8 Financial Truths That Can Change Your Life
Laura covers eight truths that have the power to transform your financial life. Use them to make better decisions, set the right priorities, and build more wealth.
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Living paycheck to paycheck may take care of your immediate wants and needs, but it’s extremely dangerous because you’re kicking a financial can down the road.
Financial Truth #4: You must spend less than you make
The only way to get ahead financially is to make sure you have discretionary income. That’s the amount you have left over at the end of the month after all your essential living expenses are paid. It comes from having more cash flowing in than you have expenses flowing out.
Without discretionary income, you simply don’t have the ability to save and invest, at least not without also going into debt. Living paycheck to paycheck may take care of your immediate wants and needs, but it’s extremely dangerous because you’re kicking a financial can down the road.
The trade-off for spending all of your paycheck today is a future with no financial security. In order to be comfortable later on, you may need to feel slightly uncomfortable today.
So secure your earning power, cut unnecessary spending, and evaluate your financial priorities carefully.
Financial Truth #5: You’ll accomplish more by paying yourself first
I don’t know who originally came up with the phrase pay yourself first, but it’s a golden rule of personal finance. It means you should save and invest before you pay anyone else.
I highly recommend that you put your savings on autopilot so it happens in the background without you having to think about it or do anything. Automation is what makes workplace retirement plans, such as a 401(k) or 403(b), work so well. Contributions come out of your paycheck before you ever get the chance to spend them.
You can create a similar system by having money transferred out of your checking account into an IRA or a savings account as soon as you get paid. Making consistent contributions, even if they’re small, goes a long way toward building financial safety nets, like an emergency fund and a retirement nest egg.
Financial Truth #6: Your financial past is irrelevant
In the business world, a cost that you’ve already incurred and can’t recover is called a sunk cost. The term comes from the oil industry where you spend a lot of money to dig a well, but may not find any oil. What do you do next, keep digging in that same well or spend more to dig another one?
Both companies and individuals have to make decisions based on what’s best for their futures, not based on bad moves or hardships that occurred in the past.
We all have personal sunk costs we wish we could get back, like bad investments, purchases that we really didn’t need, or unexpected bills. Don’t dwell on them. Feeling sorry for yourself or being regretful doesn’t accomplish anything.
Make decisions and move forward based on what’s best for your future, not according to what challenges you may have had in the past.
The more time you have to make investments and allow them to compound, the less you need to invest to achieve your goal.
Financial Truth #7: Investing early turbo-charges your success
One of the most important financial concepts and truths to understand is that investing early is magical. It isn’t always easy; but it can make the difference between poverty and comfort in the future.
The more time you have to make investments and allow them to compound, the less you need to invest to achieve your goal. For instance, if I want to retire with over one million dollars, I just need to invest $300 a month starting in my 20s. That’s a total of $144,000 out of my pocket.
But if I don’t start saving for that million-dollar goal until I’m in my mid-40s, I have to invest $1,700 per month, which is over $400,000 out of pocket. The earlier you start investing, the cheaper your future becomes.
So don’t start planning and saving for retirement too late in your working life. Begin the habit of investing a minimum of 10% to 15% of your gross income for the long term every month, no matter what’s going on with the stock market.
You’re in the investing game for the long term and simply can’t afford to wait. Start small and start now.