The Best Monthly Expense You Probably Aren’t Paying…
Life can be fun. In the world we live in we can enjoy so many different activities on any given day. On weekdays after work we might go to get sushi with our friends or go to a baseball game on dollar beer night. Then to top the weekend off we might go to a local brewery or play 18 holes of golf. Then Sunday night comes around and you log into our bank account and see the money you had has somehow disappeared…
Welcome to the life of the everyday of a young professional. The same person that makes $60,000 annually, but may not be able to cover a $400 emergency and only has a net worth of $8,000 or less. By the way, the net worth of the same age group in 1996 was 34% higher. With incomes higher than nearly any other year on record, why are we struggling financially?
In my opinion, there are multiple factors causing this issue. Temptation to enjoy what all of our friends are enjoying. That’s the lack of financial literacy. The biggest of all, is living in a world that makes it so easy for us to get what we want now rather than later. We want to buy a car right now, even if we don’t have the money upfront. We want to buy the brand new iPhone at only $25/month because our old iPhone is outdated. All of this we can “afford” because it doesn’t exceed our monthly income.
We are actually pretty good about not spending more than we can pay off monthly. However, there are so many problems that come with staying stagnant and not growing your net worth. The two greatest problems being the steadiness of our income (i.e. job security) and the inevitability of increasing monthly expenses. But what would happen if you lost your source of income tomorrow or 3 years from now, while knowing that your monthly expenses today are less than they will be tomorrow or the next day?
Insert the failsafe, what I like to call the “Pay Yourself Rule”. It works by taking on the mindset that you now have one additional bill to pay off each month, yourself. Usually this is around 20% of your income, but can differ case by case. As mentioned earlier, we are so accustomed to paying off our $1,000 rent/mortgage, $300 car payment, and $15 Netflix bill each month. Why not add one more expense that will unnoticeably affect your style of living and will work for you rather than against you?
As a CFP® (Certified Financial Planner), my primary focus with clients has always been to help them determine their financial goals and create a plan to get them there. Often times, this involves an analysis of their cash flow statement, where we determine their monthly income versus expenses. For my clients that have a hard time saving money, the Pay Yourself Rule helps them see that saving is not an optional task, but a required duty to themselves.
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