Financial Planning: Four Building Blocks to Pay Yourself First

I recently read a financial advice column that began with the premise that putting money away for retirement was extremely difficult because "its hard to part" with money for a future need.

What's wrong with this picture?

Money saved for retirement is not separated from you as the writer suggests. It's still your money. If you want to part with your hard earned income, I suggest you visit a casino. You'll quickly realize the difference between putting dollars in a slot machine and a retirement plan.

But this column isn't about retirement plans, it's about the attitude that investing money for future needs is less important than satisfying your immediate needs.

The rate of savings in America is atrocious. The average Japanese saves twice as much as we do, and Europeans save four times that amount.

Consumer spending relative to the Gross Domestic Product (GDP) is at an all time high, much of it driven by home equity loans. Sucking out the life-blood of a home to leverage an investment has always been an iffy proposition, but spending the money for no possible return is simply a dead end.

Financial Planners have different opinions on the basic building blocks of financial security, but here are the most common:

1. Control Credit Card Debt - This comes in many forms, but credit card debt can be the most serious. There's nothing "priceless" about interest rates that exceed 20%. Current estimates are that close to 650 million credit cards have accounted for more than $1.5 trillion in spending by consumers. The average credit card debt per family is $8,000 - and growing. If payments are missed, additional fees and interest charges are tacked on. The missed payments affect the consumer's credit rating, or FICO score, which can lead to higher rates for additional loans. This can easily spiral out of control. So, rule number one - if you can't afford it, don't buy it.

2. Set up a Savings Plan - Systematically save for those unexpected needs. A cash reserve can help prevent further borrowing and, if for some reason it's not used, then it will still be there. Systematically saving on a monthly basis also teaches good financial discipline. Most people will find that they can easily adjust to their new saving habits. If you don't have it, you won't spend it. So you skip a few nights out each month - it's not going to kill you.

3. Invest in a Retirement Plan - Yes, the odds are that you will grow old and develop gray hair over the years; and, if you think you'll make ends meet with Social Security alone, then you really haven't been paying attention. With the variety of retirement plans that currently exist, there is no excuse not to get involved with at least one of them. Look, first, at 401(k) plans in which your employer stands ready to match a portion of your contribution. If that's not available, then there's always an Individual Retirement Account (IRA).

4. Build Home Equity - A home is still the biggest single asset most people will ever own. Building equity (the piece you actually own) would seem like a no brainer. Apparently others are trying to convince us differently. Here's a direct quote from a mortgage company:

"Wouldnt it be great to use this asset to reduce your monthly payment and put extra cash in your pocket?"

I'm all for reducing monthly payments, and declines in interest rates can determine whether refinancing is to your advantage. But, I just don't understand this "cash in your pocket." That isn't money you earned, it's money you borrowed and will have to be paid back with interest. Over time, you'll not only pay back all that money in your pocket, you'll also need to find another pocket with some money in it just to pay the interest. This is a good deal?

These are, of course, only some of the ways to build a solid financial future. Another good rule to live by is "always pay yourself first." Think like the squirrel who knows winter is coming and put some nuts away. Just don't scamper out in front of my car while you're doing it.

Glenn ("Chip") Dahlke, a senior contributor to the Living Trust Network, has 29 years in the investment business.

He is a Registered Representative of Linsco/Private Ledger and a principal with Dahlke Financial Group. He is licensed to transact securities with persons who are residents of the following states: CA. CT, FL, GA, IL. MA, MD. ME, MI. NC, NH, NJ, NY.OR, PA, RI, VA, VT, WY.

If you have any questions or comments, Chip would love to hear from you. You may contact him at dahlkefinancial@sbcglobal.net. You may also contact him at the Living Trust Network. Its web site is http://www.livingtrustnetwork.com

Copyright 2006. Living Trust Network, LLC. All Rights Reserved

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