Keeping It - The Khuram Dhanani Blog
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Khuram Dhanani

Keeping It

How to Keep Your Financial Freedom

Imagine having enough money to live comfortably the rest of your life and do all the things you’ve dreamed of doing. Imagine living in true financial freedom. Whether they know it or not, this is the dream of most people. How can YOU make this happen?

1. The real goal is financial freedom. Money is great to have because you can do lots of things with it, but the key purpose of money is to give you the freedom of enjoying your life without having to worry about how you’ll pay next month’s rent. As you know, most people are living paycheck to paycheck, and if anything comes up and they lose their job, they are suddenly faced with a world of hurt. We saw this happen in the 2020 pandemic.

So the first thing to realize is that with money wise you have your freedom. If you don’t want to spend the rest of your life stuck in somebody else’s cubicle, you’ll need to find a way to generate sufficient revenue that will sustain you and your family for the rest of your life, and hopefully beyond your heirs.

The way you think about money and wealth really depends on how you grew up and what you heard from your parents, the rest of your family, and your friends. If you grew up with money, you may be dependent on having lots of money and all the luxuries it buys. Or, you may have a disdain for an excessive lifestyle. 

On the other hand, if you didn’t grow up with money, perhaps you are eager to have a luxurious lifestyle and buy everything you possibly can, or you have come to realize that a lot of these wealthy treasures are traps and don’t possess a hold on you. While they are nice to see and admire, you don’t feel the need to own everything. 

It’s very important to consider your beliefs about money because what you believe is what you will think and do, so your beliefs can guide you to enjoy a healthy relationship with money, or they can sabotage you into an unending treadmill of earn-and-spend. The most important priority with money is your financial security. Ask yourself what you believe about money and how it should serve you in life. Answer this question as soon as possible so you know your strengths and vulnerabilities around money and can protect yourself from sabotaging beliefs.

There’s nothing wrong with having things, but there is something terribly wrong when the things you own really own you, and this is the case for many people because most people fall into the pattern they inherited as children.

2. Earn more than you spend. This is one of the most important rules you can ever learn. If you spend more than you earn, you go into debt and debt is a black hole that will suck your time, your resources, and your future, and rob you of what you could otherwise give to your family. As people make more money, they tend to spend more.

You’ve seen the stories about the fabulously wealthy NFL or NBA stars who have palaces in Florida, but soon after they retire they wind up having to sell all their toys, going through a divorce, paying their mistresses for child support, and using their celebrity status to draw customers to a car lot. These are people who didn’t think about their wealth and they squandered it. Instead, had they received good advice, they would’ve put their money into good investments and secured their financial future for the rest of their lives, and also left a legacy for their children.

Always remember that freedom is what you really want.

3. Status signaling is for the birds. Peacocks do it. So do birds of paradise, grebes, and cranes. How much do you advertise your status?

Once achieving a level of financial success, many people want to display their wealth for everyone to see. They will purchase expensive luxury items to signal their status. Popular choices are designer clothes, sports cars, high-priced jewelry, country estates, and other costly items with the intention of making other people envy their elite status.  It’s ironic that status signaling doesn’t have the desired effect because people are really looking at what you own and appreciating that, with are not respecting you. They are admiring what you own but they are not admiring you. The real truth of the matter is that when you attempt to signal your status, you’re really showing off to yourself.

You’re also buying things that probably cost too much and that are depreciating in value. Wearing a wristwatch that cost $25,000 won’t keep the time any better than a wristwatch that cost $25. Excess money often leads to a display of the ego, but the only ego that’s interested is your own. You don’t gain valuable status by owning expensive items; you’re more likely to generate negative feelings in people such as envy and jealousy and you also make yourself a target for people’s false praise.

4. Debt isn’t normal. Most people don’t know about the serious danger of being in debt and instead of using debt to their advantage, they abuse it to their detriment. There is good debt and bad debt. However, debt is usually a bad thing for most people because it blocks their ability to reach financial freedom. This is especially true of consumer debt such as credit cards and personal loans, but it’s also true of student loans and car payments. These types of debt siphon money out of your pocket every month and charge you interest, sometimes excessive interest that keeps you in debt.

Our society teaches people to buy excessively. A few minutes on your couch in front of your television should be enough to convince you that our economy is designed to get you to part with your money. If you’ve ever been to a vacation town like Las Vegas, you’d notice that every angle has been thought of to pull money out of your pocket quickly as possible.

The unfortunate thing is that many people don’t think for themselves and simply fall for it, accepting that this is the way it is, that you earn a living and you spend your money as quickly as you make it. But that isn’t normal. Debt makes other people wealthy, not you and it adds enormous and unnecessary stress to your life.

