As humans, competition is something innate. We feel the need to compete across all fields imaginable and person finance is no exception. While healthy competition in fields such as sport and business are a great source of motivation, I don’t believe the same can be said about personal finance. In fact, I believe that competition in the field of personal finance is unproductive in terms of helping individuals achieve success.
Metrics for success are different for everyone
In sport the metrics for success and ranking are easily measurable and everyone knows what they are aiming for. The same can not be said for personal finance as everyone has different ideas of what a successful and fulfilling life looks like. Since money is an enabler for people to build the lives they want, everyone’s personal financial metrics for success are different.
Luck is a major factor
In the game of money (can I call it a game?), luck plays a huge role in how an individual’s financial journey unfolds. Take Warren Buffett for example, there is no doubt that he has amazing skills in picking investments, growing businesses and works really hard but even he acknowledges the role of luck in what he calls the “ovarian lottery”. He is quoted as saying:
“Just in my own case: I was born in 1930, I had two sisters that have every bit the intelligence that I had, have every bit the drive, but they didn’t have the same opportunities.”
In short, “if I had been a female, my life would have been entirely different.”
Take some time to let this sink in.
The start line is different for everyone
Starting points for personal financial journeys vary immensely. Continuing on from the theme of luck some people are born wealthy; whereas others are born into lower socio-economic circumstances. This gives some people a significant advantage when building wealth which is often further compounded by financial habits taught to them by their families and peers.
Personal finance is opaque to outsiders
In sport, your score is shown on the board for all to see, making it crystal clear as to who is in front. However, in personal finance your peers are unable to evaluate the full picture of your debts, assets, income and expenses. Further to this many assets are unable to be valued accurately such as a private enterprise or unlisted assets. Often people will just rely on hearsay to guess whether or not someone is successful.
Why you should run your own race
Even though trying to deduce where you are in comparison to your peers can be quite entertaining, it doesn’t help with achieving what is important to you. Personal finance is a field where the metrics for success are different for everyone; everyone’s starting position is different; and determining someone’s “score” is very difficult. This means that making comparisons to others is unscientific and therefore highly ineffective at moving you in the direction that is best for you. At the end of the day, living your life in the way that brings you the most satisfaction is actually what’s important; and your energy needs to be devoted towards managing your finances to enable this.
How to run your own race
Focusing on yourself is easier said than done. But here are some things that I do to help me focus my energy on building my own finances to suit my own needs.
Spend time thinking about is important to me
Spending time with family and friends; exercise; being healthy; travelling; learning; and working hard are all things that give me huge satisfaction and joy. I also take time to recognize that I value these things because they are important to me and not because I’m trying to compete with other people. For example, I want to travel to experience different places and learn about their culture; not for the purpose of saying that I’ve travelled to more places than other people.
Develop a picture of what my ideal life looks like
My ideal life is a life where I spend most of my energy on the things are important to me. I picture myself travelling a few times a year; exercising most days of the week; and spending time with family and friends. I read and learn freely without the external pressure of deadlines or generating a monetary return.
Develop a picture of a financial situation that facilitates my ideal life
I find that once I have a clear picture of what is important to me and what my ideal life looks like, developing a financial picture that can facilitate this becomes straightforward. How much is required for financial freedom is estimated using the 4% rule; our savings rate is driven by cutting out spending that is not important; insurance levels are driven by risk; and investments are defined our risk tolerance and how we wish to spend our efforts currently.
Compare my current situation to my ideal position
In my post on goal setting, I talk about breaking up large goals, such as achieving financial freedom, into smaller ones. As a result, smaller goals such as our yearly savings targets are what I tend to compare our current situation to. I also tend to ask myself questions like:
“How does my current financial position compare with my financial modelling?”
I find this inward focused comparison helps to focus my attention, and energy, on my own situation as opposed to that of others. I also find that it is the most efficient use of energy when it comes to building our financial house.
Concluding thoughts
When I first discovered the FIRE movement, I spent a lot of energy comparing our savings rate with the savings rates of other early retirees in the movement. Even though our savings rate was over 50% at the time I ended up feeling that we weren’t saving enough. It was almost like a “keeping up with Jones’s” mentality where I wanted to ‘win’ by being the household with the highest savings rate. Of course, this meant that my energy was deviating away from building a life that was the best for us and a lack of general life satisfaction soon followed. Realizing that competition is not the purpose of personal finance allowed me to re-focus on what was important to me.
Hopefully this article has provided some tools to help you focus on your own journey and make it a productive one for building your ideal life.
Engineer your freedom
References
Elkins, K, 2018, Warren Buffett: ‘If I had been a female, my life would have been entirely different’, CNBC Make it, available from: <https://www.cnbc.com/2018/10/16/warren-buffett-says-being-a-white-man-helped-him-succeed.html>