I visited with a couple this week who were seeking to get on a sound financial track. I asked what steps they had taken, and the reply was that they had read 12 books on the subject. When I questioned what they had learned there was a slight pause before both laughed as one said, “apparently nothing.” It was clear they were hoping book 13 would hold the secrets they were seeking.
My answer to anyone seeking a better financial situation is to start with rule #1. “Spend less than you make.” When someone asks for rule #2, I tell them they must first learn to obey rule #1. This rule forms the foundation for all that follows and adherence to it is absolutely necessary to the financial success of any family, business or government.
Most people start life with a relatively small income. As they struggle to pay their bills the common thought is, “If I could only increase my income to X amount, then I would be financially sound.” This is flawed thinking because it is human nature that as your income increases, so will your spending. And that by the way, is not necessarily a bad thing. You should be able to enjoy your money more as you have more of it. But, if you are currently spending more than you make then it is very likely (I would almost say guaranteed) that you will continue doing so, thus keeping financial stability forever out of your reach.
Being financially sound does not come from having more dollars, but from properly managing whatever dollars you already have. How many lottery winners, movie stars, pro athletes and heirs of family fortunes have quickly burned through their newfound wealth only to find themselves just as poor as they began?
Conversely, if you commit to follow rule #1, then you will live your life always having more money than you need. That is financial stability.Keep in mind, following this rule does not mean you can never borrow money. Few young families could enjoy the benefits of home ownership for example, without taking out a mortgage. Likewise, governments and businesses often have to borrow money because the need for infrastructure spending almost always precedes the growth that pays for it. Following rule #1 means you manage necessary borrowing such that loan payments fall within your “less than you make” budget. Trouble begins when money is borrowed in order to make the payments on previously borrowed money.
I love to help people get their financial life in order. Some of my greatest joys come from seeing a family become financially stable that was once bordering on ruin. So much do I enjoy this that I do not charge families who need help getting started. But I will warn you upfront. Our conversation will begin with a commitment to follow Rule #1 and it will end there if you are unwilling to do so. Simply put, if you cannot follow Rule #1, whatever Rule #2 is won’t matter.
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