In this week’s column, we are going to explore Financial Fallacy No. 4, which is: I barely earn enough money to make ends meet now; I do not have enough left over to invest.
This is the most common comment I hear in my live seminars and workshop. I hear it from families trying to live on $48,000 a year, to which I am very sympathetic. It is hard to make ends meet on that income.
However, I also hear it from people who earn $78,000 a year, $98,000 a year and $268,000 a year. I have actually had a client sit across my desk from me who earned $750,000 a year who said: “Jody, I can’t start investing now. I’m waiting for my next paycheck just to get this month’s house payment paid.”
You see, this is really just a conversation we create in our minds. Over the last couple of decades, many people have gotten their wants confused with their needs. We have learned to allow our lifestyle to quickly expand to whatever income we earn. Unfortunately, the result of a raise in pay for many people is nothing more than a bigger shovel with which to dig a deeper hole.
Therefore, let me demonstrate the real problem. To accomplish this, please ask yourself the following two questions:
How large an asset base will I need to retire?
Do I know how much I need to be investing this month to achieve my own retirement goals (however much you want that to be)?
In other words, do you really know how much you are going to need at your later retirement age, after calculating the effects of inflation, so you will be able to accomplish your retirement goal? Then, how much you need to be investing this month to be on target to reach that amount?
See, most people don’t have a clue. If you do not know what you need to doing today to accomplish this important goal, then how could you really do anything meaningful to resolve this problem?
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Now, ask yourself a couple of additional questions:
Do you make your house payment each month? If so, why do you do that?
How about your car payments, do you pay those every month? Why do you do that?
The reason you do both is that you don’t want to lose those things, right? In addition, you know very well, if you do not pay for them, the lenders will come and get them.
Do you invest every month the amount you need to ensure the accomplishment of your retirement goals, or your children’s college educational needs? If not, why not?
Do you want those things any less than you want your home or car? Of course not!
The reason most people don’t put their money toward their retirement or college education expenses is they do not have any concept how much they need. You pay your house and car payments because you know exactly how much those bills are, and you’ve already decided those things are very important to you. Therefore, you pay those expenses first before you pay for most other things.
Think about this very carefully for a moment: If you did not know how much your house payment was, and you knew if you sent in too little that they would keep that amount and still foreclose your home, would you send them anything? Probably not.
When you send in your mortgage check, you are preserving your home. However, unfortunately, when it comes to your monthly retirement investment needs, or building your children’s college education funds, most people are totally in the dark. Those goals are simply too abstract to deal with.
Instead of neglecting these financial goals, calculate how much money you need to set aside each month to reach your long‑term financial goals, and then start paying toward those goals at the beginning of the month, just like you do your house and car payment. In most cases, you’ll see that you will still have enough money left over to get you through the month. The reason? Things that are less important to you will cease to warrant your money.