The idea that debt is a beneficial financial tool – and a burden you should expect to have to bear for your entire life – is a recent one. It used to be that people would save up for large purchases and avoid accumulating debt. It’s curious to note that credit scores are a relatively recent invention – they did not exist before 1989.

A 2021 Credit Wise survey showed that “73% of Americans rank their finances as the #1 stress in life.” And according to the Mayo Clinic, chronic stress can lead to eating disorders, drug or alcohol misuse, tobacco use, fatigue, social withdrawal, reduced sex drive, upset stomach, sadness, and depression, among other things.

Something else to think about is all the extra time people have to work to earn enough money to pay their monthly debts. Instead of working harder and longer to earn more money to get off the debt treadmill, they could’ve spent that time building a business, enjoying time with family or friends, and doing the activities that make them happy.

The real tragedy is that people often go into debt for things they don’t even need, acquiring material possessions simply to feel better about themselves. True value and fulfillment don’t come from possessing things – it comes from being with the people we love, doing the activities we enjoy, giving service to others, and engaging in the other intangibles of a wholesome life. 

One of the horrors of debt lies in how difficult it can be to escape once you’ve become indebted. Ultimately, debt can turn you into a modern-day indentured servant, always needing to work harder and longer to pay off larger and larger balances. 

Fortunately, debt is not essential to your life, but being debt-free does require rethinking some of the assumptions and expectations we’ve been taught. For example, you can save up for the things you want to buy rather than borrow money to buy them right away. You can buy a really good second-owner car rather than buying a new one that drops in value as soon as the tires hit the street. You can purchase a house with cash, or put down a bigger down payment to save years of expensive mortgage payments. 

Unfortunately, modern society promotes financial structures that funnel you toward indebtedness and bad long-term decisions. Taking control of your financial future means you don’t get stuck in an unending cycle of debt payments but instead have a plan to pay off this debt as soon as you can so you can start saving and aggressively investing toward having financial freedom.

Every bit of money you invest now will be worth significantly more later in life, so start investing as early as possible. You should also know that it is never too late to begin. If you have not started investing yet, don’t fret – but stop making excuses. You don’t want to think back on this moment with regret. When it comes to investment, time is your best ally. The money you invest needs time to grow. Stocks and bonds tend to grow over long periods, and interest-bearing accounts require time for compound interest to work its magic. The important thing is to start investing and continue to put aside part of your earnings every month. It’s also a very good idea to pay for the services of a financial investment advisor. Pick someone who is independent and who charges a fee based on your investment’s performance. Stay away from advisors who receive commissions on the investment products they sell because they will be acting in their own best interests, not yours.

5. Spend only your passive income. Passive income is the money you receive that‘s not connected to the time you spend working. You may be receiving royalties from books you wrote, songs you composed, or income you’re receiving from savings such as interest-bearing accounts, stock dividends, bond yields, rental or lease payments, and other assets. Passive income is money with minimal active involvement. 

Active income is the money you earn through your salary,, tips, commissions, or from the revenue of a business you own. It’s good advice to save or invest as much of your active income as you can. Though it will take some time, eventually your savings and investments will generate passive income, and when this income rose large enough you’ll be able to live from the proceeds. Again, a financial advisor can help you develop an investment plan that’s customized to your circumstances and that’s designed to grow with controlled risk so that by a certain time in the future, you’ll be able to retire and live a comfortable and secure lifestyle.

Remember to always protect your principal because your principal is what’s generating your financial growth. Make a rule that you’re only going to spend your passive income because your principal is the foundation of your future. If you want to, you can use your passive income to go on vacations, stay at nice places, go to restaurants, and buy some fancy clothes you really don’t need… Later, when you realize that you’ve spent a ridiculous amount of money, you’ll be glad to know that the money you spent frivolously gave you a fun time and some experiences, but your spending wasn’t fatal to your freedom. You should never touch your principal because it’s your core nest egg and you’ll sleep a lot better at night without the stress and anxiety of robbing your future.

6. The asset illusion. Many people mistakenly believe fancy cars, clothes, jewelry, and other high-ticket items are assets, but they are confusing price with value. Price is what you pay, and value is what you receive. Items like these are liabilities because they don’t produce value and they begin losing their value the minute you buy them because, in most cases, they start depreciating.

Depreciation is just one-way luxury goods can cost you dearly. They are infinitely more expensive to repair and insure. You need to invest time, energy, and money to keep them from being stolen. On top of that, the money you used to buy them can no longer multiply in your investment accounts.

Imagine that you want the status of a stainless-steel, high-end refrigerator with all the features. This refrigerator even plays videos on its surface and also displays images from your security cams! It costs $3,000. After 21 years, that $3,000 could have been invested and turned into $24,000. 

Assuming your old refrigerator worked just fine, did you really need to spend money on the fancy refrigerator? What you really purchased was a status symbol refrigerator, including the cost of the extra electricity to operate the oversized machine, any repair costs that were necessary, and possibly all the food you wasted filling a refrigerator that was too big for your family.

