Start well to end well, part 2

A contractor friend was telling me his employees’ wages have almost doubled in the past year. I asked if they were taking advantage of the windfall and setting aside money for a future slow down. He laughed and said that despite record wages, just as many were asking for Holiday advances on their paycheck as they always had. This comes as no surprise in a country where most tend to spend all that they make, whatever it is. This careless money management practice will inevitably lead to future foreclosures, repossessions, and financial struggles when the economy turns south again.

Many falsely believe that if they only had a little more money they would be financially sound. But financial soundness does not come from income, but from discipline. Wealth is not built on high wages, but on properly utilizing whatever wage we currently have. Thus, every good financial plan begins with a budget. The challenge with budgeting is in sticking to it, which can be very difficult. Professional advisors can help draft up a detailed and beautifully designed budget plan, but it serves no purpose if not followed. And my experience is that few follow them.

So, continuing with my theme that you must start well to end well, let me offer some advice on a first step to budgeting that I think anyone can follow. Most people budget backward. They begin by listing their needs (usually overstating real needs), and then allow for their wants, and whatever is left over gets saved for the future. The problem is, even with rising wages there is rarely anything left over since both needs and wants tend to grow with rising income.

So, let’s budget the other way around. When you get paid take 10% immediately and save it for the future. This is called paying yourself first. Before you pay your mortgage or buy food or toys, pay yourself. Think of your future self as your most important creditor and set this money aside religiously, because it truly is sacred money. Then live on whatever is left over, needs first and then wants. Follow this principle regardless of whether you earn $1,000 or $20,000 a month.

Here is what I have seen happen when people do this. First, the very act of setting aside money upfront develops financial discipline and you begin to think more carefully about the remaining 90%.  You will find yourself viewing your needs and your wants differently. Paying yourself first is an empowering act. It puts you in control of your money rather than having it control you. With your growing financial confidence, the once impossible process of living by a budget starts to become not only doable but enjoyable. I have watched this happen, even among my own children. Those that followed this principle early have been more financially sound than those who did not, regardless of income. Getting control of your finances can be one of the best gifts you can give yourself and your family.

Dan Wyson, CFP® is author of “The Gold Egg,” and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 - 435-986-9525 – Securities and Advisory services offered through Commonwealth Financial Network, member FINRA/SIPC, a registered investment advisor.