Many financial advisers recommend sticking to a budget. By categorizing expenses and limiting spending, they argue, you can have enough left over every month to save money and grow rich.
But budgeting is like dieting: It’s enormously sensible but almost never works.
The problem is that when you budget, you pay everyone else first – the landlord, the credit card companies, the phone company, and so on. So at the end of the month, you have nothing left to put in the bank. You promise yourself you’ll do better next month, but you never do. There are always unexpected bills to pay, unanticipated sales to take advantage of, and that impossible-to-figure-out $200 or $300 that seems to fall through the cracks.
Budgeting doesn’t work. But there is something that does: putting some predetermined percentage of your income into a savings account each month before you pay any of your bills.
Think of yourself as a personal corporation and the money you save as your personal income. All the other money you spend on house and car payments and so forth are the expenses of your personal corporation. Only the portion that goes into a savings account is really yours.
Of course, it’s not enough to simply think of your income this way. You must actually do something to effect a change. You might, for example, have a portion of your paycheck automatically deposited in your savings account each month – as soon as the check is deposited.
In a sense – because withholding taxes have already been taken out of your salary by the government before it’s deposited into your checking account – this is paying yourself second. But you can put yourself ahead of the government by setting up a pre-tax retirement account – an IRA, SEP, 401(k), or 403(b).
I pay myself first by putting as much money as I’m allowed into a tax-deferred savings vehicle. I do this for me, my spouse, and my children. I pay the government next by creating a separate holding account into which I deposit a percentage of every fee that’s paid to me – the money that I’m going to owe in taxes. Then I pay my bills.
I recommend that you do the same.[Ed. Note: The above article was excerpted from Michael Masterson’s book Automatic Wealth.You can meet Michael in person this November. He’ll be revealing exactly how you can add six figures to your income in 2009. And he’s not the only one… 11 other money-making experts have responded to ETR’s Internet Ultimatum.] [Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]