When you buy a Mercedes, the vehicle drops 20% as soon as the wheels hit the streets, and every week that goes by, the value of that expensive car becomes less and less. There are exceptions, of course. If you buy a house at the right price, real estate tends to increase in value over time, but when you’re buying something because it’s pretty and it shines and it’s in a nice box you’re really looking at an allusion and you’re buying a liability.. Learn to consider more deeply the real value of the object you are interested in buying. If it appreciates and will build value, that’s an asset. If the object begins to lose value after you buy it, you’re looking at a liability.

Another thing to consider when thinking about assets is that many people continue to buy, adding to the already huge amount of things they own. Most Americans buy a lot of things they only use a few times, but they never throw away or donate what they’ve stopped using. How many shirts or dresses are in your closets that you know you’ll never wear again? How many shoes do you have that are over 10 years old? When you stop to think about it, your home or apartment is probably loaded with stuff that you never use again.

I had a friend who owned a home and the time came when he chose to sell it. He was astonished when he was cleaning out the garage because he found five rakes, three hoes, four shovels, and two wheelbarrows. He had collected all these items for a garden he was going to put in someday and never did.

Holding onto so much baggage is costly with your emotional and mental space. Piling on more stuff becomes exhausting as you fill up your physical space and increase the burden of ownership. When you live a simple, clean, minimalistic life, you’re free of emotional exhaustion. When you own so much, it can cause anxiety. Of course, you don’t have to live like a monk because you should have a reliable car and decent clothing but holding onto the things you never use again and keeping up with the latest fashion trends that you’ve been provoked into buying because of what you see on the media only make you a prisoner in your own home.

It’s the same situation when we view the incredible lives of incredible people doing incredible things, such as on Instagram. The truth of the matter is that we’re only watching the highlights of what people are doing, but we get caught up in the illusion. We say to ourselves, “My life’s not like that!” and we feel insufficient. We want to fit in, and we want to be part of the tribe. This feeling of inadequacy makes us want to do what we see because of the mirror neuron in our brain, but because we’re smart enough to understand what’s going on in our psychology, we can choose to understand and accept that reality is not like that at all. When we step back and realize how we are being sucked in, we can become calmer and more accepting of what we really want to need, which is, first of all, financial security.

It’s true. You may need to experiment with buying things that are excessively expensive. Having these experiences may be helpful with your ability to understand and relinquish these objects’ hold on you. This is okay as long as you remember to only spend your passive income and then deeply reflect on the experience with honesty. Always remember that the purpose of money is freedom. Having a little fun now and then is great as long as you control your destiny. 

7. The cost of consumption. The cost of buying something isn’t limited to only the item itself. There are two additional costs when you purchase or consume something.

A. Opportunity cost. Every dollar you spend is a dollar you can’t invest. If you are earning a 10% annual ROI on your investments, the opportunity cost of your expended dollars rises significantly. Think of that expensive $27,000 refrigerator.

B. Time and energy cost. It takes significant time and energy to keep up with the latest fashion trends, hottest new cars, most beautiful ways to decorate your home, etc. Is your time and energy expense worth your application, or could your time and energy be better spent more productively? Remember that your time and energy are finite resources. Until someone invents a pill that allows you to live forever in full youthful health, it’s important to realize that you’re winding down like a clock. It’s important to evaluate how you’re spending your time and energy because no one knows how much time or energy they have left. Everything is an investment and must be evaluated closely.

8. Have a practical point of view. Being practical about how your spend your time, energy, and money is an effective discipline. Yes, it’s great to be creative and it’s important to have good times with your family and friends because they are the spice of life. However, it’s equally important to consider how events will turn out and how you can steer that course. Start viewing material goods for their practical use and not with all the folderol that the media and society are promoting.

With this in mind, the practical approach recognizes that a car’s primary purpose is to move you from Point A to Point B and not impress strangers with how much money you have.

The purpose of the house is to provide shelter and comfort for your rest and renewal and to enjoy sharing the space with family and friends. What purpose is there to having a dozen rooms you’ll never use? Someone once boasted that he has 18 bathrooms in his house. It’s impossible to use them all every day! 

9. Get the basics right. 

You don’t have to track every penny you spend. You don’t have to avoid Starbucks coffee. You don’t have to pack lunches from home for the rest of your life. Just get the basics right: Live below your passive income. Create and stick with a reasonable budget. Know your spending. Focus on collecting appreciating assets. Avoid status signaling. Avoid going into debt. Know the hidden costs of consumption. Keep a realistic view of material objects. 

When you get the basics right, everything else takes care of itself.

Khuram Dhanani
Khuram Dhanani
Khuram Dhanani
kd@softstonecapital.com