When I first began writing a financial column, I would end almost every column with conventional financial wisdom that’s been past down from generation to generation—pay yourself first, live below your means and use credit wisely. This would be good advice if these concepts were taught and embraced during our high school years. For shortly after we graduate from high school many of us are shackled down with credit card debt, student loans, car loans, furniture loans and IOU’s from close friends and family before we even know what hit us. Adding insult to injury, these liabilities are incurred before we have a stable job or stable source of income to repay them. We start off our adult life deep in the hole and we wonder why the little man can’t get ahead.
Looking back on my entry into adult life, I can recall having an outstanding balance on a student loan long before I knew what I wanted to be when I grew up. Upon graduating from college and having no job and no job prospects, I took out a loan just to cover rent for the first four months in my new luxury apartment hoping I’d be able to find a job by then. Fortunately by way of a Temporary Agency, I was able to get my feet wet at a local bank. I must have felt comfortable on my temporary assignment at the bank because I immediately went out and financed a newer model car.
I’m have come to learn that most of us share a similar story. As a result, when I would present financial concepts based on conventional financial wisdom I often got blank hopeless facial expressions. Imagine trying to tell people who barely have enough to make ends meet that you should pay yourself first. On to my next expert viewpoint—you have to use credit wisely. We thought we were using credit wisely as we financed nearly 90-percent of everything we owe on—I mean own. Lastly, you should live below your means. You’re a day late and a dollar short with this advice. It would be nice to simply have enough means at this point to support this mess I created.
Financial statistics suggest that most of us are struggling financially. Scripture says that the wisdom of this world seems foolish in the eyes of God. The great success coach Earl Nightingale once said that if you don’t have a success model to follow, look at what everyone else is doing and do the opposite. That being said, I tend to question conventional wisdom—particularly conventional wisdom that relates to finance. It is my belief that although the ideology of pay yourself first, use credit wisely, and live below you means have merit, it does not seem to be practical for most people. Secondly, I don’t believe those concepts prove to be the most efficient, effective, risk tolerant way to manage money. I believe that a more common sense, more practical approach to managing money while allowing you to accomplish your financial goals should be based on these financial principles—free yourself first, use credit only when absolutely necessary and live below you means with a purpose.
Free yourself first—You will not prosper financially if you’re living paycheck to paycheck. You need wiggle room in the budget for a number of things including saving, investing, aggressively paying off debt, and dealing with minor emergencies. Thus avoiding liquidating the emergency fund or worse digging a deeper hole by borrowing more and more money every time something unexpected comes up. Under the ideology of pay yourself first, it is recommended that you invest 10-percent of your gross income for your future before you do anything else. Don’t you deserve more? I think you’re being cheap only allocating 10 cents out of every dollar earned to yourself. I want to get you to a point where you’re paying yourself more like 25-percent before you do anything else. However, I think you should first build a solid financial foundation so that you can protect and preserve the money your saving for future goals. I think it’s bad financial planning when you’re using your retirement plan as an emergency fund or as a down payment for a home. My first recommendation is to have a minimum of 10 percent of your gross income FREE so that you can systematically build a solid financial foundation which include being debt free except for the house and having over $10,000 in the bank just for emergencies. At this point you can pay yourself first, more than 10 percent, without blinking. Best of all the money you’re savings for future goals will be there to service it intended purpose.
Use credit only when absolutely necessary—The idea of using credit wisely is way to compromising. People will creatively justify their misuse of credit as something noble and smart. I recently provided financial counseling for a guy who was bragging about what I deem to be his most recent car accident—a product he used to finance his car promoted as a smart lease. After going over the terms of the lease, we agreed that there was nothing smart about it. When you take on the mindset of use credit only when absolutely necessary, it forces you to consider other options that are generally neglected such as do without, pay cash, and save until you have enough money to make the purchase. Contrary to popular belief, when you use credit, you reduce you standard of living because you’re always paying more than market value for the product purchase once you factor in interest. Secondly, debt is hazardous to your wealth. When you’re tied down with payments, you tie up your most powerful wealth building tool, which is your income. Just think how much you can save and invest monthly if you did not have all those payments.
Live below your means with a purpose—The idea of living below your means simply does not appeal to most people. When presented with the idea of living below your means most people conjure up images of boring, lonely, unfashionable people that sit in the house all day reading books and doing crossword puzzles—wrong! People who decided to live below their means are people who recognize that money is finite. There’s only a limited amount that will flow through your hands over our lifetime. Even Creditors set a limit. Despite the fact there’s a limited amount of money flowing through our hands, we all have many responsibilities, goals, and desires that has a price tag attached to them. When you choose to live below your means with a purpose, you began to prioritize your responsibilities, goals and desires. You identify what’s most important to you and spend your money accordingly. Things that are low on the priority list are either delayed or ignored. As you begin to see your goals and desires being fulfilled, it’s easier to stomach the idea of living below your means.
(Damon Carr is owner of ACE Financial. He can be reached at 412-856-118.)