Do You Control your Money or Does It Control You?
This article is for people who are sick and tired of not having control over their finances.
We have worked with individuals and small (micro) businesses for over 26 years. Over these years, we have learned a lot from our clients, some of which defies commonly held beliefs.
- Almost everyone has made poor money decisions in their life. Today is a new day. Stop beating yourself up over it
- It is not the amount of money you earn that allows you to build wealth, it is the amount you save
- Very few millionaires have inherited their wealth. The vast majority are self-made millionaires (they worked for it)
- Debt is not a tool for building wealth
- Happiness has little to do with traditional definitions of financial success, and more to do with family and friends
Once you understand these five things, it is a little freeing. It means that anyone really CAN start to overcome their money issues, get out of debt and build wealth.
Start by acknowledging that you CAN do this, but you will need to change how you think about money. You will need to start living below your means and working to eliminate your debt. People may think you are weird, because it is considered "normal" to have debt in our society.
If you think that living within your means is a low income problem, rest assured it is not. We work with clients who are retiring comfortably on just Social Security income, and we work with clients who are struggling with more than $300,000 per year of income. People in all income categories experience the same problems - too much debt; not enough savings; fear of running out of money; living paycheck to paycheck.
Budgeting and Spending
The foundation for your success is to adopt a budget. As "ugly" as that word is, you will not be successful in gaining control over your money unless you are able to assign a home for every dollar that you spend or save every month.
Many people have been doing budgeting ineffectively all their lives. The standard advice is to prepare a budget on a yearly basis, which is very overwhelming when it comes to monitoring progress. Recently, we came across FREE, very simple budgeting software that allows you to assign every dollar a home every month. Every month is its own budget.
The software is called "EveryDollar", and it syncs across all your devices. First you enter your take-home pay for the month at the top, then all your expected expenses, line by line. Anything that is not critical is eliminated. All available funds at the end of the month are assigned to non-mortgage debt payoff, in order of smallest debt to largest, to build momentum.
Every day, at the end of the day, you enter your transactions - the amount spent, where you spent it, and then choose your pre-established categories. EveryDollar shows you exactly how much you have spent in each category, and how much is left in each category.
Now comes tracking. Simultaneously deduct the amount you charged from your checking account balance and add it to EveryDollar. Otherwise it is too easy to keep whipping out the card and not pay attention to the charges piling up. If you know you have to enter each charge into EveryDollar at the end of every day, you are much less likely to go on a spending spree.
How should you prioritize your debt payoff/retirement saving/college saving/emergency fund? Start by stopping (temporarily) all voluntary savings/spending (college, retirement, discretionary spending) EXCEPT for the amount required to meet your employer 401k match. Then focus on
saving $1,000-$2,000 in a savings account. This is your initial emergency fund.
Next, list your debts in order of smallest to largest. Take the smallest debt, and focus all extra money on paying off this debt. Make minimum payments only on all other debt. Once you have the first debt paid off, move on to the next. And so on.
No one said this was going to be easy. It may involve working overtime, getting a second job, selling your car or even selling your house (although the house USUALLY isn't the problem). It may involve eating inexpensively for a year or two. However, as you see the amount of debt you owe decline rapidly, it will intensify your focus and remind you it is all worth it!
If you have a white board, chalk board or even a large piece of paper, I suggest you write your goals at the top and leave it for everyone in the house to see. Getting everyone on board is crucial! Write the total debt balance you are trying to pay off at the top of the board, and every time you make a payment cross out the old balance and write in the new. Don't erase the old balance, because it is important to see PROGRESS.
Everyone's financial situation is different, and the above advice is general in nature. It may need to be customized to your specific situation.
Email your questions in to firstname.lastname@example.org, and we may address some of the topics raised in a future blog post.