Your Income: It’s Just The Beginning

It has been said that your income is the greatest wealth building tool available to you, but having a tool and correctly employing it are two different things. There is another saying that reflects most people’s realities. When all you have is a hammer, every problem looks like a nail. Having an income is only half of the process. You have to know how to use it in order to benefit from it. Many believe that an income is meant to be spent and if that is your belief, you have the wrong perspective. One of the best questions I’ve been asked while mentoring those who are seeking financial stability is the following.

What is the key to unlocking the power of my income to build wealth?

The average income in America is somewhere between $48,000 to $53,000 a year (depending on which survey you are using). It is becoming increasingly harder to raise a family on this amount, let alone build wealth. This is why most families resort to both parents working. The dynamics of society have changed drastically since the time of a single bread winner and two parent families.

However, there are some common factors associated with unlocking the power of your income to build wealth. Certainly a single person without children has an advantage. The single person only has to focus on a couple of items. First, control the amount of money he or she spends on consumer products, services, and experiences. Also, don’t use credit to artificially inflate his or her income. This creates debt and introduces the main culprit responsible for diminishing the ability to build wealth. 

The final step for the single person is to save like mad. A single person, appropriately managing his or her money, should be able to save at least a third of his or her income.

For the couple with children, the task becomes a little more complicated. This is because in the process of raising a family, there are expenses that seem to come out of nowhere such as a sick child, school related expenses, and falling into the trap of keeping up with the Jones. Therefore, the first practice a couple needs to concentrate on is to live well below their means. If you have a dual income, live of the greater and bank the lesser. This is a strategy my wife and I used for several years. If the greater income is not enough, only supplement the greater with the lesser to the extent needed to meet your current requirements.

The second practice is the same as the single person, get out of and stay out of debt. Debt is not your friend. Don’t become too friendly with easy credit and don’t fall for the realtor’s assessment of what you can afford. When purchasing a house, the lender and the realtor are looking at two sides of the same coin: interest and commission. That is not to say that there are not good lenders and realtors out there, but you have to know that, in the end, both are working for themselves while working for you. Just because you qualify for a $400,000 house doesn’t mean you have to buy a $400,000 house.

This leads to the next principle, limit your exposure to risk. Do your due diligence in whatever direction you choose to invest your money. Don’t take someone’s word for it. Whether you are talking to a realtor/lender, a financial planner, or an insurance salesman, make sure you hire a competent professional. And that professional’s first priority should be you. I strongly recommend you share your goals with the professional and hold him or her accountable to helping you achieve your goals even when your goals conflict with his or hers.

Most financial planning is influenced by behavior. Therefore, you must learn to say no to yourself and your family. But don’t just say no. Learn to work through the process of making a purchase. Discuss the advantages and disadvantages of saying yes and no. Measure and discuss the opportunity costs. Teaching your children how to make an adult decision will not only help you unlock the power of your income, but it will also position your children for success with money when they begin to make financial decisions.

The single most troubling problem today concerning money management is that there isn’t any! The “I want it all and I want it now” mentality speaks of the instant gratification generation we have become. There are pockets of those who have learned and practiced good financial behaviors, but for a vast majority, managing money is not a strength.

The best way to unlock the power of your income is to lock up the power that spending your income has over you.  You cannot spend you way to wealth. In my book Simple Wealth Building Strategies I provide you with eleven different strategies that collectively help you systematically build wealth. Sometimes taking what someone else has done successfully and adapting it to your situation is the best way to develop your own strategy. Therefore, taking a look at my book might encourage you to develop and implement your own successful wealth building strategy.