A few weeks back I was asked to give a talk to a group of people in regards to healthy finances. In preparation for that talk I did some research and found some rather disconcerting facts. According to an article I found on Inc.com, our country has some pretty significant problems with debt. Twelve percent of people say that financial stress makes them physically ill on a weekly or monthly basis. According to this poll, the millennial generation suffer the most with 23% of them feeling this way. Millenials are now the largest generation in workforce and 67% of them say that is their financial stress takes over their ability to focus and be productive at work! I could continue on with these stats for quite a while, but pointing out the issues does very little to help fix them. There are three main steps I believe a person needs to take to pull themselves out of a situation like this or to avoid it altogether. These steps are: live beneath your means, save money, and invest for the future.
Live Beneath Your Means
Living beneath your means is a concept of spending less than you make. This seems pretty simple, but this is probably the number one problem America is having currently. The best way to track and make sure you are doing this is to vow to not use debt anymore and set up a budget. I bet you just felt a shiver down your spine. That’s the type of response most people get from the word “budget”. In fact, according to a 2013 Gallup poll, only about 32% of people use a budget. An individual needs to manage their financial life much like a business. Without a budget or plan, you have no idea where you are headed or how far away from it you may be. Every month you should strive for a surplus. Think of it like a bucket of water. Every dollar of income is water into the bucket and every expense is water out of the bucket. You want to maintain some water in the bucket and make sure it doesn’t run dry. This extra money can be used to pay down debt, freeing up future month’s income. The biggest drain on a budget is debt. It drains the bucket before the month even begins. According to Experian, the average credit card debt for a married couple in 2018 is right around $12,700 with an average interest rate of 15.54%. According to Nasdaq, the average auto loan in 2018 was $30,000 with an average interest rate of 4.21%. The average student loan debt is currently $34,389 at a government interest rate of 6.85%. Using a simple interest calculation for an annual period, your interest alone on those balances would be $5,592.22, or right around $466 a month. Your number one goal on a path to financial security should be to eliminate debt and to transition from paying interest to receiving it.
The budget you prepare should end every month with a -0- balance. That doesn’t mean you spend it all; it means you designate it all. Some of the designations may include the savings or future investments we will discuss in a bit. Budgeting takes some time to master. Even those that have budgeted for years struggle with it at times. The trick is to stick with it and make sure you stop adding to the problem by using debt to bail yourself out.
Many of the reasons people use debt are for ‘unforeseen’ circumstances. A car needing tires, a vet bill, Christmas presents, medical expenses and (close to home for me) two daughters needing braces at the same time. What we need to begin to realize is that there are very, very few truly ‘unforeseen’ expenses. If you have a car, you will have car repairs. If you have a pet, you will have vet bills. Christmas is the same day of the year, every year. These expenses can all be planned for and you can eliminate the need for more debt by doing just that. This is where it becomes very important to have some cash left in the budget to fund these future expenses.
For those expenses that you truly can’t foresee, such as a unexpected absence from work or getting laid off, you should also fund an emergency savings account. A typical rule of thumb is to have 3-6 months expenses in a savings account for those truly unforeseen circumstances. This will give you additional ability to stay away from the use of debt.
Invest For the Future
The first two topics have been about preserving your current cash flow and making sure you have a budget/financial plan in place for the present and foreseeable future. The final piece of the puzzle is to begin to fund your future cash flow. When you get to a point where you want to be done with work and retire or transition out of full time work, you will still need the inflow of cash to fill your bucket. There are a staggering amount of people who are almost fully reliant on social security filling their bucket. While I don’t believe that social security will ever go away or run out of money, it was always intended to be a supplement. You don’t plan on working for 40+ years of your life to get to retirement and find a way to get by. Use your cash flow now and build additional reserves for your future. Give yourself the freedom to do whatever you want. The only way this is possible is if you have money left in the budget after your current outflows. No one, to my knowledge, has ever gotten to retirement upset that they saved too much money.
This is a very brief overviews of the three main ways to eliminate financial stress from your lives. The only way to get out of a financial mess is to change your habits and begin to fight your way out one step at a time. Don’t let your current situation discourage you. I promise there have been people in worse shape than you that have turned their finances around. If your current situation feels overwhelming, remember the only way to eat an elephant is one bite at a time. If you would like any financial coaching or help with your budget or accountability, please do not hesitate to reach out to our office. If you have any stories or quick advice or motivation for people walking these trials, please leave it in the comments below!