By Teneshia “Miss Money Sense” LaFaye
Before I was a successful business owner, I worked on a job like everybody else and I lived paycheck to paycheck, struggling to pay my rent and my car note in spite of making $40,000 a year in the early part of this century. Although I was successful at getting annual 3 to 8 percent raises, I still used to play the lottery religiously hoping to win a million dollars so that I would finally be financially free.
Little did I know that winning the lottery would have led to more financial struggle. More money just adds to your problems because if you have bad spending habits with a limited income, those bad spending habits will be magnified with more money. You will continue to spend and when the money runs low, you will borrow more in order to keep up your habits. Why do you think celebrities end up in so much debt? You may see that they earned $2 million, but they owe $3 million in debt.
Did you know that lottery winners are more likely to go bankrupt than a regular person? And look at professional athletes. Most NFL players go bankrupt within two years of retirement. I know an NFL retiree who signed a $1 million contract at age 20 and spent all of his money in less than two years.
Even NBA legend Shaquille O’Neal blew through $1 million in his first 30 minutes of being drafted, but he adjusted his spending habits after a call from his banker. Most NBA players are broke within five years of retirement. Hence, Allen Iverson and Antoine Walker blowing through their $100 million plus earnings.
So if making lots of money will likely lead to bankruptcy, what is the solution to financial security and prosperity?
The answer is that it doesn’t matter how much money you make, it matters how much you keep. That’s been my mantra for more than three years and I dedicated an entire chapter to that ideology in my second book, Mom’s Money Lessons. But Shaq made those words famous when he said it doesn’t matter how much you make, but it’s important that you educate yourself in order to keep it during a speech for his doctor in education last May.
So the key to financially security is holding onto your money not spending it all to look good. So I always say, take a little of every paycheck and put it into a savings account.
If you don’t think you can save any money, start with $5 per pay period for the next 90 days and then double the amount until you are saving at least 20% of your income. Evaluate whether you are wasting money on adding a soda to your fast food meal because that $1.99 can add up to $7,000 in 10 years, $22,000 in 20 years and $56,000 in 30 years. You should have a rainy day fund of 3-6 months of living expenses to avoid liquid asset poverty, which means not having at least 3 months worth of bills stashed away to handle an unforeseen financial emergency.
Your tax refund check is the biggest lump sum of money you will likely get in a year, so use it wisely by saving half of it. You should consider investing into a Roth IRA, fixed rate Universal Life insurance policy or an indexed annuity because your money will grow tax-free, be protected from creditors and lawsuits and be passed onto beneficiaries tax-free.
You can venture into riskier investments, such as mutual funds and stocks, for bigger returns once you have a year worth of living expenses saved.
You also should consider a business to build residual income, which is money that flows in regularly from previous work. I have four businesses that bring in residual income.
By the time you’re making much more money, you will have created a habit of saving and investing so that the more money you make, the more money you will hold onto in your investments for true financial security and prosperity that will impact generations in your family.
Teneshia LaFaye is a former award-winning newspaper journalist and a nationally certified financial education instructor. She owns a health insurance agency and has written two books, What My Mom Taught Me About Money and Mom’s Money Lessons, available on her web site www.mytensense.com. Get her FREE daily money tips to work on improving your financial mindset by “liking” her MissMoneySense page on Facebook.