Financially, What Comes First, the Chicken or the Egg?
Occasionally I have the great privilege of having a strategy call with potential clients. During those calls, I review some key behaviors that will contribute significantly to their financial success. I have yet to find a universally effective way to help people understand the idea that the practices of wealth need to precede the wealth itself.
The best thing to do if you win a million dollars is to become a millionaire
Jim Rohn used to say that the best thing to do if you win a million dollars is to become a millionaire. If the underlying meaning of that statement is not immediately clear, let me help. If you don’t have the habits of wealth, additional money in your bank won’t magically grant those habits to you.
Without those habits, you are not likely to maintain any unexpected income for long. Around 70% of lottery winners, for example, have spent or lost all of their earnings within five years.
In the spirit of true confessions, I can use myself as an example of what I’m talking about.
With my first engineering position out of college, I started in the early 90’s at a salary of $35,000. I didn’t think I’d be able to spend that much money in a year. As a college student from a modest family background, I had never had anything close to that. Being the adaptive person that I was, I learned quickly that spending wasn’t a difficult skill to master.
Due to market conditions, and perhaps because I was a fairly diligent employee, I received a number of pay increases over the next two years, at which point I switched companies for another salary bump.
Guess what, even at $45,000 or $50,000 annually, the extra money seemed to be magically absorbed in the family household. We were comfortable, but I hadn’t learned the habits that would have accelerated the growth of our net worth much faster than it actually did grow.
The mistaken philosophy that the accumulation of money can precede the habits of wealth is still alive and well. Unfortunately, the opposite is true. Even if you only have a minimal income presently, you need to instill the disciplines of wealth now, so that your income and net worth will grow much faster.
Habits of Wealth
So what are the habits to which I’m referring?
- Create a monthly spending plan (every month)
- Track your actual spending to your spending plan every week
- Ensure your spending plan includes a portion for giving to charity, saving and investing. For extra credit make sure there is also a portion going to personal growth and development (books, audio programs, workshops, etc.)
- Know and track your net worth consistently, at least once per quarter
Gratefully we live in a time when there are myriad tools to facilitate these steps. Software programs and websites have greatly simplified and automated the above processes. It takes an initial effort to set up the process and even more to get in the habit, but once established the above steps really don’t take a lot of effort to maintain.
If you find yourself wishing for more money, but lacking these habits, you may want to start by focusing on instilling them first, and then work on increasing your income. If you do that, you will see your net worth increase much faster, than if you go for getting more money first.
To see how you’re doing overall in your financial habits take this 10 question quiz.
James Stephenson is the author of “Small Steps, Big Feat.”