The Money Mindset That Leads to Financial Flexibility, if Not Freedom
By: Rocco Pendola
Tags: Money, Budget, Personal Finance, Saving, Self

Financial flexibility. I prefer it to freedom:

The financial freedom crowd thinks your goal should be to make enough money so you can choose to not work anymore. For most of us, this is unrealistic. You’re more likely to attain financial flexibility. The idea that you keep pots of money to pay expenses, cover periods of reduced income, and achieve your short- and long-term goals and desires. You become financially flexible when you can tap the goals and desires money without digging into your living expense, emergency, or invested money.

Over my lifetime of fits, starts, mistakes, flat dumb decisions, and blowing stuff up, I came to realize it’s tough to follow a meticulously methodical plan without a focused mindset. You can’t execute if you don’t play some flavor of psychological tricks on yourself.

On the ground, we can water this idea down to “prepare for the worst, hope for the best.” But there’s more nuance than that. I like to take it to somewhat of an extreme. I situate my personal finance in anticipation of a crisis. While I enjoy the good times, I try not to ride the euphoric wave they alluringly offer.

It’s sort of like winning a sports championship after a long, hard season but getting right back in the gym or on the practice field the next morning. Even if you’re hungover.

When we’re doing well with money — or anything really — we tend to want to savor it. We don’t think much about things going awry. People often tell us not to think about stuff going south. That’s too pessimistic. And you require a positive attitude to will the good times to continue. If only.

I attempt to properly situate the anticipation of an ongoing or looming crisis (take your pick) alongside my personal finance. I don’t obsess over the prospect of crisis looming. Instead, I try to productively channel my anxiety to ensure I’m not caught off guard when money-related shit does go down.

You can do this by giving yourself wiggle room. So if your personal financial situation becomes less than ideal, it doesn’t feel less than ideal. In fact, if you make a personal financial tweak, there’s no personal economic impact.

This way of approaching money presents another contradictory word pairing of sorts. When you’re always calmly, coolly, and collectedly anticipating crisis, you don’t experience crisis quite as hard — at least not a personal financial one.

It’s at this somewhat theoretical juncture where the practical importance of sound income allocation — the importance of keeping various pots of money — enters the equation.

Pots of money. Here’s what that means:

To be financially flexible, you need pots of money. One pot of money to consistently satisfy your monthly living expenses for 1.5 to 2 months (subsistence fund). One pot of money to cover reduced or a total loss of income for 3 to 6 months (emergency fund). Other pots of money to pay for discretionary needs and wants (a new apartment or continuing education fund). And another pot of money to fund the aforementioned starts, stops, and restarts (transition fund).

So you’ve got cash to live by the month. You’ve got cash for an emergency fund, earmarked for nothing other than periods of reduced income (e.g., unemployment). This excerpt leaves out the all-important rainy day fund. It’s truly life-changing when you embrace the distinction between emergency and rainy day fund. You’ve got cash for other discretionary needs, wants, and desires. You have cash to cover periods where you choose to not work or work less (transition or temporary retirement).

It’s quite an endeavor and achievement to fill all of these funds. It’s not for everyone. Even if it is, a lot of people will quit — or at least cut meaningful corners — before they get there. But getting there is critical to attaining financial flexibility and making the pessimistically optimistic lifestyle work for you.

Because when bad stuff goes down that requires a financial fix, you have all of this money behind you. You’re not taking a knife to a gunfight (nod to the great Taylor Swift) like so many people do with money matters. We’re often ill-equipped to deal with financial emergencies or even relatively tiny financial blips. We all have seen the data — 40% of Americans don’t have enough cash on hand to meet a $400 emergency expense.

If you put pressure on yourself (there’s a storm coming — even if there’s not!) to obsessively allocate your income the way I describe (or however you choose to do it), you’ll find you’re nimble. When you’re nimble, a crisis doesn’t feel like a crisis.

You can use your pots of money for what you originally intended them for OR you can adapt and adjust on the fly. Like Bruce Springsteen calling a setlist audible during one of his four-hour marathon rock concerts as his well-oiled E Street Band responds flawlessly. It’s a thing of beauty.

While it might seem stressful to take on a pessimistically optimistic mindset that focuses on the possibility of crisis at every turn, it’s actually not. It beats the heck out of spending pretty much your entire life focused on “retirement.” On worrying about something there’s a good chance you’ll never do — such as save well over a million dollars. The so-called experts say you need this kind of money to retire.

They’re wrong.

You’re not going to retire traditionally. And you don’t need a million bucks.

You can eschew the outdated mindsets that lock you into conventional notions of retirement. You can do it by taking a seemingly odd psychological approach. You have to be a little odd to go there. I am and I have. It’s working for me. I hope it or something like it can work for you.