Rule #1 Spend Less Than You Earn
My life changed radically 21 years ago, when I broke my self-imposed gag order and told the whole world about my struggle with a debilitating spending problem. I had no idea at the time that this would be one of the smartest things I could ever do. By telling my story and owning up to my problem, I became accountable.
Since then, I’ve read and written hundreds of thousands of words on the subject of money management. I’ve experimented with various methods. I’ve addressed audiences large and small. I’ve listened, pondered and asked questions. I’ve collected enough data to choke even a well-adjusted accountant. And I’ve written 22 books on the subject, including 7 Money Rules for Life: How to Take Control of Your Financial Future (Revell, 2012).
During my quest, I have come to thousands of conclusions. My most important conclusion is this: Anyone can learn to control their spending, even in the face of a sudden job loss or financial challenge. And that is why rule one in my book is: Spend Less Than You Earn.
If you are experiencing financial troubles, it undoubtedly can be traced back to a time when you failed to control spending. Then, the trouble started to grow. For some of us, it grew and grew.
I’ve also concluded that regardless of the amount of money we have, there are three main reasons people experience money troubles:
1) Financial problems are rooted in one’s refusal to accept the fact that life is not fair. As long as you feel entitled to material things you cannot afford, you will have money troubles.
2) Financial problems are the result of irregular and unpredictable expenses. When people add up their monthly expenses, they don’t think about the things that don’t happen on a regular basis. When irregular expenses creep up, they see them as emergencies or financial crises.
3) Financial problems will never go away as long as unsecured debt is carried from month to month. Credit-card debt has an odd way of reproducing.
Financial ease has nothing to do with being rich. It comes as the result of taking responsibility and by following sound financial principles and rules. And the first place to start is examining your spending and getting it in line with your income.
Whether your financial situation requires a minor correction or a major overhaul, no situation is hopeless. No matter where you are right now, you can take control of your finances. You can get out of debt and learn how to live below your means. You can get off the financial roller coaster and stay on level ground where money ceases to be an issue. But you’ve got to follow the rules.
Start by tracking your spending. Until you can get your spending under control, you won’t be able to get a handle on your finances or your financial future. Do it. Start today!
Rule # 2 Save for the Future
While the common term for a savings account is, well, “savings,” I prefer a more elegant title: contingency fund. It just sounds better, doesn’t it? But whether you call it a savings account or a contingency fund, it’s a key component in a sound financial life. And that’s why it’s Rule 2 in my book 7 Money Rules for Life: How to Take Control of Your Financial Future.
Save for the future is a principle my Everyday Cheapskate® and Debt-Proof Living® readers have taken to heart. Having a healthy stash of cash put away in a safe, accessible place means regularly putting 10 percent of your net take-home pay into your contingency fund (CF).
Sound impossible? What if you’re struggling to live paycheck to paycheck, you ask? Start with 1 percent, or 2, or 5. Saving for the future is preparing you for the day when you and your income part company for any number of reasons.
Take Grace from Oregon, for example. Not only has she paid off more than $13,000 of unsecured debt, she’s grown her CF to a cool $15,000. She was almost beaming in her email to me.
She closed by saying quite casually that she will be laid off from her job this year. She’s not even upset. That’s because she’s been mentally preparing and has several options in mind. With absolutely no debt and money in the bank, what might otherwise be a devastating blow has become her next great adventure.
Kathryn and Galen from Missouri were in a similar position. Before they were free of their unsecured debts, Galen was pink-slipped—again. Unlike the previous time, they were prepared with a $10,000 CF. They knew what to do, and for a long time didn’t even have to touch their CF. The bills were paid, the family fed, and one day at a time, all went well until Galen was gainfully employed and life was back on track.
For some reason, it’s so much easier to live frugally and make the sacrifices necessary when you know you have money in the bank.
So what’s your story? Are you prepared or scared? Do you have money in the bank, or do you feel like you’re just one paycheck from being homeless? Take the first step to change.
Rule #3 Give Some Away
More than 25 years ago, Gordon Gekko, the main antagonist in the 1987 film Wall Street, declared, “Greed is good!” From the excess and financial fallout of the ‘80s, it appeared that many people based their belief system on that line. Sadly, greed is like a cancer that when left untreated can destroy individuals, families, businesses, governments and economies.
Breaking the stranglehold of greed starts with releasing the thing that has the power to consume you.That is why in 7 Money Rules for Life: How to Take Control of Your Financial Future rule three is:
Give Some Away. Giving away some of your money quiets your desires and knocks the life out of greed. Trust me, I know. My ignorance about credit and debt, plus my skewed logic that I could have it all now and pay for it later, set me up to be greed’s dream client.
