We too often put our financial security off into the distant future. Someday, I will make more money and then I will start saving. Someday, when I have more money I will start putting money aside for retirement. Someday, when my mortgage is paid off I will be able to really invest.
Someday almost never comes.
As a Fort Worth bankruptcy lawyer, I have counseled over 3,000 people who have had financial setbacks in one form or the other, and income rarely is the reason.
I have seen families of 4 who make $50,000 a year and families of 4 who make over $150,000 a year, each with the same problems, they can’t seem to get out of debt. Anytime you have a lot of debt and don’t see a clear path to getting out of it, it drains you physically and emotionally. It creates a sense of hopelessness. You work hard every day and you are not moving forward, your paycheck goes to pay for your debt. It can feel like a never ending cycle.
Again, it’s amazing how income levels don’t really matter. The family who earns over $150,000 a year lives in a more expensive house and drives more expensive cars but they are still over-extended. The family who makes $50,000 a year has a less expensive house and car, but are still over-extended.
What matters, and the key to financial security is your monthly disposable income. This is the dollar amount you have after you pay all of your expenses (rent/mtg, vehicle, utilities, food, gasoline, insurance, etc.). That is the only way you will truly get ahead financially. If you are waiting for that raise to start doing something about your debt and finances, you are going to be waiting a long time. Even if you get the raise, what typically happens is, your expenses magically start to increase. Think about it, you have been living on a very tight budget and have felt immense pressure to make ends meet. The second you get a little extra income, you are going to reward yourself by doing things you have not been able too. Maybe you go on a vacation, or start eating out more. Whatever it is, you will soon find that your disposable income is the same as it was before.
So, the first place to start is to confirm whether you are a “someday” person. If you are, then you need to do the following.
1. Create a cash flow statement (NOT A BUDGET). You need to find out exactly where your money has been going. I would recommend going back 6 months and tracking your INCOME and EXPENSES. Doing this manually will take some time but it’s not that difficult. Pull six months bank statements/credit card statements and go through and generally identify your monthly income for each month and the total amount you spent. The next step is to go through and categorize your expenses. To speed this process up, I recommend using www.mint.com. The service will track and store your transactions, allowing you to run reports.
2. Once you have a clear picture of where your money is going, its time to find out what areas you need to improve on (i.e., spend less). A good sound strategy for any budget is as follows:
50% of your after-tax income should account for your NECESSARY EXPENSES. This includes, housing, utilities, gasoline, food (grocery store, not eating out), insurance
30% of your after-tax income should account for your “wants.” This includes things like cable, going to the movies, eating out, shopping, etc.
20% of your after-tax income should go towards repaying debt (credit card, medical bills, etc.) and savings.
3. Now, the above is where you ideally want to be, but its not always possible to fit into these categories, but it at least gives you a general idea of how you should allocate your expenditures. More importantly, it will show you if you are overpaying for a car or house. The most important thing to realize is, you must be able to save SOMETHING each month. If you are making 7.00 an hour, it is going to be very difficult to save anything. But there is usually always an area you can trim. If you are paying $100 for your cell phone, then that is excessive and a luxury that you cannot afford at 7.00 an hour. Look hard and hold yourself accountable.
4. Live by your budget. This is where most people fall off the wagon so to speak. Setting the budget is the first step, but staying with it is the most difficult part of this whole process. The only way you are going to stick to a budget is if you make it SIMPLE. The more complicated, the less likely you are to be consistent. Here are some tips to stick with your budget.
Again, use mint.com, it does a lot of the hard work for you, it pulls your transactions and will categorize them based on their database. Once you set a certain expense as a category, the software will learn. Mint will allow you to see how you are doing on your budget in real time. Until you get clarity on your budget and what you are spending, you will be “stuck.” For instance, using mint, you can check where you are at on the 20th of the month, if you are over in a certain category; you may be able to spend less in another category. If you don’t know how much you have spent on any given category, how are you going to stay within your budget?
5. Setup an automatic savings transfer for your monthly savings.
Now, I want people to be cautious about jumping into this. You may be very motivated right now and setup the automatic transfer before you actually start living by your budget. This could result in unnecessary overdraft fees, etc. I would recommend that you do this manually for the first 3 months. You need to setup a plan to put away a certain amount PER PAYCHECK. So if your goal is to save $300/month, and you get paid twice a month, then plan on transferring $150 to a savings account every payday. After you are comfortable and have lived within your budget for 3 months, set it up as an automatic transfer.
Tax Refunds – So many people get their tax refunds and spend the money in a matter of days. STOP DOING THAT. There are always “reasons” why you must spend the money but that is the entire point of the budget. If you get annual bonuses, DON’T count on that for your budget. If you get tax refunds, DON”T count on that for your budget. Those funds need to be strongly used for savings. I would use 50% of bonuses/tax refunds for savings.
Buying things does not make you happy. A lot of people work very hard and when they get some extra money, they want to use it on themselves or their family. This is a normal feeling, however, buying things does not equate to you being happier or less stressful. In fact, buying stuff typically adds more stress to our lives. BUT HAVING MONEY IN SAVINGS, will help reduce your stress. Having a security blanket will do more for your well-being then buying stuff. And what’s great is, that as soon as you start consistently saving, you will love seeing that savings balance grow.
There are always going to be roadblocks and setbacks. You may have a bad month and greatly exceed your budget. The most important thing you can do is to always come back to your budget. This is a skill that will be strengthened over time. So even if you fail at budgeting, don’t quit, keep trying, eventually you will get it figured out. You wouldn’t quit the gym if you didn’t see results in 1 week would you? You wouldn’t give up on a work project if you didn’t know how to complete it? Adversity is part of life and getting through it strengthens us. So don’t give up and keep at it, the only thing between stopping you from gaining financial security is TIME and EFFORT. If you put the time in and the effort, then it is only a matter of time!