The Past, Present, Future Rule Revisited

money

A few days shy of one year ago, I wrote an article for this site entitled “The Past, Present, Future Rule”. It described a principle, or “rule”, which I have used with many Coaching Clients over the last several years. It specifically deals with allocating and managing a sum of money, which is come upon suddenly, in the manner which is, in my opinion, most globally beneficial to the individual’s personal economy. Being that many readers will soon be receiving income tax refunds, I think this an excellent time to revisit this idea.

You can read the original post here.

Recently I received a comment on that post from a reader who expressed his disagreement with the method. He is far from alone on this matter, several people have taken issue with the method I outlined, and so I thought I’d write an elaboration on the logic applied, as well as provide an update on the status of the woman whose story I told in the post.

Before I get started, here is the comment that I received.

“Sorry Johnny P but this is horrible financial advice. If you’re friend has credit card debt at 18% interest, she is paying 900$ a year in interest on a loan of $5000. Her absolute number one priority should be paying off her debt. Obviously she needs to make sure she has money for future bills, but until her debt is paid off she should not be focusing on saving (no legal investments pay 18% or more annually over an extended amount of time) and she sure as hell shouldn’t be devoting money to entertainment. If she wants to have a shot at living a financially secure life, she’s got to pay off the debt first. Her experience of a boost in her personal economy is a mirage at best, and a detriment to long term financial access. If she stopped paying out $900 in interest every year she would not have to rely on her tax return to make it ends meet.”

Our commenter makes some excellent points with regards to the numbers involved. From a purely mathematical sense, he is absolutely correct. In order to explain the effectiveness of this method it is critical that I make an important distinction about my approach:

My job is not that of a financial advisor or accountant; my job is to assist clients in creating for themselves a more prosperous life overall, and to aid them in enhancing their quality of life through a multi-faceted application of strategy and by becoming more emotionally intelligent.

Now, his recommendation that the woman in the story eliminate her debt makes ton of sense on paper. The debt is parasitic, and it is costing her money to carry it. It is by definition “bad debt” in that it is not generating income for her as “good debt” would (think mortgage payment on a rental property that is producing income every month).

I noted in the article that I talked her out of the very strategy that our commenter recommended. With my Coaching, she opted not to use her $5,000 refund to eliminate her bad debt and begin with a “clean slate” (her total debt was in the neighborhood of $4,800).

So why did I convince her to defy such seemingly solid logic?

Well, therein lies the rub.

She was in the position that she was in due to her beliefs about the subject of personal finance. Her behavior in that area had led to her acquisition of debt, and her beliefs were behind the wheel of her actions. I knew that if I did not help her to change the way that she represented the subject of money in her brain, that she would be “doomed” to repeat this cycle year after year as so many people do.

While repaying the debt in full would have been a “fix” to the current financial crisis, it would have been a “band-aid”, a temporary fix to what would be a recurring problem.

By having her apply the past, present, future rule as outlined, allotting equal thirds of the total sum to debt, cushion (with a bit set aside for some “frivolous” spending), and an investment in her future (albeit a lame one in this example, a savings account), I was able to set the stage for the more important change within her that was ultimately required.

By applying one third of her chunk of change to her debt, she was able to reduce it by over 33%. Additionally, the amount of interest that she was paying out was reduced. While the percentage stayed the same, the total amount paid came down due to the reduction in the principle amount owed.

By depositing one third of her money in the savings account, she was able to “see” that she had something tangible set aside for her future.

By holding the other third as her cushion, and using a predetermined amount of that to indulge in some guilt-free purchases, she felt much more prosperous in “the now”.

Above we have three categories, and in each we were able to score a “win” with our strategy.

Remember that the root of her problem was her belief that she was “bad with money”. This belief was born out of the behavior which she had demonstrated in the “my buying power is my income plus all available credit” ways of her past. This belief condemned her to repeating this process over and over.

While she may have consciously desired to be debt-free, have a nice, growing nest egg, and not struggle with the bills every month, subconsciously her belief was causing her to operate much differently. This is because the belief wrote the program for the subconscious (the real super-computer) to follow.

Her belief caused her subconscious to perceive her potential to accomplish her loosely formed, consciously articulated “goal” as being very poor. I mean what are the odds that someone who is “bad with money” is going to be in an excellent financial position?

From there, her subconscious perception of her potential influenced her actions (spending habits, purchases on credit, failing to save).

Her actions yielded predictable results in the form of more debt, zero savings, and a frustrating, paycheck to paycheck existence.

Her results then provided critical feedback to her belief, strengthening it, and reinforcing it with every passing day. Being “bad with money” had officially become a part of her identity.

This pattern is observable with any belief, whether limiting or empowering, and is precisely the vehicle we used to assist her in dramatically improving her personal economy.

 

beliefloopsite

The all-powerful Belief Loop

Seeing the amount of money that she owed, and the interest accruing go down by a significant margin alleviated some of the stress associated with carrying her debt. This action was a step in the direction of becoming free of debt, which she desired greatly. Since it was progress, the stuff that makes us feel alive, it was a powerful experience for her.

To further address the debt issue, I aided her in creating a plan to allocate funds from her paychecks to be applied to her debt. Now instead of minimum payments, she was applying a hard percentage of her weekly income to her debts and watching them shrink.

Her “cushion” allowed her to feel like a person who “had some money”. No longer was she broke when she looked at her bank account online. Much like the prosperity consciousness trick I teach people (which I borrowed from Jim Rohn) of carrying three $100 bills on the outside of your “money roll”, it had the effect of helping her hold her head a bit higher day to day. The $300 idea is not about flashing your cash for others, but rather for the effect on your state that comes with seeing three $100 bills each time you take your cash out. It’s difficult to feel like a person who is bad with money when you are always toting that with you, and, in case you haven’t caught on yet, it’s the belief that you’re bad with money that makes you bad with money in the first place!

