Are The Joneses Keeping You From Building Wealth

March 09, 2012

Are The Joneses Keeping You From Building Wealth?
What You Can Do To Change It
by Cathy Pareto, MBA, CFP®

It’s hard to pin down when it happened but it happened. At some point, society subtly taught us that we are what we have or what we own. And thus the race to keep up with the Joneses began, making you go on shopping sprees that you couldn’t afford, and racking up debt you will have a hard time paying off. That ever present feeling that you had to keep up with the Joneses has kept you from building the wealth you deserve, and for what? For the short lived thrill of having the sexy car, the latest cell phone, the hip lap top, the coolest clothes and the biggest house? While it can be exhilarating to buy the latest “it” item, the products themselves or the feeling you’ll get from buying those items will not last very long. And unfortunately the damage to your wallet will. So what can you begin doing today to start building your wealth?

Change How You Think

When you get the urge to buy an expensive or inexpensive reoccurring item (Starbucks coffee) ask yourself the following questions:

—Do I really need it or is it just an immediate desire? Think before you buy. Whatever you want to buy is not going anywhere. Give yourself some time to think about your purchase decision and the impact it can have on your ability to build wealth. You might be surprised at how your mind forgets what you “really” need to buy.

—How many hours do I have to work to pay for this item? Calculate your hourly rate and figure out how long you have to work to pay for the item? If you love your job you may not mind putting in extra hours (fun retirement hours), but if you don’t or prefer spending time with family you may want to think twice. If you buy the item on a credit card you have to also calculate the interest rate you will be paying. Those $4 lattes a day do add up.

—Why do I want this item? Sometimes we want things for the wrong reasons so consider your motive. Are you trying to impress someone? You want what your neighbor has? Think about this: Are you going to work until 80 just to say you impressed Tommy, or that you had what Jane had? Do you really think they’ll care? The more you understand your motives the less likely you’ll be to destroy your future wealth. Yes, we could all die tomorrow so why not live now? The fact is that most people will not die tomorrow, but they will get older and will need money to live on. So the question is will Tommy or Jane support you during your old age? You know the answer to this question.

—Is the Item Within My Budget? Who doesn’t want to live like the rich and famous? Everyone does but we have to be realistic. Before you buy a house, a car or any major item you have to be realistic and see if your budget allows it. Having enough credit to buy it does not mean you can afford it. Your monthly income and monthly expenses will determine if you can afford xyz.

Budget Yourself

Most people think of a budget as punishment for bad behavior, but it doesn’t have to be that way. A budget is merely a plan you create for planned income and expenses and your guide to helping you make decisions and analyze where you are spending your money. You can create a plan using an excel sheet or with readily available software such as Quicken, Quickbooks or online for free at

Creating a Budget That Works

Most people go wrong with budgets because they either make them too restrictive making them feel like they can’t have any fun, they include too much making it impossible to track, or they do not include everything they need to include. Here are some tips on how to make a budget that works for you.

Add the following line items to your budget:

1. List All Sources of Income: Payroll, Rental Income etc.

2. List All Monthly Household Reoccurring Expenses: Utilities, car payment, rent, mortgage, loans, insurance, credit cards, food, cleaning supplies, clothing, gas, etc. (do not include things like fun or entertainment yet)

Now that you have these item listed use the following formula:

Income – Expenses = Disposable Income

Let’s say your monthly income is $5,000 and your monthly expenses are $3,850. This means that you have $1,150 of disposable income per month. So here’s what we are going to do with this money.
You are going to split it like so: 20% Fun 20% Emergency Savings and 60% Retirement Savings.

$1,150 x .20 = $230 and $1,150 x .60 = $690

1. Fun Allowance: Open a second free checking account and deposit your $230 (20% of your disposable income) a month into your fun allowance checking account. You can spend it without worrying about tracking it in your budget. But remember once you run out of allowance money that is it. You’ll have to wait until next month for extra fun money. (if you want more allowance money see where you can cut back on expenses and not on emergency savings or retirement savings).

2. Emergency Savings: To avoid being one paycheck away from disaster you’ll need to save some money for
emergencies. Deposit $230 (20% of your disposable income) into a savings account. Open a high interest savings account with ING, HSBC or other provider and fund this account on a monthly basis until you have saved at least 3 months worth of expenses. Your IRA, 401K or Retirement Plan should never serve as your emergency fund. If you are younger than 59 ½ and you take money out of these plans you will not only have to pay a penalty but also taxes. It’s not a good idea.

By the end of the year you’ll have $2,760 in emergency money. You need $11,590 ($3,850 in monthly expenses x 3) but don’t get discouraged. You’ll get there.

3. Retirement Savings: Contribute $690 (60% of your disposable income) a month into a retirement account ie. 401K ($15,500 2008 contribution limit if you have earned income and are younger than 50 or $20,500 if you are older than 50 years of age and have earned income).

By the end of the year you would have contributed $8,280 into your retirement account not including your employer contribution match or account growth.

Your goal should be to contribute at least 10% -20% (you’ll need more if you are closer to retirement age) of your salary into your retirement account. If you would have followed this budget you would have contributed 13.8% of your salary. Nice Job!

If your budget is tighter, review your monthly expenses and see where you can cut back. If you follow these simply tips you will avoid the trap of trying to keep up with the Joneses and you will have built the wealth you deserve. We are all going to grow old. The question is how comfortable are we going to be? It’s up to you to decide, so before you spend more than you can afford think about your future and what you want it to look like.

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