Diamonds in the Rough Roundup 4/18/14

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I’m saddened that the New York Knicks didn’t make the playoffs this year, but at least I can watch the other games without prejudice.  Except for Miami.  They must lose.  Here are some must win articles I came across this week:

–My Biggest Money A-Ha Moment by Are Ya Gonna Eat That?:  Recognizing we have a problem and what triggers that problem is an essential part of getting your finances together.  Then we just have to figure out how to outsmart ourselves so we don’t fall prey to those triggers again.

–Put Your Whole Heart into Your Debt Repayment by Girl Meets Debt:  Paying off a large amount of student loan debt really puts you in a long term point of view.  You really have to have your heart into it, make an audacious plan, and execute it every single month.  It will be worth it.

–You Can Make Money Quick! by Sprout Wealth:  There are lots of ways to make money beyond the regular 9-5.  Diversifying your income is a great idea because it keeps more income coming in besides your regular paycheck obviously, but if one area dries up, you can focus more energy on another stream and hopefully not lose too much.

–Forget About Credit Card Debt:  Americans are Worried about Medical Bills by Miranda Marquit:  The health insurance system in America sucks.  There are no two ways about it.  Costs are so high that even people with health insurance can’t afford many medical procedures.  It’s a shame that profits are the driving force in the healthcare system.

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Quick and Easy Ways to Pay Less Taxes

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homer check

Tax season 2014 has come and gone.  The best thing about it being over?  No more seeing those unfortunate Liberty Tax employees dancing on the corner.  Way to make paying taxes even less dignifying.  Since you filed your taxes, are waiting for your refund (here are some things to do with your refund by the way), or have to send a payment in, it may be time to finally relax.

WRONG!  There is never a time to relax when it comes to taxes, because what you do this year will affect you next filing season.  Being mindful early on in the year, however, can make tax time 2015 a lot easier and hopefully more lucrative.  Here are some easy things you can do now in order to reduce your tax bill if you’re employed:

Contribute to (or increase) your 401k:  Can’t think of a quicker and easier way to reduce your taxes than this.  Though it is technically a tax deferral since you will be paying taxes on it when you eventually withdraw between age 59 and a half and 70, the earnings have time to compound.  And if you don’t think your income, and thus your tax liability, will be lower when you’re retired than in your prime working years, you have some priorities that need to be shifted.

Another thing to remember is that money contributed to a 401k is done so before taxes, so a $100 contribution doesn’t take $100 away from your next paycheck.  Having less money is the main reason that people don’t want to increase their 401k contribution, so this fact should be kept in mind.  Besides, just find one monthly expense to cut or reduce and voila!  You have successfully invested in your future and increased your net worth.

Open a Health Savings Account:  Regular readers on this blog know that I’m a big fan of the HSA (here and here).  Irregular readers should know that I’m a big fan of the HSA.  You can set aside pre-tax money for an expense you will need now and in the future: health care.  Everybody has to go to the doctor or dentist at some point, so why not save money on taxes and open an HSA?  The contribution limit for families in 2014 is $6,550.  That’s a lot less money to pay taxes on.  The best part is that when you eventually use your HSA money, you are not taxed on it.  Any earnings are not taxed either.

This is such a great deal but you have to have a high deductible health plan (HDHP) to participate.  Some people, especially those who see doctors a lot, are wary of these because you pretty much pay any emergency visits in full until you meet the deductible amount.  The advantage is that their premiums are much less and the plan still pays for routine annual visits.  If you run the numbers and find that even with the tax savings and lower monthly premiums you would be saving more money by having a traditional health plan, then signing up for a high deductible one wouldn’t be the best idea.  But if you’re not in that minority of the population, fully contributing to your HSA is an amazing way to reduce your taxes.

Open a 529 plan (some states):  If you would like to give your kid a little financial head start for college, you can open a 529 plan.  Each state has their own plan with different administrators, investments, fees etc.  Some states allow you to deduct some or all of your 529 contribution from your state taxes.  Currently, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don’t offer this because they don’t have any state income tax (this is also a list of good states to retire in).  California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey and Tennessee have a state income tax but don’t allow for a 529 tax deduction.  I guess they don’t care about education.

All other states have some type of deduction from state taxes.  It’s also worth pointing out that 401k contributions should have priority over 529’s.  Not only do you get a federal tax break, you also probably get matching funds when contributing early on.  And if you don’t make sure you’re taken care of during retirement, your kids (if they’re good) will have to pick up the slack anyway.

