I had to teach myself. Good thing we physicists are fast learners.
Being Human Isn’t Very Helpful for Your Financial Wellbeing
27 Years Ago
It looks cool, powerful, I thought. It may not be new, but it looks new. I want it!
It was November ’92, and I was looking at the first car I’d ever buy in the US, a 3-year-old ‘89 3.8-liter Ford Taurus LX. Today, I wouldn’t think as much of it, but having just arrived from Israel for my post-doc, it looked amazing.
Back in Israel, cars were four times as expensive as here. The typical family sedan had a 1.6-liter engine. My last car there was a 0.9-liter sub-compact. You couldn’t even find a Taurus anywhere, and here I was buying one!
I could have, heck, should have found a car that cost half as much, even if it meant buying a 5- or 6-year-old midsize. But I was hooked, and the used-car salesman reeled me in. In less than an hour he had me signing all the dotted lines, handing over most of my cash, and on the hook for $6,000 at 10.4% APR! Yikes! The payments were almost 10% of my after-tax salary!
Why did I do it?
I’m human, and as human beings, we want that shiny new thing, and we want it now! Whether it’s a fancy house, a fancy car, fancy clothes, fancy jewelry, or fancy vacation, our appetite for more and fancier things is limited only by our imagination (or at least by our access to credit – like my 10.4%-APR car loan). I was also 30 and hadn’t yet learned anything about personal finance.
As human beings, we want that shiny new thing, and we want it now!
As a result of going after all those shiny fancy things, most of us never save enough for a comfortable retirement before our health forces us to stop working.
Why Do You Think You Never Get Ahead?
If you’re like most of us, you aren’t setting much aside for retirement. You may be telling yourself you can’t do it because…
- “I’m not very good with money”
- “I can’t make enough!”
- “Therapy isn’t valued like other professions”
- “My student loans are killing me!”
- “Housing, education, and health insurance are so expensive, and costs keep going up!”
Especially if your fees are too low, it can be hard to do well, but… people in Third-World countries who make $3 a day set aside money for a rainy day despite crushing poverty. Knowing that, it’s kind of hard to justify how little we save.
Three Main Reasons Why We Really Don’t Save More
Objectively, we’re incomparably better off than people making $3 a day, so there has to be a subjective explanation for why we don’t save enough.
There is. Again, it’s called being human.
We like to believe that we’re rational decision-makers, but research shows that our decisions are emotional and we just rationalize them after the fact. This is no secret to marketers…
The three main reasons most of us struggle financially are:
1. We’re Manipulated Like that used-car salesman did to me, marketers manipulate your emotions to get you to spend every penny you have (or can borrow) to make their clients or employers wealthy.
To a greater or lesser extent, all of us want to “keep up with the Joneses” – we want to be admired, and get triggered by fear of loss. Emotion-based marketing uses this to manipulate us into seeing our wants as needs, getting us to pull out our wallets.
Marketers manipulate your emotions to get you to spend every penny you have (or can borrow) to make their clients or employers wealthy
2. We’re Bombarded with Temptation When you try to will yourself to resist the manipulation, marketing wears you down. The APA defines willpower as “the ability to resist short-term temptations in order to meet long-term goals.” and cites research showing that “people whose willpower is run down are more likely to spend an increased amount of money and purchase additional items than those who haven’t recently exerted their willpower.”
On average, you’re exposed to as many as 10,000 marketing messages a day. Each time you see a (relevant-to-you) ad, especially if you can act on it in the moment, it takes willpower to not buy. All those ads wear you down, and you end up buying stuff you don’t really need.
“People whose willpower is run down are more likely to spend an increased amount of money and purchase additional items than those who haven’t recently exerted their willpower.” – APA
3. The Joy of Buying Has Been Separated from the Financial Pain The instant hit of joy when you buy something new and shiny (a.k.a. “retail therapy”) is especially addictive when credit cards separate your decision to buy from the pain of the consequences, and when the ultimate result of a miserable (or non-existent) retirement is decades away.
The instant hit of joy when you buy something new and shiny is especially addictive when credit cards separate your decision to buy from the consequences, and when the resulting miserable retirement is decades away
The Humanly Predictable Result – Lifestyle Inflation
If you aren’t careful, your spending goes up in lockstep with your income, if not faster.
Say you make $50,000 after tax, and spend all of it. Then, fortune smiles at you and your income jumps to $60,000. Suddenly, you feel flush. The never-ending marketing deluge has you decide that you can afford to (make higher monthly payments and) move to a nicer home in a nicer neighborhood, buy a nicer car, go on vacation someplace nicer, etc. You deserve it, don’t you? Heck, you need this! The result? Your annual spending increases to match the $60,000 you can now afford.
That’s “lifestyle inflation,” and it prevents you from ever getting ahead.
If you want to break this cycle, don’t count on developing superhuman willpower to cut your budget, ignoring the constant pressure of ads. Suddenly doing without things you enjoy now is really hard. Overcoming your human nature like that for years and decades is like trying to lose weight through dieting and keeping it off – next to impossible.
What You Can Do – the Simple Secret to Predictably Having More
The simple secret to having more over time is to embrace your human urges, rather than fighting them. Your practice is doing better? Sure, set aside more, but reward yourself in the present by spending at least a part of the new income.
Do this repeatedly and you’ll be on your way to financial security.
My human-centric definition of lifestyle inflation, which has helped us save to the point that we have much more than we used to is: Lifestyle Inflation is diverting more new income to buying more stuff than to savings.
My human-centric definition of lifestyle inflation is: diverting more new income to buying more stuff than to savings
In the above example, where you used to make $50,000 a year and then started making more, you’d let yourself spend more, but divert to savings at least half of the $10,000 in new income.
How Well Does this Work in Real Life?
Over the years, each time our income increased substantially, we diverted more than 60% of new income to savings. As a result, our net worth increased more than 10-fold without reducing our average spending. This way we managed to set aside a lot without suffering.
The Bottom Line
As they say, it isn’t what you make, it’s what you keep that will make you wealthy. Following our example will help you keep more without feeling deprived, which is the secret to staying the course and predictably building financial security.
The best thing is that you’ll feel more confident around money, and will be able to concentrate more on doing therapy. Your new relationship with money will help you set your fees properly, which will in turn let you focus on fewer clients who are exactly who you want to work with, so you can be your best therapist self for each client, every session.
From my experience working with therapists, considering your financial future is probably far outside of your comfort zone. And so, just as you help your clients work on things that they find hard to tackle on their own, I’m available to help you tackle this aspect of your business and life that you might not feel confident to address on your own. Email me to book a free 30-minute call to help you get started on a path that will leave you feeling more confident about your future.