During my first year of working, my checking account ran out of money three days before my next paycheck. Since no major payments were due, getting by on the next three days was feasible. However, I felt very uncomfortable about it.
Many people spend more than they make month after month. And they believe they are doing well financially. So they feel comfortable spending more than they make. Therefore, I know my experience sounds trivial to them.
My point is that people will continue to do something as long as they are mentally comfortable with doing it. If one really wants to reduce spending and start saving, one needs to very motivated to do it.
If you are ready to make a change, here is my bootcamp strategy for savings and reducing spending. It’s tough, requires strong personal commitment, but doable.
- Pay yourself first. Save 12% of your before-tax income. Put money in a savings account that you won’t touch.
- Pay down non-mortgage debt next. If your debt is about 10% your annual salary, target for a 2 year payoff. It will require about 7-9% of your after tax pay for the payoff. If you your debt is greater than 12% of your annual salary, you will need more help than this post can give and a customized analysis of your payoff schedule.
- Run your finances on a cash basis. Cut up all your credit cards. Do not finance anything, including a car lease. Since you have already put 12% into savings, feel free to spend until you are out of cash. But once you are out of cash, stop spending.
- Buy only what you need. Eliminate all unnecessary spending. As I wrote in an earlier post, eliminate or reduce regular expenditures like land-line/cell phones, cable, daily newspaper and eating out. Plow this money back into savings or debt reduction.
This is not financial or saving advice. Please consult a professional advisor.
Copyright © 2006 Achievement Catalyst, LLC