Financial awakening is an interesting and important concept in personal finance.
Chances are, you are this blog and others like it because you’re interested in the subject of personal finance. It could be because reading about personal finance is enjoyable. Or perhaps you’re looking for knowledge to achieve a specific financial objective, whether it is paying down debt, making a budget, living frugally, or investing for retirement.
Seeking out personal finance knowledge deliberately and purposefully, and eventually acting on it, generally indicates that you’ve achieved financial awakening.
The majority of people will never reach this level of financial enlightenment. This is evident by reading mainstream headlines on the state of most household finances. The statistics show that about 19% of American individuals spend more than they earn. Approximately 46% of individuals in the U.S. lack a rainy-day fund, otherwise known as an emergency fund.
I didn’t achieve my financial awakening until around the age of 30 give or take a few years, which I believe makes me somewhat of a late bloomer, especially in today’s digital age. Most people younger than me have early and persistent exposure to the dangers of debt, the need to have a budget and save, investing for retirement, and achieving financial independence.
How to tell if you’re financially awake
Think of the world as two alternate financial realities, something like in the movie the Matrix where there is a digital world and a real world. In personal finance there is one world that consists of financial zombies lumbering through their lives, unaware of their true surroundings. They have not yet had their financial awakening. The other world is made up of a much lower number of motivated souls, in control of their financial destiny who had their financial awakening.
Here’s how to tell if you have attained your financial awakening:
1. You have an allergic reaction to debt
You understand that some types of debt are possibly unavoidable and necessary to achieve long-term financial objectives. Taking out student loans to pay for college or a trade school or a home loan to buy a house may qualify in this category. These are both expensive items that you need for your career or long-term goals.
Another type of debt is designed to satisfy the need for instant gratification, like credit card and or auto loan debt, and in some cases mortgage debt. I know of people who have bought homes in a week or less, which borders on an impulse purchase.
Regardless of the type of debt, you recognize that eliminating debt from your life will lead to a more secure financial foundation. Once that realization is clear, you work tirelessly to eliminate debt. You also avoid taking on any new debt unless you’re eventually in a financial position to use it to your advantage.
2. You are not a fan of consumerism
You’re hyper-aware of the consumerist culture and the incredible marketing efforts enabling it. You have become immune to all forms of advertising and the attempts to lure you into purchasing something that you may not need. Frugality (without being cheap) is your new motto. You buy things on sale or when there is a deal.
You recognize that any financial resource squandered on items that add no value to your happiness or that is needed for day-to-day living is a waste. You dislike spending unless it genuinely benefits you in some substantive way.
3. You consider investing for retirement a primary goal
You finally figured out that making money isn’t limited to a day job with a W-2 or 1099. Compound interest is indeed a miracle and a superpower that can be tapped in all sorts of ways. You understand that a dollar invested today can be worth much more 10+ years in the future even after accounting for inflation.
You diligently squirrel away your money in a tax-advantaged retirement account, such as a 401(k) plan, and Individual Retirement Account (IRA), or a TFSA, to leverage the power of compounding. You understand that dividends matter to investors to generate passive income. You may also consider real estate and rental income as a source of future wealth and income for retirement.
The main idea is that investing puts your money to work and leverages the power of compounding and in turn improves your financial foundation for retirement.
4. You’re a personal finance nerd
Once the curtain is lifted, you find yourself obsessively seeking out personal finance knowledge much like me. You may not become a personal finance blogger but you binge-read personal finance blogs, glance through mainstream media related to the subject, and constantly analyze your finances to track your debt, savings, and retirement money. Like any obsession, this can sometimes be unhealthy, so make sure to balance it out and keep it focused on what is important.
5. Financial independence is your primary goal
You eventually realize that this alternate world is basically about building your net worth and financial independence. It’s the ability to control your destiny and shape your life into what you desire it to be. That financial independence can mean early retirement for some, for others, it’s accomplishing personal goals that would otherwise be unattainable.
Regardless of the destination, your journey becomes that of financial freedom. All your financial efforts are focused on that primary goal. You start to optimize your finances and begin to operate your household like a business.
When did you become financially awake?
Although I had better financial sense than most, I didn’t become financially awake until around the age of 30. Before that, I was more of a consumer. I bought my first car because I loved the way it looked. I did not comparison shop either. It just worked out that the car lasted 11 years and over 100k miles. I also bought take-out lunch and dinner too many times and that was money I could have saved.
That’s when I feel I became more fully aware of managing money, debt, savings, and retirement. I essentially had my financial awakening. Of course, this doesn’t mean I had it all figured out back then. In fact, I still don’t despite being a financial blogger and in the top 3% of financial bloggers.
It just means that all five of the topics I discussed earlier eventually came to my consciousness. I had numbers 1 – 3 mostly figured out by around age 30 give or take a few years, but it was the last 2 topics that shocked me awake and I was a bit older by that time.
I started reading some articles about people who were retiring in their 30s or 40s and eventually made it to such legends as Mr. Money Mustache, Financial Samurai, Mr. Tako Escapes, and a few others. This opened up a whole new world for me and helped me focus my financial energy more constructively. I came to a better understanding of financial independence.
I sincerely believe that the earlier someone becomes financially awake, the greater their chance to become financially independent. The Rule of 72 shows that assuming an 8% fixed rate of return over time you can double your money every 9 years (actually 9.01 years). Start early enough and the dollar you invested at age 22 has more time to compound toward your financial goals.
Nothing is holding most anyone back these days. With all the free personal finance knowledge out there, all you need is an internet connection to achieve your financial awakening. Once you are financially awake, there is no turning back. You will see your financial world in a whole new way. And hopefully, that wisdom will set you on a course for financial freedom.