Money

Here's one piece of financial advice you can't afford to ignore

Personal finance expert Peter Dunn gives advice to a chronic overspender on how to be less like Leonardo DiCaprio's character in 'The Wolf of Wall Street.'
Source: The Wolf of Wall Street
Personal finance expert Peter Dunn gives advice to a chronic overspender on how to be less like Leonardo DiCaprio's character in 'The Wolf of Wall Street.'

Dear Pete:

I like reading financial advice articles, but I never follow through on any of the advice. The problem is that I love spending money. My family didn't have much when I was growing up, and I was never able to get anything I wanted. I make a very nice living today, but I spend a tremendous amount of money. You only live once, and I don't see the fun in not living life to its fullest. I see the logic in personal finance articles, but I never pull the trigger. How can I do what I know I should do, and still live the life I want to live?

— Matt, San Diego

Dear Matt: I know I'm supposed to write 800 words trying to convince you that you're being short-sighted, Matt. I could just conjure up a metaphor about going on a 1,500-mile journey without a spare tire or something trite like that. I should tell you that you might end up back in your childhood's financial reality if you don't better manage the resources you've earned, but I will spare you the violin music and provide you with actionable advice.

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Your financial behavior struggles aren't that different than my nutritional behavior battle. Sometimes I read fitness magazines during layovers at an airport bar while drinking a beer and eating a plate of nachos. I justify it by wearing a FitBit.

Instead of trying to convince you to change a behavior that you have no problem with, I'm going to hit you with the most clichéd personal finance advice of all time. But this time I need you to take the time to look past the obvious lesson and dig deeper.

If you're a seasoned personal finance reader, then you're familiar with the phrase "pay yourself first." You've heard it a million times. If you had a dollar for every time you'd heard the phrase, you'd spend it. But that's beside the point. My job is to get you to understand why paying yourself first won't cramp your style.

Pay yourself first is one of those age-old idioms that means both nothing and everything. Some people hear or read the phrase for the first time, and it's life changing. For the rest of us, it's no different than refusing to eat an apple a day.

The phrase is meant to spur wealth accumulation. By not using a portion of your current income, you're able to divert the funds to grow for use in the future. It's pretty simple stuff.

There's more to it than you think.

I've always felt paying yourself first, or savings in general for that matter, isn't about accumulation. Saving is really about proving you don't need your entire current income. You're breaking your dependency upon your income.

Matt, the fact that you're consuming your entire income leads me to believe that you are fully dependent on your entire income. You're likely trying to make hay (save money) only with what's left over.

Buying what you need first, quickly turns into buying what you want second, and then savings gets the bronze. It's called the sweep method, and it rarely works.

The sweep method is the idea that you can sweep the money you didn't spend (if there happens to be any) over to savings at the end of the month. I've certainly seen the sweep method work for very disciplined individuals who don't have a consumption issue. But I've never seen it work for someone trying to change their habits. Paying yourself last does not create healthy new habits. If you're looking for fresh new habits, Matt, then you need structure. The amorphous nature of trying to sweep over an immeasurable amount of forgotten-about spending ammunition, is fruitless.

You need to schedule savings.

The moment your employer pays you, money should flow right into savings. Doing this will decrease the amount you spend; the money will ideally accumulate over time; and you will prevent the impending financial disaster on your horizon. Then, spend whatever you want. Personally, I fund my financial priorities first with every paycheck, then I don't feel a bit bad about blowing the rest. The only way you can spend money freely and achieve financial independence is to pay yourself first.

At your current pace, your financial life will fall off of a cliff. You can't possibly accumulate the amount of money you need to re-create an income stream once your work income ends. If your income-consumption percentage is still 100% at retirement age, you will feel the ugliest pangs of failure you could possibly imagine. I've seen it happen. It's awful.

Take action right now. Honor the cliché: Pay yourself first.

Peter Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money for Pete the Planner? Email him at AskPete@petetheplanner.com