Congratulations! You have made the single most important step in the entire process – searching out how to become financially stable.
In my 20’s and early 30’s, I made tons of mistakes. I overspent, mis-used credit, and basically lived a “Rock star” lifestyle- without any care in the world. The problem is, I’m here to tell you this sort of lifestyle is unsustainable.
While I usually write about becoming financially independent, financial stability is a much easier goal to achieve – and it happens to be the the first step to financial independence.
In order to become financially stable, you just need to spend less than you earn. Simple as that. While many “experts” might suggest that you save at least 10% of your income, it just isn’t feasible. In order to become financially stable, you need to be able to achieve a saving rate of ~50% of your monthly income, and give the savings a purpose. I.e. Pay down debt, save for an emergency fund, invest it, and so on.
50% of my income? Are you kidding me?
Spending less than you earn is a mindset. Like cutting carbs, you need to be able to start cutting useless expenses that keep you broke. If you keep at it, it’ll turn into a game and it’ll get more and more fun as the months go on.
Here are examples of 3 useless expenses that keep you broke:
- Credit card payments (The interest is a killer!)
- Car loans/leases
- Student Loans
Look at it this way. Consider you want to buy on credit – ask yourself: is this going to pay me a rent, a dividend, or have the opportunity to go up in price (so I can sell it for a profit later). If the answer is no to all three, then it’s a wealth killer – don’t charge/finance it!
But what if I pay off my credit card in full each month? In this case, sure, go ahead. Charge the latte – in fact, I use my credit card daily as well – but it’s paid 2-3x a week (Yes weekly!) and I love the points that come with the card!
So how do I get on top of my financial house?
First things first. You you need to visualize your entire financial health. My favourite go-to is a spreadsheet. Start with your last months salary/income from all sources at the top, then list all you last months expenses. Think mortgage/rent, utilities, taxes, food/restaurants, entertainment, clothing, travel, subscriptions, misc, etc. Don’t forget loan payments, i.e. car, credit cards, student loans, lines of credit etc. Your income, less all those expenses is your monthly surplus. Do this for the past 2 months, and then get a head start on this month. If you have money left over, congratulations! You’re on to a great start. If you spent more than you earned, don’t worry, it can be fixed if you want it too.
Here’s an example spreadsheet you might consider copying/pasting from and using your own values for:
|December 2018||January 2019|
|Working Salary (Fixed)||$5,618.09||$5,618.09|
|EXPENSES (Fixed Monthly)|
|Rent / Insurance||$1,750.00||$1,750.00|
|Electricity – Primary Residence||$104.51||$104.51|
|Cable TV & Internet||$144.39||$144.39|
|Credit Card A+B+C||$180.00||$220.00|
As you can see in this example, in both months, this person spent more than they earned, resulting in a deficit – due primarily to the Credit card payments, student loans, restaurants, and shopping. The thing is, the deficit would have been financed through a credit or savings – neither of which are a good thing.
So what to do, and how?
If you have credit card debt, it’s time to pay it off. Cut every aspect of your budget you can. Once that’s done, work on any student loans, and the car loan, generally in this order as credit cards have the highest interest rate, these should be worked on first.
This might sound daunting, but it’s really not. Start slow.
You can start a side hustle, get a raise, sell stuff from your home (even at a loss) whatever you need to do. Naturally, stop shopping. Stop going out to eat. And cut out everything that you don’t really need. Pay off all your accounts that don’t pay you a rent, a dividend, or have the ability to appreciate in value (to resell at a later time).
Once you’ve gotten through to this point, you’re essentially debt free. You’ll have lots of free cash left over (Your monthly surplus) to do whatever you like with. And most of all, you’ll be financially stable.
Last, in case you’re wondering about a mortgage. A mortgage is an exception to the rules above as it’s assumed there is equity built up in the home, and that it will go up in value over time.
This Article was Originally Posted on SurplusAcademy.com
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