Understanding and Controlling Your Finances [Incentives ]

One of the very hardest things about "controlling your finances" is getting started down the path. During high school and college, and even after college for most people, finances are mysterious and maddening. There is never enough money.

One way to start down the path of control is to give yourself some sort of incentive to do so. If you feel that you are getting something from controlling your finances, then it is much more likely that you will do it. Different incentives work for different people. Let us try two approaches that might incent you to at least look into the prospect of starting to control things better.

Approach 1: Becoming a Millionaire

Many people find it hard to believe, but becoming a millionaire is fairly easy. Becoming a millionaire overnight is more difficult, but doing it over time is a reachable goal for every American citizen who is 25 years old.

Here is how you can become a millionaire. Start at age 25 and simply deposit $20 every week in an account that earns 12% interest. $20 is not a lot of money. If you smoke, it is the amount of money you are probably spending on cigarettes each week. If you go out to eat for lunch every day, it is less than what you are probably spending on your lunches. It is less than $3.00 a day. Every American - even homeless Americans begging at a New York subway stop - can put together $3.00 each day.

If you added that much money to an interest bearing account earning 12% every week, and you did that starting at age 25, then by age 65 you would have a million dollars. If you started at age 20 instead of 25 you would have a whole lot more.

Here is another way to think about it. Imagine your first child. Imagine that your first child is to be born tomorrow. If, on that day, you opened an account earning 12% and deposited just $20 per week in that account, then at age 20 you would be able to write your child a check for about $80,000. Hard to believe but true. Small amounts of money, accumulated consistently and earning interest over a long period of time, really add up.

You probably have three questions:

• What, are you kidding? That is all I have to do?
• Why didn't anyone tell me?
• Why didn't my parents do this for me when I was born? I sure could use $80,000!

One other question you need to ask is, "Where can I find an account that pays 12% interest?" We will discuss this question later in this series.

The point is, with just a little discipline over time you can accumulate huge amounts of money. That is what "control" is all about. You will learn a lot more about accumulating wealth in the other articles in this series.

You can use the Weekly Investment Calculator to help you calculate the future value of small weekly contributions to an account. You will be amazed. (To run this calculator you will need a web browser that understands JavaScript. The later versions of NetScape, the MS Internet Explorer, etc. all do)

Approach 2: Getting Something You Really Want

Let's say that the thought of a million dollars in 40 years doesn't do anything for you. You want something now. Here is another way to think about your finances.

Television is a funny thing. The technology behind it is simple and seemingly harmless: television transmits moving pictures to your home. What could be the problem with that? The weird thing about television is that if the proper images are transmitted to your home, they can change the way you think. In particular, they can increase your desires. Take, for example, the Salad Shooter. Would it have ever sold without the mind-bending influence of TV? No. At the same time television tends to encourage you to satisfy all of your desires immediately. That is why, two weeks after you have purchased a brand new car, commercials can make you believe that you need another one.

Let's try to imagine an alternate and parallel universe without television. In this universe, a person who wants something stops and says, "in order for me to have that something, I need to save up enough money to buy it first. Then I will go purchase it." Would this work? No it would not in some cases. For example, is it worthwhile to wait 30 years until you save up enough money to buy a house, and then go buy one? No. See the section on buying a house for a discussion of this particular purchase. Is it worthwhile to save money for five years before you buy a car? Not necessarily, mainly because you have to have a car to survive in most American environments.

But let's say that on all other desires in your life you were to follow a "save first, buy later" rule. What would happen? Two things: first, you would notice that your desires might suddenly change dramatically. Second, you would have to find a way to accumulate money over time and hold it so you could realize your desires.

It is this simple but fundamental change of thinking - the "save first, buy later" rule - that can lead to the concepts of "controlling your finances" and "accumulating wealth". If you can make that change, it will cause you to modify your thinking so much that in a short period of time things like stocks, bonds, CDs and all the rest suddenly become interesting and relevant.

You may find yourself thinking one of three things right now:

• "There is no way I want to live my life that way. It is too constricting."
• "There is no way I can organize my life enough to live that way. Things are too chaotic."
• "There is no way my life will ever be organized that way. I'm too far in debt now to ever get out of it."

If you find yourself thinking one of those things, let me ask you simply to put the idea on hold for a few minutes. Suspend your disbelief long enough for a new concept to enter your mind.

In order to organize your life in this "save first, buy later" way, you have to determine your financial priorities. This can be hard, and to do it right it helps to have some experience with other financial concepts. Therefore, a later article will help you to see how to do it right. In this article let's ignore doing it right and simply try out the concept to gain some experience with the process.

To determine your financial priorities, the first thing you have to do is think of the things you would like to have in the future, and then organize them. Therefore, I would like you to try taking 15 minutes to come up with a list of "things you would like to have one day." Simply take out a sheet of paper and list as many of your desires as you can think of. It may take a few minutes to get started; if you find yourself staring at a blank sheet of paper here are some thoughts to help you get started:

• Do you want or need a new car?
• A new house?
• New furniture?
• An encyclopedia?
• A computer?
• A new spring wardrobe?
• A comfortable retirement?
• A new riding lawn mower?
• A deck or swimming pool?
• A college degree for your kids?
• A trip to Paris?
• An engagement ring for your girl friend?
• No more payments on your credit card?

Just start imagining all the things you would love to have one day, and write as many of them as you can think of down on the sheet of paper. For most folks, if you think about all of the things you want to have both short- and long-term, you end up with a pretty long list. If you have a spouse create the list together. Come back in about 15 minutes.

Now you have a list. Take another five minutes and write down prices next to everything. If you don't know the exact number, write down an approximate number. If you don't know an approximate number, just guess and then double that number.

Now take your list and find the one thing on that list that you REALLY want. The thing that would make you happiest or solve the most problems or bring the most joy to you or a friend. On that list there is one thing that brings the biggest smile to your face when you think about it. Put a big star next to it and focus your attention on it.

Now here is an important fact: You can have that thing. It will take some work but you can have it, and you will have it if you can gain control of your finances.

Let's go back to Bob from the previous article. He made his list. He put prices next to everything. Then he took about half an hour to think about everything on the list and discovered the one thing that he really wants, more than anything, is a pilot's license. Bob wants to learn how to fly. He can't exactly explain why. He just wants to get his license and he has wanted it since age 13. He called a local airport, and it costs about $4,000 for a person to get a private pilot's license. So what Bob needs is $4,000. And his question is this: "This is great. Now I know exactly what I want, and I can taste it I want it so bad. But where in the world am I going to get $4,000???"

You may find yourself thinking exactly the same sort of thing. In the next article we will discuss this problem and how to solve it.