Friday, August 3, 2007

Financial Peace

After posting yesterday about a guy in deep financial woe, I felt like saying a few words about some ideas on how to make a limited income stretch. I've often thought that Mrs. Sal and I could give financial planning tips--not investment advice for those who actually have enough money (or, unbelievably, more than they need), but rather how to make it in the hand-to-mouth world that most of us live in. If you've ever done any reading on this subject, you'll recognize some Larry Burkett, some Ron Blue, and a very healthy dollop of Dave Ramsey. But it's not about slavishly following a system--every family situation is different, and one-size-fits-all can't be the only answer. Here goes:
  1. Commit to give, from the "first-fruits." As a Christian, this is not optional. From both a spiritual and a psychological perspective, it puts things in their proper order. It's hard to feel poor when you know that you are "rich" enough to give, off the top, every pay period. That doesn't mean that the family who has never given regularly should start tithing 10% and cut back on groceries, but you can commit to giving 10 or 20 bucks at a time and resolve to raise it as things get better (and there's no rule that you ever have to stop once the magic 10% number is reached, either). If you're not a Christian, give to a charity. But givers are happier. NOTE: I'm not saying that if you give to a church, that God will bless you with prosperity. That's bull. We give to change ourselves, not to change God.
  2. Make a budget every month. This is key--if income doesn't equal outflow, that's bad. Some folks do that every month and don't even know it, and just get deeper and deeper. Even if the budget tells you that you're in over your head, at least you have the knowledge now to address the problem. And you make a NEW budget each month--different stuff comes due, there may be an odd number of pay periods, etc. Don't budget for a magic "average" month, instead budget by paycheck (how much of THIS check is going where, and how long will it last). If the money runs out before the paycheck does, decide in advance who or what gets put off. A budget like that prevents you from paying the less-important stuff before what really matters.
  3. Try direct deposit and direct debit for recurring stuff, like rent/mortgage, utilities, etc. There's no chance you're not going to pay these things, but there's a chance you could miss the due date. Simplify, simplify.
  4. Before you pay anything but minimum payments on anything, squirrel away an emergency fund of $1000 or so (have a garage sale, consign some clothes, spend a month without darkening the door of a McDonalds, but get it). Most of us are one surprise away from real trouble. Just a little cushion can make that blown water pump go from major crisis to minor irritation.
  5. Avoid consumer debt. (OK, in some cases, this advice comes way too late.) Whether credit cards, car payments, student loans, or whatever, these payments are the biggest impediment to regular folks getting ahead. Make paying them off a priority. Most experts would suggest a "debt snowball" (see Dave's website above for details). But if you don't borrow any more and keep paying down, eventually they will go away. If possible, get rid of them sooner rather than later. And when they are gone, don't give yourselves all that saved budget space as a lifestyle increase, earmark some for savings.
  6. As soon as possible, build a safety net of insurance. Many jobs will help take care of health, dental, and/or disability insurance. But make sure you're covered, and that you have adequate life insurance. It's cheap, and it kicks other potential crises down the road. If you have decent insurance and an emergency fund bigger than your deductible, you can handle a wreck, a hurricane, or a death in the family, or at least manage them far better.
  7. Stay away from new cars. This goes with #5, but it gets its own topic. Dave Ramsey would say only pay cash for a car. That's wise, as we tend to borrow on this depreciating item and get upside down pretty quick. If you are not in love with the new car smell, you can really save a lot here. Buy used, pay off quick (or better, on the spot), and drive it until the doors come off.
  8. Once the bills are paid, take the rest in cash. This is the best budget management tool of all. After your check has come in and the bills have been paid (electronically), take what's left over and use it for the day-to-day expenses (maybe leave your gas budget in the bank so you can pay at the pump by debit card). As the money dwindles, you'll get more and more frugal. When it's gone, it's gone, and you don't bounce anything. If, amazingly, you have some left over, decide whether you're going to throw that at a debt or sock it in savings. Don't roll it into the next pay period. If some month there's less and it's going to be tight, at least you're the one who gets to decide what to do. If every month there's not enough, you need to cut your bills (drop the digital HDTV, cut back on cell service, sell the new car and get a clunker) or make more money. That's the only way the math works.

That's a basic look at the monthly management. Later, if time permits, we'll look at more long-term stuff.

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