Awhile back I started living a new way on the paycheck to paycheck lifestyle. Instead of just saving some money directly out of my paycheck when it was deposited I came up with a new rule to follow. My new rule is as follows...
To start the new process out I figured out how much money was needed to pay all my bills and still have some money for gas and random expenses. Once that figure was determined I established a savings account at a different credit union than the one where I have my normal checking and savings accounts. The money over and above my newly established figure was direct deposited into this new savings account. For example, lets say all your bills for the month total $900 and you spend approximately $400 in gas, food, entertainment, etc. with a little padding so you don't bounce your main account. You can estimate the figure at $1,500 as a comfortable cut off. So if you make roughly $2,000 a month you set $250 for direct deposit if you get paid bi weekly or $125 if you get paid every week.
This system limits how much "extra" money you have at your disposal for frills and thrills. You've already tightened your belt substantially and you are paying yourself every time you receive a check. Now is when the second step comes in. Since you are trying to avoid spending all that you have until you get your next check you will have some money left over when you get paid again. This extra money is technically money you won't need to pay your bills for the next period because you've already accounted for all that money in your most recent paycheck. What you can do then is transfer that money from your checking account to your savings account online so you are building two savings accounts simultaneously. You can then designate what each savings account's purpose is for you. One for emergencies and one for investments, or your next car, vacation, addition, who knows.
With a little planning and self restraint you could end up with thousands of dollars at the end of each year that you would have otherwise lost to small expenses here and there. I am still living on the wages I earned a few years ago and the excess that I continue to save is working for me somewhere else. Being rich is not how much money you make, it is how much money you keep.
Living on less keeps you creative and always analyzing which things in your life are needs and which are actually wants. That is up to everyone to decide for themselves. For me, I'm happy with less junk now and more security in the future.
Wednesday, October 26, 2011
Overcoming Debt
It is amazing how easy debt is to a accrue yet how seemingly impossible it is to eliminate. Debt can be overcome easily with will power and desire to see it through. Not that the process ever feels all that easy though. These are some ways that I regained control of my balances and in less than a two years, became debt free besides my mortgage.
Step 1: Stop Spending
Seems easy enough but this is usually the toughest part for most people. Stop using your credit cards. Stop using any line of credit you have available to you. Before you can really tackle the balance of your debts you need to eliminate the sources of them. Force yourself to live on less than your income by setting a budget and sticking with it.
Step 2: Build an Emergency Fund
One of the easiest ways to cut your dependance on your credit lines is to build an emergency fund. When you build your own stash of money in the bank you eliminate the need to depend on credit to bail you out when situations arise. The amount of money needed in the emergency fund varies widely among advisers. It ranges from a few thousand to a year's worth of expenses; I.E. car payments, rent or mortgage, utilities, etc. For our purposes though I would say for most people a few months of expenses should be plenty. You just want enough to cover you in case something comes up like an appliance goes out or your transmission in your car fails.
Step 3: Create a Snowball Effect
Once you have stopped your excess spending and built your cushion for emergencies you're ready to tackle the debt head on. Many people talk about this concept in many different ways. The idea is simple and the results are amazing. You come up with a list of all your debts and organize them in one of a few ways. Some say to list them in order of the remaining balance. Some say to list them by interest rates. Personally I believe listing them by interest rates is the best way since you would pay off the highest interest rates first and therefore save more money.
The way the snowball effect is laid out is you take one balance of the many and put as much extra money as you can afford towards it every month. Even if you can only afford an extra $20 or $50 dollars it will bring the principle down quickly. Once you completely pay off that account, you take the same amount you were paying on the previous bill (minimum payment+extra$) and add it to the payment you've already been paying.
By the time you get 2 or 3 of the accounts paid off you are putting a substantial amount of debt eliminating force behind every payment made. You can have your cars paid off, have no credit card debt, and could even cut many years off your mortgage.
Step 4: Keep on the Right Track
Once you have all of your debts cleared up it is a good idea to keep yourself to the same strategy except putting your money into savings instead of finding new ways to spend it. If you clear all your debts then get back into a routine of spending nearly all you make it will be easy to fall back on the credit. Wouldn't it be nice to buy your next vehicle with cash and not pay a single cent in interest simply because you paid yourself the car payments before you needed the car. You'd have more bargaining power at the dealership to get a better price and you wouldn't have to worry about making the payment on time ever.