$300 of her “present” third went to some pure, unadulterated spending. She had no rules here, I instructed her to treat herself to whatever it was that she wanted with that money, and to feel great about it. She did exactly that, buying a few items she’d had on her “wish list” for some time. These guilt-free purchases had a positive effect on her state of mind when it came to money. She wasn’t saying “screw this, I can’t buy anything I want because I messed up in my past”, ultimately caving eventually and engaging in “retail therapy spending” of would-be bill money or worse, going deeper in debt. She was learning what it was to have a sum of money that she could freely “invest” in her own entertainment and material desires once again, something she would have when she had remedied her primary issue of belief and resolved her financial situation. Since she had a finite amount of money allocated for this spending, she put a good deal of thought into what her purchases would be, and had zero “buyer’s remorse” in her selections after the fact.

Lastly, the third that she deposited into savings let her know that she was, in fact, accumulating wealth, and establishing a resource of funds with which she could later invest in income generating assets. Much like my commonly recommended habit of saving all one dollar bills that you receive as change of what not, this had the effect of changing her from a person with “no savings” to one who was taking steps to build a financial future. I was and still am well aware that saving this money was “costing her” more in interest on the debt by not paying it off in full, but the interest payments were re-framed as small payments towards her new belief system about her own financial prowess.

That story took place about four years ago now. I’m happy  to say that she is now free from bad debt. The weekly payments (virtually all creditors will accept multiple payments per month happily) that she was making enthusiastically towards her debts knocked out the cards in short order. Since she had a percentage of her income assigned to paying down debt, she was making quite a bit more than the minimum payment each month. She first applied the minimum payment to each of two cards, while using the remainder to hammer the smallest one. When that one fell, she was then able to apply her allotted percentage to the other two, and continued this until they were all eliminated.

She did not “cut up her cards”. Since she is rid of her “bad with money” belief, she doesn’t need to hide from credit. Now, she uses her cards (which now sport much lower interest rates) to finance larger purchases, making monthly payments until the debt is clear, as credit is intended to be used.

She maintains a nice chunk in her checking account at all times. She’s since upgraded jobs and now makes a bit more each week. Her new habits and beliefs allow her to pay her bills in full, and on time. She never feels “broke” when she looks at her bank statement now, and hasn’t gotten a dreaded overdraft notice in years.

She has a percentage which she delegates for spending; scratching her itch for the finer things in life regularly and without guilt or negative association. She also gets much joy in giving gifts which she is able to purchase when she desires.

A designated percentage of her income is routed directly to her savings account. She keeps a decent amount of cash in there, investing anything over that set amount into income generating assets. She loves the security of a nice “rainy day” fund that is accessible with a quick trip to the bank, and loves to watch her assets increase (as well as her income which feeds the “machine” and gets filtered by the system that she’s created).

Since she has no “past” towards which to apply a third of her tax refund money now, she is able to put TWO thirds in her “future” column. She uses her “present” third for a guilt free shopping spree or vacation.

If you were to ask her today if she’s “bad with money”, she’d laugh. She’d tell you that she once was, but now she is much more intelligent emotionally, and is grateful that she was able to cure the mind virus that brought her down in the past (Thank YOU JP 😉 ).

Everything about her financial situation took  a major turn for the better over the last several years. She went from a person who, even upon receiving a major promotion and income spike, would have ended up broke and in debt, waiting on that refund check each year, to an emotionally intelligent money manager who is taking major steps in building a solid financial future for herself, while enjoying the finer things in life that she desires along the way.

Her first application of the “past, present, future” rule set the stage for her long term financial success, the very thing that the commenter was concerned she would be destroying any hopes of by taking such action.

Sometimes in finance, as in each of the other four categories in life (body, relationships, professional life, mission) it’s not just simple math. In this case, the simple math route would have been a quick solution to a symptom of a major, life draining disease.

Using cheaper labor, or materials can be an excellent way to increase profit margin in a business, but can be disastrous if it comes at the cost of an inferior product or service. Here, while the math may make sense, the situation is simply more complex.

I greatly appreciate the feedback provided by our commenter. As I said before, in a purely mathematical sense he is absolutely correct. I have no doubts that he is a man who possesses a great deal of knowledge of the mechanics of personal finance (as evidenced by his breakdown of the math involved).

I do however feel that it would be difficult, when examining the outcome of this woman’s actions, and the dramatic increase in her quality of life (even speaking purely financially- I didn’t mention how her improved mood as a result effected the rest of her life)  to conclude that the advice she received was poor.

Life is dynamic and made up of many components. Living is art, and while I’m as big of a science geek as you can get, there is simply a time and place for hard science, and a time and place for a more artistic approach.

 

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3 Responses

  1. Worth

    Great post JP. Sure the math works but it doesn’t fix what most gurus call an underlying problem. Doing what you outlined above takes care of the debt AND the underlying problem.

    March 6, 2014 at 10:13 am

  2. JP,

    It’s good to see you’re still putting content up on the site.
    The best thing I ever did was the Blueprint to Beast phone call with you. Changing my state of mind / belief system has changed every aspect of my life for the better.

    March 6, 2014 at 10:56 am

  3. SomeCowBoyGuy

    Fair enough JP. From my perspective I disagree, but it sounds like your system worked for your friend, and that’s the bottom line. I appreciate your well reasoned and thorough response to my thinking. I guess we can say the approach I listed would be good for those wanting to get out of debt at all costs, but yours is good for folks who still want to “live a little” while getting out of debt. Both systems are better than racking up more debt with no end in sight.
    Keep up the good work brother.

    March 10, 2014 at 4:18 pm

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