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
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2 comments:
Hi - I have to disagree about cutting up credit cards. It is not the card that is the problem... it is the lack of financial discipline. When you are living truthfully to a budget, the form of payment for your purchases does not matter. Part of financial discipline is paying off your credit card in full each month. When you do that, you can actually make money (hundreds of dollars) from a credit card, instead of paying hundreds. How you make money is with a cash back credit card. I made over a $1,000 last year between my credit card and another interest-bearing account. Discipline has its rewards. I teach this discipline on my site at http://creditcard.cashbackideas.com
Partner,
Thanks for your comment and link.
Fully agree that the card is not the issue. If one can pay off the balance each month, there is no need for "bootcamp" measures of getting rid of the cards. From your comments, you are an handling using credit cards well.
However, for some that routinely are not able to pay off the balance each month, I believe a reasonable approach is to create an environment that doesn't allow the issue to happen. No credit card = no balance which may not be paid on time :-)
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