There is an ever growing gap between debt and savings in America. With 25 % of Americans having no savings whats so ever. The average household credit card debt sits at about $15,000. Yeah, I guess gap may not have been the word to use, perhaps a pit of Grand canyon like proportions would be more accurate. So lets turn it around people, here’s your personal finance primer.
First and I do mean first if you read this article on a Sunday night, Monday morning go directly to HR and setup a portion of your paycheck to go directly into a savings account. It doesn’t have to be a huge amount in the beginning five dollars a week is fine. What’s really important is getting into the habit of living on a little bit less. Trust me everyone can find a wasted five bucks in their budget it’s there, you just have to find it.
Speaking of finding wasted money you should start a daily expense log. An expense log is a great way to inject a dose of reality into your finances because we’ve all said to ourselves at some point ” I don’t spend that much on coffee”. When it comes to tracking your expenses I believe you should keep it simple. Keep track of your daily expenses with a notepad and, at night, enter expenses into a master spreadsheet. The key to tracking expenses, is to be diligent and honest, ask for receipts and eventually the leaks will make themselves known.
After tracking your expenses for a while you now, should have an idea of where all your money is going now its time to make a budget. The key to making a good budget is don’t be to strict leave some wiggle room. Allow for some discretionary spending i.e. give yourself an allowance. Don’t be too hard on yourself at first, it takes time to “dial in” a budget. When spending mishaps to occur follow these steps: (1) write the expense down in your log; (2) adjust your budget accordingly; (3) learn from the mistake; (4) move on; I believe for a novice, a good place to start with your budget is a 90/10 split. Ninety percent of your money goes towards expenses ten percent to savings. Once you get comfortable with the 90/10 split, it’s time to start looking for ways to increase the savings number.
One of the best ways to increase your savings without really doing anything is saving pocket change. I know what your thinking. “Pocket change !” Pocket change can add up to some big numbers given some time. It seems that saving change has gone the way of the Dodo, but if you think about it how much change would you accumulate if you paid for your coffee with cash instead of plastic every morning? What about if you also saved the change from the afternoon vending machine trip. The best part of saving your change is watching it grow from a couple of nickels and dimes in a jar to next months student loan payment, an extra credit card payment or just a bigger savings account balance (the last ones my favorite). Still not convinced consider this, in 2007 a man bought a pick up truck with close to $25,000 in change that he had been saving for 13 years not to shabby.
Last but not least lets talk about consumer debt i.e. anything with an annual percentage rate of 10 percent or higher. First things first take a look at all you’re consumer debt and figure out which one has the highest APR, (it’s probably a credit card) and focus on paying that one off first. Another important step in paying off high interest consumer debt is never make just the minimum payment. Your typical minimum payment is comprised of 1 to 2 percent of principal, and the rest is interest. For example if you were to make just the minimum payment every month on a $1000 balance at 18 percent interest it would take 12 years and 1 month to pay off. Along with the $1000 balance you would pay an additional $923 in interest.
So you’re keeping track of your expenses you’ve made a budget and guess what it looks ugly. You have just enough money to get by and paying anything extra on your credit cards is out of the question. The extra change you’ve been saving is just enough to put gas in your car for the day. If this sounds like you’re scenario I have a solution unfortunately no one ever likes this one. A second job is the solution to your problems. The benefits of a second job definitely out way the inconveniences. First and most importantly you’ll be earning more money. Those extra paychecks can go directly to paying off your debt and increasing your savings. Besides the monetary benefits there’s also a sense of security that comes from working that extra job. You wont constantly be thinking “what happens if I lose my job here”. Another benefit is there’s the potential to learn new skills and to network. Keep in mind that the second job doesn’t have to be a life sentence but if you have a lot debt and expenses it can be a savior.