This is the system I still use today and it has allowed me to live free of debt and worry from financial stresses for 2 years now. If you would like to add to it or comment on it please feel free. I enjoy hearing feedback and new ideas.
Step 1: Stop Spending
Seems easy enough but this is usually the toughest part for most people. Stop using your credit cards. Stop using any line of credit you have available to you. Before you can really tackle the balance of your debts you need to eliminate the sources of them. Force yourself to live on less than your income by setting a budget and sticking with it.
Step 2: Build an Emergency Fund
One of the easiest ways to cut your dependance on your credit lines is to build an emergency fund. When you build your own stash of money in the bank you eliminate the need to depend on credit to bail you out when situations arise. The amount of money needed in the emergency fund varies widely among advisers. It ranges from a few thousand to a year's worth of expenses; I.E. car payments, rent or mortgage, utilities, etc. For our purposes though I would say for most people a few months of expenses should be plenty. You just want enough to cover you in case something comes up like an appliance goes out or your transmission in your car fails.
Step 3: Create a Snowball Effect
Once you have stopped your excess spending and built your cushion for emergencies you're ready to tackle the debt head on. Many people talk about this concept in many different ways. The idea is simple and the results are amazing. You come up with a list of all your debts and organize them in one of a few ways. Some say to list them in order of the remaining balance. Some say to list them by interest rates. Personally I believe listing them by interest rates is the best way since you would pay off the highest interest rates first and therefore save more money.
The way the snowball effect is laid out is you take one balance of the many and put as much extra money as you can afford towards it every month. Even if you can only afford an extra $20 or $50 dollars it will bring the principle down quickly. Once you completely pay off that account, you take the same amount you were paying on the previous bill (minimum payment+extra$) and add it to the payment you've already been paying.
By the time you get 2 or 3 of the accounts paid off you are putting a substantial amount of debt eliminating force behind every payment made. You can have your cars paid off, have no credit card debt, and could even cut many years off your mortgage.
Step 4: Keep on the Right Track
Once you have all of your debts cleared up it is a good idea to keep yourself to the same strategy except putting your money into savings instead of finding new ways to spend it. If you clear all your debts then get back into a routine of spending nearly all you make it will be easy to fall back on the credit. Wouldn't it be nice to buy your next vehicle with cash and not pay a single cent in interest simply because you paid yourself the car payments before you needed the car. You'd have more bargaining power at the dealership to get a better price and you wouldn't have to worry about making the payment on time ever.
This is the system I still use today and it has allowed me to live free of debt and worry from financial stresses for 2 years now. If you would like to add to it or comment on it please feel free. I enjoy hearing feedback and new ideas.
The Launch
I have been toying with the idea of starting a blog for months. After scouring the internet for research and inspiration, I've finally decided to take on the challenge. The premise behind this blog will be to help people in their journey towards financial freedom and general success. It will be a sounding board where everyone can learn from others trials and errors.
In the past few years I have focused on which direction my life should go. There are stacks of books and countless hours of internet research which have helped getting to this point. My outlook for the future is to become successful, while at the same time helping others do the same. It has set me on a path to achieve a success that will allow my future to be on my terms.
The end goal is not to become a millionaire or any set monetary figure. The idea is to create a financial outlook that will be conducive to raising children and spending quality time with family and friends. Enjoying life without the worries of financial insecurity are essential in my dream future.
So with all that said, here begins my journey and hopefully yours as well. Lets grow together and make the world a better place in the process.
In the past few years I have focused on which direction my life should go. There are stacks of books and countless hours of internet research which have helped getting to this point. My outlook for the future is to become successful, while at the same time helping others do the same. It has set me on a path to achieve a success that will allow my future to be on my terms.
The end goal is not to become a millionaire or any set monetary figure. The idea is to create a financial outlook that will be conducive to raising children and spending quality time with family and friends. Enjoying life without the worries of financial insecurity are essential in my dream future.
So with all that said, here begins my journey and hopefully yours as well. Lets grow together and make the world a better place in the process.
Subscribe to:
Posts (Atom)