Credit was my accomplice, and with it I landed in a pit of financial despair. I’m a lot wiser now, and I want you to learn from my mistakes. Become a giver, and dump your greed. How? Here are four simple steps:
>>Develop personal compassion. Putting others’ needs ahead of our wants takes our eyes off of our selfish desires.
>>Develop generosity. A heart filled with gratitude expresses itself with generosity. Generosity kills greed and becomes the natural outflowing of your grateful heart.
>>Put others’ needs ahead of your wants. Take some of your wants and find someone who has a real need.
>>Repeat. Give some of your money away, systematically and regularly, as part of your personal money management program.
Giving is the way to break the grip of greed so contentment can thrive. How much you should give is up to you, so don’t look to me or others to tell you. Only you can make that determination.
Once you have established the amount, here are five ways you should give.
>>Systematically. As you receive your income, take care of giving first before you do anything else.
>>Thoughtfully. This is a deliberate decision that needs to be based on good plans—not impulsive or driven by emotion alone.
>>Enthusiastically. If you are not excited or engaged in the need, you may have not found the right place to give.
>>Voluntarily. Forced giving is useless. Don’t let anyone twist your arm.
>>Cheerfully. Generosity brings happiness as sure as miserliness brings misery.
I cannot say that my battles with greed are over. I know that I could easily go right back to where I was if it were not for a mindset of generous giving, a habit that changed the equation of my life. Giving has freed me from the stranglehold of materialism.
Rule #4 Anticipate Your Irregular Expenses
If I asked you to stop what you’re doing, add up your monthly expenses and deduct the total from your monthly income, I can nearly predict the result. You’d look up with a big smile on your face.
There it is, proof that you spend less than you earn. Your income is greater than your outgo. You’ve nailed Rule 1 in my book. At first glance, your list looks reasonably thorough. But it is not complete.
The mystery for many people is if their spending is so much lower than their income, why can’t they get through an entire month without using credit to cover unexpected expenses, like medicine for a sick child, a semi-annual insurance premium or a family birthday party?
Most people, without actually thinking things through, assume their necessary expenses are those they pay every month. But not all necessary expenses recur as systematically as the rent, grocery bills and car payments. And that is why Rule 4 in my book is: Anticipate Irregular Expenses, Then Prepare Accordingly.
Monthly expenses we pay for every month are generally not the problem. Somehow the rent and utilities get paid and the family gets fed. The problem is irregular expenses. The purpose of Rule 4 is to plan ahead for irregular and even unexpected expenses in the same way you anticipate the expenses that you are keenly aware of each month.
But if these expenses are irregular or intermittent, how—you ask—can you anticipate them? The way to do that is by looking at the past year. And what better time to do that than now, while you’re reliving 2014 in preparation for tax time? Your credit card statements and check registers will help jog your memory of car repairs, insurance policies, summer camp, seasonal sports and property taxes, to name just a few.
The next step is determining how much you’ll need to save to fund these expenses throughout the year. As part of the debt-proof living plan, I created a budgeting tool that works on the same principle as a Christmas Club Account. I call it the Freedom Account. Once you determine how much you will need for your yearly irregular expenses, you divide that number by 12. Each month one-twelfth of that total gets deposited into your Freedom Account.
I can’t tell you how many people I’ve heard from who tell me the Freedom Account has truly brought freedom to their financial situation. Instead of being surprised by things such as car repairs and Christmas, they’re prepared, funded and ready to go. And all because they’re smart enough to plan ahead by saving just a little bit every month.
Rule #5 Tell Your Money Where to Go
If the word budget is like nails on a chalkboard, you’ve got a friend in me. I know the feeling.
For many years, I wouldn’t have anything to do with a budget because I couldn’t stand the idea of someone telling me how to spend my money. To me, a budget was a whip disguised as a formula, with every intent of beating me into submission.
Instead, what I learned from coming back from the edge of financial doom and finding my way to solvency is that a budget is the ticket to financial happiness. I still don’t like the word, so I’ve replaced it with Rule 5: Tell Your Money Where to Go.
Like a roadmap or blueprints for your dream house, a Spending Plan shows where you are and how to get where you want to be. In its simplest form, a Spending Plan is a sheet of paper on which you write your income for the coming month and what you will do with every dollar of it. You “prespend” your paycheck on paper before you part with any of it.
A good Spending Plan addresses every bit of income by giving every dollar a specific job to do. Some will be directed to pay the rent or mortgage, others will be directed to food and utilities.
A portion of your monthly income will fulfill Rule 2—long-term savings—and some will go to work hard on Rule 3—giving. Some of those dollars will bring balance to your life, as they are assigned to entertainment and fun, others you’ll direct to places like retirement accounts and investments. A good Spending Plan becomes a great predictor and leaves a lot less to chance.