Work less:  Not a popular piece of advice on personal finance blogs, but if you make less money then you pay less in taxes right?  While this is true, it’s probably not recommended in most cases, especially if you need money to pay off debt or save for retirement.  But if you are in that enviable position where you make more than enough money and want to spend some more time with family or just relaxing, work a few less hours per week and you’ll be paying less taxes.  Not a bad trade off.

These are just a few very quick ways to reduce your taxes and help your future self at the same time.  There are many other ways to reduce taxes, which is why there are books and CPA’s available.  The US tax code is complex but it is definitely worth learning since you will most likely be paying taxes until you’re in the grave, and even beyond.

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Diamonds in the Rough Roundup 4/11/14

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The sun is finally shining and the cherry blossoms are blooming.  I’m enjoying these temps in the 70’s and looks like we’re finally out of winter.  Check out some of these equally refreshing articles I came across.

–A Realistic Look at Ideal Days in Our Future Financially Independent Life by RichmondSavers:  Great thought provoking post on how we would spend our days if finances weren’t an issue.  It’s something we need to think about as we all only have a limited amount of time on this planet.

–How to Recover from a Financial Mistake by Stefanie O’Connell:  Everybody makes a dumb financial move here and there.  It’s important not to beat yourself about it, learn from it and move on.

–Should I say Something?  A PF Enthusiast’s Dilemma by Cash Cow Couple:  It’s always tough to see or hear a loved one about to make a not so smart financial move.  Is it always smart to tell them or is there another way?  A thought provoking situation.

–The power of profit margin by Get Rich Slowly:  Being in charge of your finances is like being in charge of a business.  If you start thinking of your transactions as personal profit or loss, it can put a new spin on spending recklessly.

–How Much Do I Have To Make As An Entrepreneur To Replace My Day Job Income by Financial Samurai:  Really fascinating post comparing the different aspects of being employed to being self employed.

Big shout out to Daraius at Million Mile Secretes for including me in his Interview Series.  Check it out here.

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A Twist on the HSA

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The Health Savings Account is the relatively new kid on the block in the healthcare world (check out my intro post to the HSA here).  The HSA has the distinct advantage of staying with you at the end of every year rather than expiring on December 31 like Flexible Spending Accounts.  Depending on which bank you open your HSA with, that money can be invested or gain a small amount of interest.  If you’re eligible for it, it is a nice account to have because contributions, earnings, and qualified distributions are all tax free.

There is one condition of the HSA that actually gives it a while new dimension.  It can act as an IRA.  My eyes were opened to this idea from a post by the Mad Fientist.  It took me a few days to kind of wrap my head around it but ever since I did, I’m all in.  And it’s all because of one rule regarding HSA’s:  any distributions made from the account after the age of 65 can be used for ANYTHING.  Meaning that after you turn 65, you can use the money for healthcare expenses, paying the mortgage, going on a vacation or just letting it sit in the account and grow.  The one caveat is that if you withdraw HSA money after 65 for anything other than healthcare expenses, you will have to pay taxes on it. This makes it similar to a traditional IRA.

The key to making this happen is that you don’t have to DIRECTLY pay for healthcare expenses because the funds don’t expire.  Let me explain.  With an FSA, the money expires at the end of the year so you better use that money on any and all healthcare expenses.  Or scramble to get glasses in December like I did because I had too much money left over.  You either use the debit card they give you or pay for it yourself and make sure to submit the receipt by the end of the year.  With an HSA, you can just pay for a $100 doctor’s visit out of your own pocket (ideally with a rewards credit card), hang on to the receipt and know that you have two choices.  The first choice is to now move $100 from your HSA to your checking account to cover the $100 charge you made.  This is fine if you know you won’t have enough money in your checking or savings to cover the bill.  This is also similar to what you would do with an FSA.

The second choice, and the better one, is to not touch your HSA money and simply file the receipt away for future use.  This will allow that $100 to grow in the account and still give you the ability to withdraw that $100 at some time in the future if you really need it.  Or, ideally, just let it sit in the account until you’re 65 and withdraw it without penalty or taxes.

There are certainly some things to keep in mind when using the HSA as a modified IRA.  If you have a genuine healthcare emergency that you will definitely not be able to cover out of pocket, use the HSA money.  That’s what it’s there for.  Hopefully the emergency will happen after you have had a few years to build up some money in the account (the 2014 IRS limit for HSA contributions for a family is $6,550).  So saving the max amount even after a few years will give you a nice cushion in case of a high hospital bill.  So if you haven’t opened an HSA or are not contributing the max amount, find a way to do so.

For its intended use, the HSA is a great account as it allows you to set aside money tax free, lets the money grow in the account tax free and lets you withdraw it tax free for qualified healthcare expenses, which we all need to spend money on at some point.  No other account allows you to do this.  But if you can keep your healthcare expenses low and cover them out of pocket, this money can grow and grow until 65 and if you need it before then, it will certainly be there for you.  Just be sure to hang on to your receipts.

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Filed Under: Investing, Money Savers, Self Building

It Might be Time to Cut the Cord

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I admit, I am slow to change.  A big reason is that I take a long time to decide when comparison shopping anything.  Not one of my best qualities but it has saved me a few dollars along the way.  I didn’t get my first smartphone until about 2 years ago.  I was obsessing over two particular phones, so much that my tech loving brother didn’t want to be around me anymore because of my persistent questioning (I made the right choice though since the other phone was found to be buggy and became obsolete quickly).  But eventually I can make the plunge, and I think the time may be coming when it comes to cable television.

Cable TV has been a staple all my life.  I had it growing up as a child and throughout college.  Even when I was in graduate school, my roommate and I found a way to get cable TV without paying for it (I think the last tenant never cancelled theirs).  Watching the latest highlights on ESPN has always been a habit of mine.  Being exposed to cable TV all of your life is not necessarily a good thing, but it’s what I’ve had all of my life.  Given my tendency to over think any type of change, it would take some time for me make plunge into a cable-less world.  There are a few reasons that are pushing me to make the inevitable switch sometime soon:

The wide availability of streaming.  Netflix is awesome.  There’s just no two ways about it.  The current price of $7.99 a month will most certainly increase as time goes on, but it beats the pants off of the $70 per month for cable TV.  And after doing some unofficial analysis of my family’s TV watching habits, the vast majority of the shows we enjoy are on Netflix.  There are only a couple of shows that we watch on cable TV, but that’s hardly a reason to keep it around.  With a little bit of searching on the internet (or by using another streaming service), pretty much any show can be watched online.

One thing I recently came across really shows the staying power of streaming TV.  Amazon is in it now.  They have had their streaming service for a while, but they now have a device called Amazon Fire TV that is an all in one streaming device.  You can watch Netflix, Hulu, Amazon Instant Video and a bunch of other apps all on this one device.  We currently use a Playstation 3 for streaming purposes, but the fact that Amazon has fully committed to the world of streaming video shows that it is here to stay.

Not difficult to get HD local channels.  I’m a huge NBA and NFL fan.  And this is probably the biggest reason I hesitate to get rid of cable.  It would be tough to miss the big playoff games.  But reading reviews about the HD antennas out there, it looks like I should be able to watch most of the big games on the local channels.  Gone are the days of the bunny ears and fiddling around with them to get good reception.  Reviews for these products have been great, so it’s exciting to know that I shouldn’t have to give up TOO much sports watching.  Besides, having a toddler has greatly reduced my sports watching capability as it is.

Saves money.  Getting rid of cable and relying on streaming TV should free up around $70 per month.  That’s not a tremendous amount, but if this experiment sticks, that’s money that we will be saving every month for the rest of our lives.  It is definitely more important for me to pay off  my student loans faster than it is to watch a few TV shows, so I can use that savings to do just that.  Or to pad our emergency fund.  Whatever I choose to do, it will only be a financial net positive which is great to know.

These are just a few of the reasons to ditch the cable.  If this experiment doesn’t work and our lives are miserable because of it (which sounds really selfish), I can always come back to cable.  All the cable companies in the area run good deals from time to time, so I can just sign on when I see one.  It’s always good to find a way to cut down monthly costs and help yourself in the process, and cutting cable seems like just the thing.  I will report back about my life without cable after a few weeks.

If anyone would like to share something about their cable-less life or let us know about any tips or ideas, please feel free to comment below.

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Filed Under: Money Savers, Student Loans

The Infinite Monthly Payment Loop

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infinity

This is how monthly payments look in space.

I’ve been told there was once a time where people actually paid for things up front and in full.  Cars, houses, education and such were paid for with cash and then utilized to the best of the person’s ability.  A person or persons simply saved up the money required for a car, for example, paid for it in cash and drove it off the lot, knowing that it is now theirs to take care of with no extra payments to speak of.  I don’t know if such a time ever existed or will ever exist again, but it does sound nice.

If there is one phenomenon that can be pinpointed as the sole reason of financial hardship for so many people nowadays, it is the ability to get whatever you want by paying for it monthly.  This is the prime reason that people are getting poorer and the banks are getting richer.  It seems there is always a monthly payment due for so many things, and new ones seem to crop up every few years.

Let’s take the ultimate never ending monthly payment as an example, the home mortgage.  Playing with some mortgage calculators, I wanted to find how much would be spent on a $200,000 home if the buyer had a 20% down payment and took out a 30 year loan at 4%.  A 20% down payment is the industry standard for a “recommended” down payment amount and a 4% rate on a 30 year loan is considered great in any time period.  This savvy home buyer thinks he got a deal, and in some respects he certainly did.  But according to the calculations, if he makes his minimum mortgage payments on time every month, he will end up having paid $349,991.21 at the end of the 30 year loan.  So he will end up having paid almost $150K extra for a 200K house.  Doesn’t sound like a great deal to me.

Now there are things to take into consideration such as the mortgage interest deduction and appreciation of the home, but those are very variable as not everyone always qualifies for the interest deduction and the market can go up and down.  Many people don’t even save enough for a 20% down payment and buy more house than they need, so the amount of money paid at the end of the loan can be much higher.  The bottom line is, it is in the bank’s best interest to get us caught in the seemingly infinite loop of monthly payments.  They get a steady stream of income from the home owner, while getting much richer in the process because of interest payments.  The buyer gets a house to live in, which is nice, and may or may not make some money in the process depending on market conditions.

This is not only limited to houses anymore.  Cars loans are a MAJOR profit center for banks.  They provide a continuous stream of income for loans that are 3-5 years long, which is the amount of time that many Americans trade in their cards anyway.  And since most Americans have multiple cars, you can see why the banks and the auto industry love car loans.  The other thing they love about car loans:  the buyer isn’t going to be making any money off of the car.  Houses can and usually do appreciate somewhat.  Cars almost always depreciate in value.  If there is a more one sided transaction out there that everybody does other than the car loan, I would love to hear it.

The monthly payment loop is not only firmly entrenched in the home and auto industry, but in consumer products as well.  How often do you see appliances, another guaranteed depreciating product, being advertised as affordable because of no or low interest payments for the first year?  You can get pretty much any type of appliance or electronic on a monthly payment plan, especially at those God awful places like Rent a Center, where everything is advertised only in monthly payments.  These products provide no long term financial benefit for the buyer, who usually trades them in for the latest model after a few years anyway.

And the ultimate monthly payment cycle?  Credit card debt.  If the store is not offering a product on a monthly payment plan, thank goodness Visa is giving you the option.  Just charge the amount of the appliance in full, and make monthly payments on it until it’s paid off.  Most credit cards have very high interest rates, some in the area of 20%.  Can’t think of a worse deal.  I write about how I love using credit cards and getting rewards, but this is NOT the way to be using them.  This is a way to get into financial trouble in a hurry.

Thanks to savvy marketing and unending greed, most people in our society are wired to think about money in terms of monthly payments.  If you can swing the monthly payment on the house, two cars and the new dishwasher, that means you can afford it, right?  Maybe.  But you are doing your current and future self a huge disservice by having your money tied up in products like these.  Imagine not having a $300 car payment and instead investing that money in your company’s 401k or using it to pay off debt?  That is the way to financial freedom.  It’s tough to get out of the infinite monthly payment loop, but doing so will get your finances back on track.

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Filed Under: Credit cards, Money Savers, Self Building

Diamonds in the Rough Roundup 3/28/14

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The Sweet 16 is upon us.  I hardly watch any college basketball during the regular season, but something about March Madness brings out the college basketball fan in me.  Here are some sweet posts I stumbled upon this week:

–17 Things That Will Push You From Middle Class to First Class by Johnny Moneyseed:  This post is pretty much the blueprint to a good life.  Read it and save it.

–How to Kick Ass at Work by 1500 Days:  It really is worth the effort to reach out to people in your company and form relationships.  Any increase in compensation will stay with you for the rest of your life.

–Has Luxury Lost its Luster? by SeeDebtRun:  I’ve often thought of this myself as luxury seems like an “old” thing now.  Having nice luxury cars and a big home used to be a status of wealth, but nowadays it can seem like the sign of insecurity.  Not having that attachment to luxury will ensure a good life.

