"If only I made more money, then everything would be fine."
"An extra $2,000 a month is all I need to solve all my financial problems."
"If I had a million dollars I'd never have to worry about money again."
No matter how much money you make--whether it's $2,000 per month or $200,000 per month--you can still create a financial crisis for yourself.
Anyone Can Go Into Debt
Look at Ed McMahon, best known as Johnny Carson's sidekick on The Tonight Show. Here's a man who made millions of dollars throughout his lifetime. And where is he today? Facing foreclosure on his Beverly Hills home. Owing American Express $747,000. And I'm sure more money problems underlie those two.
What happened? McMahon put it succinctly when he said, "I made a lot of money, but you can also spend a lot of money." His was a case of simple overspending. Well, not so simple . . . millions in overspending.
If your plan is to go broke, just do this: If you make $1, spend $1.10.
I guarantee you'll find yourself upside down in no time. And if you make $1 million, then spend $1 million plus $1.
Here's Why Folks Go Broke
So many people think that if they just make more money, their problems will be solved. However, most of us have heard the sad stories of lottery winners who wind up broke or in debt a few years after winning the lottery.
Does someone steal the money? Did the lottery winner get bad financial advice? Did all her friends and relatives show up to partake in the windfall? These are all feasible scenarios. However, in the majority of these cases, I suspect the following is true:
If you have poor financial habits when you have a little money, you will carry those same poor financial habits with you when you have a lot of money.
McMahon--an intelligent, successful, world-renowned celebrity--broadcast his shortcomings in The New York Times: He spent more than he made. And he made a lot.
McMahon has one advantage over the rest of us. He can make a phone call and appear on "Larry King Live" to talk about his dilemma before a sympathetic audience. He can gain the support of Donald Trump and Jay Leno. All of which he did, to his credit. I'm quite certain McMahon will be just fine.
Develop Healthy Habits
However, most of us don't carry celebrity clout. So as you make more and more money in accordance with your plans, what can you do to protect yourself from financial mismanagement?
This series presents three ideas that will help you create the financial security and independence you want. This month's column will describe the first principle. Next month's column will cover the other two concepts.
The first thing you have to do is put your financial future first--and your financial today second. Many women make the mistake of saying, "I'll save if I have money left over at the end of the month" or "When I have extra money, I'll invest it." That's an excuse never to save or invest.
The simple solution: Instead of setting money aside based on what's left over at the end of the month, set money aside at the start of the month.
Note that I don't believe in saving for the sake of saving. Because of fees and inflation, you actually lose money when you keep it in a savings account. I use savings only as a place to hold my money while looking for a good investment.
Take 30 Percent Off the Top
Here's the rule I've followed since the beginning of my investing career: Before we pay any bills, we take 30 percent off the top. This applies to every single dollar bill that comes into our household. Ten percent goes into an investment account. Ten percent goes into a savings account (for emergencies) and 10 percent goes into a charity or tithing account. With the money that remains, we pay our bills.
I can already hear some of you screaming: "But I can't afford to take 30 percent off the top! I won't be able to pay my bills!"
I understand, because when I started doing this, that's exactly the situation I was in. But instead of saying, "I can't do this," I asked myself, "How can I do this?"
For me, it was a combination of two things:
1. Talking with my creditors. Most agreed to take a smaller amount each month as long as they knew I had every intention of paying them in full.
2. Figuring out ways to increase my income.
It really doesn't matter what percent you take off the top: It could be 3 percent, 3 percent and 3 percent. What's most important is that you create the habit of doing this with every dollar that comes into your household, every day and every month.
Don't take a break, even for just one month, because part of the challenge of creating a habit is doing it until it becomes second nature. Also, commit to a percentage that will stretch you a bit, and cause you to think and create.
This one habit alone got me to think, create and buy my first investment property in 1989. I continue this habit today, but the percentage I set aside is now a bit larger.
You'll be amazed at how fast the money accumulates in your accounts and how quickly you find ways to replace the money you've taken off the top to pay yourself for your financial future.