The purpose of a Spending Plan is not to force you into a life of deprivation but rather to prevent overspending, which will keep you from falling into debt. It rarely matters what you’re overspending on—dining out, entertainment, clothes. In the end, it’s all debt.
There is something startling about seeing your exact income and expenses for a full month laid out on paper. If you have not done something like this before, let me warn you: Rarely does a person’s planned spending match actual spending. In fact, in the first few months, you may find your income and your recorded outgo to be from different planets! Do not despair. The more patience and diligence you expend, the clearer your financial picture becomes and the greater your reward.
Once you have it the way you want it, your Spending Plan becomes the roadmap that keeps your finances on track.
Rule #6 Manage Your Credit
I’ll admit it. Rule 6 is not my favorite of the seven rules. Honestly, I would much rather change “Manage Your Credit” to “Death to Credit, Live on Cash” and be done with it. But unless we can figure out how to turn back the clock a half century or so, that would be unwise—even foolish.
That leaves us with two choices. One, we can ignore the matter of consumer credit and just hope for the best (not a very good option). Or two, we can take full responsibility for maintaining an excellent credit rating for the purpose of saving money and improving our financial intelligence and our effectiveness as money managers. We must opt for the latter because credit rating plays a very important role in financial health.
Rule 6 in its entirety reads, “Manage your credit rating to achieve a high level of creditworthiness.” Read this rule again, paying close attention to the words “credit rating” and “creditworthiness.” This rule does not mean going into debt, creating debt or taking on huge sums of available credit.
Credit on its face is not bad. In fact, having a good credit rating, which is measured by your credit scores, simply means that based on your past behavior, companies and individuals that you deal with can expect the same from you in the future.
As much financial trouble as I managed to get into because I abused credit cards and ran up insane amounts of toxic debt, I don’t blame credit. I take responsibility for the foolish decisions I made and the horrific ways that I abused consumer credit. That my credit led to toxic debt was of my own doing.
There is a trending belief in some circles that to have good credit you have to be in debt, or that a credit report is just a “debt report” because it measures your debt. That is not true. You do not have to be in debt to be found highly creditworthy.
These days, a poor credit rating can be costly, and that’s the reason you need to assume the role as your own personal credit manager. To do this, you need to monitor your credit report, credit score and credit card account on a regular basis.
You may assume, given my financial history and the way that credit-card debt nearly ruined my life, that I wouldn’t carry a credit card even if my life depended on it, and that I recommend you get out the scissors to perform a little plastic surgery. If that’s what you’re thinking, I’m about to disappoint.
The truth is that a credit card—the right credit card—used smartly by someone with a modicum of financial intelligence can be a useful financial tool that can also contribute to a high FICO score, thus achieving that high level of credit worthiness you need.
Rule #7 Borrow Only What You Know You Can Repay
Rule 7 insures you have a safety net when borrowing money. It is unrealistic to flat-out ban borrowing money from our lives. I am grateful for a home mortgage. Without it, my husband and I would not have had a prayer of owning our home. And I don’t believe that financing an automobile is evil or that all student debt is toxic.
Borrowing money and the debt that it creates should be taken on rarely, and then dealt with swiftly. Debt should be a means to an end. Borrowing money is a financial tool that improves your life if dealt with intelligently, not emotionally.
The rule is to borrow only what you know you can repay. When I use the word “know,” I do not mean with-absolute-certainty-beyond-a-reasonable-doubt know. I mean to know as in having a reasonable certainty based on credible information.
Another way to put it would be “borrow only what you have a reasonable certainty based upon credible information that you can repay,” which seems awkward. So let’s stick with “know” in this rule, knowing that we know what it means.
The following guidelines apply to all forms of borrowing—all forms of debt.
1. Borrow the least you can get by with to achieve your intended result, not the most that the lender will approve. Never let a lender determine how much you should borrow. Some mortgage lenders will try to nudge you into the “most house you can qualify for,” not the house you can afford.
2. Repay debt quickly, rather than stretching it out as far as possible. Opt for the largest payment you can handle, not the smallest the lender will approve.
3. Have an escape plan. You need to have a plan in mind to pay off the debt early in the event that life takes an unexpected turn, either by selling the collateral or paying the debt with other resources or assets.
Borrowing money is not wrong, but it should be done advisedly and with tremendous caution. Debt of any kind should be seen as a short-term situation that always has an accompanying aggressive payment plan.
Debt should never be seen as ideal, but rather as a reasonable means to an end. Being debt free is ideal, and the goal for which you should be reaching with all the determination and strength you have.