How are things coming along with keeping track of your expenses? I encourage you to continue doing this for at least a month to see exactly where your money is going.
For now, let's assume that month is over. You have tracked ALL of your expenses and can see where every cent of your hard-earned income has gone. Now what?
If you are spending more than you are making, you have a serious problem. And as I mentioned last week, what you need to do next is to get rid of things that are unnecessary. Cable, internet service , cell phones, movie theaters, and restaurants are a good place to start. If, even after cutting out ALL non-necessities, you are still spending more than you make, you have no option but to increase your income. Get a job delivering pizza, working at Starbucks, tutoring, babysitting neighbor kids, or doing retail. Whatever you can find to increase your income, do it.
If you have tracked for a month and have found that you are spending less than you make, you may still want to consider cutting out unnecessary things - especially if you have the big "D" word that I'm about to address: DEBT.
There's an excellent chance that, if you live in America, you have debt. And a good amount, at that. It seems almost an impossibility in today's culture to live without debt.
The average American owns at least 5 credit cards. One in six families with credit cards pays only the minimum due every month. Roughly 70% of homes in the United States that are occupied by their owners have a mortgage. Of those homeowners with a mortgage, 22.6% of them have either a second mortgage or a home equity line of credit. It is rare to find someone who paid cash for their vehicle.
But living debt free is not as impossible as it may sound. Making sacrifices now will be well worth it later in life!
As debt soars higher and higher in America, savings has become a thing of the past. After all, who needs a savings account when there are credit cards?
A savings account is a VERY important thing to have in place for the purpose of emergencies. Many people say that they only keep their credit cards around for emergencies. But let me tell you something: That would be the absolute WORST time to use a credit card!! At the point in your life when you know you cannot pay for something, you would choose to put your life on a credit card that charges you interest up the wazoo?? That's craziness!! A savings account is a MUCH wiser decision.
If you have debt, however, you don't want to save and save and save while you continue to pay gobs of interest on your loans and credit cards.
So how much savings is enough? Well, that depends on you and your situation. Some people recommend $1000. Some people recommend 3 months of living expenses. Some recommend 6 months. So how should you decide? Let me give you a few examples:
If you and your spouse both work full time, you would probably be safe leaning toward a smaller amount in your savings account. If only one of you works, you might want to increase the amount a bit in case of an unexpected job loss or medical emergency. If one or both of you are contract workers or your income varies dramatically due to a sales position, you would probably want to keep a larger amount of money in your savings.
Do what feels comfortable to you, but don't go overboard. Remember that you are continually paying interest on all of your debts while you are building your emergency fund (savings account).
Your assignment for this week: Work on getting rid of unnecessary expenses in your life. If you are spending more than you are making, get out there and look for an additional source of income. And as you cut out the non-essentials in your life, begin building your emergency fund.
Next week, we will talk more about your emergency fund and begin looking at what I consider to be the most effective way to pay off debt: the debt snowball.
Links to the rest of this series: