Monday, June 9, 2008

The True Enemy of Wealth and Financial Security

The popped housing bubble and economic downturn is affecting all income stratas of the population...from those who make minimum wage to folks who earn millions. This past week it was revealed that Ed McMahon and Evander Holyfield were facing foreclosure on their multimillion dollar estates.

Now the fact that even millionaires are facing an income crisis should be a wake up call to all who think that just earning more and more money is the ticket to financial security. As I've mentioned is a prior post, the three most common things you can do with money is either spend, save, or invest it. Actually there is a fourth use as well- giving it away as in charity contributions but for simplification, I'll include that in the spending column.

We may be in an economic downturn with rising prices and a slumped housing market, but all this has been seen before as the market goes though its cycles of boom and bust. Is it more difficult to make or save money now? Yes, but how much you make is really the smaller factor of being financially secure. Most people make the classic mistake of thinking that higher income is the key to wealth and happiness, but they are off the mark....

In order to master your financial destiny one has to realize and accept that the true enemy to wealth isn't how much you earn, but rather how much you spend. We can look at celebrities and scoff at their financial mismanagement and think that if we had that kind of money that we wouldn't make that same mistake. The sad truth is, most of us are just as guilty at the same kind of mistakes. There are people who live in the poorest countries that have to live on less than a few dollars a day. Their time is spent just trying to scrounge up enough food for their family to have one small meal a day. If any of them had even our lower incomes, they would feel as if they've just won a super jackpot of a lifetime. And yet most of us complain that we don't make enough money without realizing the real opportunity we've been given to be blessed by the accident of birth to have landed in a rich country with many opportunities.

I hear people say over and over again about how they wish they didn't have to work and how they dream of retiring rich but they also throw away money needlessly with no concern. They mistake needs with wants.

All we need is food, water, clothing, and shelter. Of those 4 things:

Food: We need basic nourishment- fruit, vegetables and some meat. We don't NEED to eat out at fancy or specialty restaurants on a regular basis and spend many times more to eat.

Water: Water is the essence of life, but we don't NEED to pay $$ for bottled water when it is freely available on tap.

Clothing: Basic clothing is all that's necessary. We don't NEED designer anything that allows a company to charge big bucks just so one can say they are in high fashion or cool.

Shelter: A roof over your head with indoor plumbing and heating is really all we need. We don't NEED fancy houses with ocean views or McMansions that take up so much space.

Outside of the basic groups we have the usual assortment of wants:

1) Apple I-anything
3) Cable/Satellite
4) Cars
5) Misc (Electronic goodies, jewelry, gourmet food, travel, etc...)

Now I'm not saying that anything who partakes in any of these things is a bad wasteful person. I freely admit to also buying things I want in addition to what I need. What I'm saying is that we all need to be aware of the differences between our needs and wants and weigh them against our income. "Wants" involve an extra expense that isn't essential. We all need to know this because of the following:

1) Financial security and wealth depends on how much you save and invest.

2) How much you spend determines how much you can save.

3) You will NEVER achieve wealth or financial security if you spend to the point where you are not able to save.

It doesn't get any clearer than that. When you get your company paycheck, what you do with what remains after your needs are paid for will determine your financial future. As the months go by, is your bank balance growing, shrinking, or remaining the same? Your goal should be to save at least 5% of your income in addition to anything you contribute to retirement accounts. That's a minimum target as the more saved the better, but at least it gives you a line in the sand to measure. Just doing this would put you way ahead of most other folks since sadly, the national savings rate is now negative- meaning people are spending more than they earn. Be strong and be willing to cut back on some of your wants if needed in order not to be part of this group.