–Save Half Update: $4000 Student Loan Paid in 6 Months by TrendyCheapo:  I love reading stories about people paying off student loans.  That’s because I hate student loans.  When people sacrifice or find cheaper ways to do things and then apply those savings to pay down student loans, it’s a wonderful thing.

–Avoid Student Loans by Living Like a College Kid by Student Debt Survivor:  During optometry school this message was given to us the first week of school, “Live like no one would now, so you can live like no one can in the future.”  Basically saying be frugal as possible in school so you don’t have to take out student loans.  I’m glad I followed this and minimized the amount of student loans I needed.

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Why you need to collect Points and Miles

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I’ve talked before about some great rewards you can get from credit card spending.  I’ve also talked about the importance of having a great credit score and the benefits one can reap over a lifetime just by having a great score.  With these two things in mind, the next step is to maximize your credit card rewards.  And I mean MAXIMIZE.  As in sign up for a few cards every 3-4 months , also known as a churn.  Contrary to popular belief, this does not hurt your credit score much, and actually will make it more solid in the long run as you will have higher and higher credit limits and lower and lower credit utilization ratios.  So there should be no fear of getting the most credit card rewards possible.

But if you are the type who racks up credit card purchases like there’s no tomorrow, forgets to pay on time here and there or is okay with carrying interest month to month, don’t even think about getting credit card rewards.  Actually, you should re-think your life and your use of credit cards at all.  They are a tool, but only in the hands of those who know how to wield it.  Willingly and knowingly carrying a credit card balance is one of the most foolhardy things one can do financially.  If you are one of those people, maximizing rewards is not for you.  If you try it, the only thing you will be maximizing will be your pain.

Now that we got THOSE people out of the way, let me show you a few reasons why getting lots of credit card rewards is awesome.  The first thing that comes to mind is that miles and points are TAX FREE.  There apparently is no way for the IRS to quantify how much a “point” is worth, especially since they can be worth different amounts in different programs.  And let’s hope it stays this way.  We work hard for our money, and being citizens of a country, we have to pay taxes.  This is reasonable and necessary as taxes allow the maintenance of the roads we drive on and the libraries we frequent.  But if there is a legal way to avoid taxes, I’m all for it.  Miles used effectively, for example, can turn a first class ticket normally costing $5,000 into a $50 out of your pocket expense to cover the taxes.  That’s $4,500 saved.  Tax free.  Now granted, most people don’t buy $5,000 plane tickets, but money saved is money saved.  You can compare that $50 out of pocket expense to a $300 coach ticket you’d probably buy.  That’s still a $250 savings.  But in a lot more style sitting in first class.

A common complaint about collecting miles is that people say they don’t travel much and there’s no need to collect so many miles.  In my experience, everyone has to travel somewhere at some point in their lives.  Be it for a wedding, funeral, visiting family or for business, everyone gets on a plane at some point in their lives.  And having miles ready for that day can be very lucrative.  From a single credit card sign up, a person can easily get a round trip domestic ticket to anywhere in the country along with no checked bag fees.  That is incredible piece of mind.  Also, some of the more flexible programs such as Chase Ultimate Rewards and AMEX Membership Rewards allow you to redeem points for cash or gift cards.  So if you know you’re not going to be flying anywhere soon, just trade those points for some cold hard (tax free) cash which you can use to pay down your debt or bolster your savings.  Did I mention it’s tax free?

Another reason to get into the world of credit card reward maximization?  It will help you spend less.  Yes, you heard that right.  The common refrain from credit card haters is that they make you spend more that if you use cash.  In my experience, that’s only if you are not conscious of your spending.  As long as you have a budget or  some type of spending plan and realize that getting 5% cash back is peanuts compared to not buying the thing at all, you will not spend more with a credit card.  On the contrary, I have found times where I want to spend less, just to maximize rewards.  If I see something that catches my eye in the mall, I don’t buy it right away because I know i won’t get maximum cash back like that.  I can use an online shopping portal like the Ultimate Rewards Mall or Bigcrumbs.  I’ll probably forget to check it when I get home, or I’ll realize it’s not worth the effort so I just won’t buy it.  If you look at every purchase you make in the frame of maximizing credit card rewards, you will want to buy less things.

And finally, if those reasons didn’t sway you, here’s the real reason you should get in on the credit card rewards game:  it’s fun.  It’s fun finding an awesome credit card sign up bonus, being approved for the card, and knowing it will cover a fun trip for you and your family.  It’s fun to find ways to maximize your cash back, such as buying gift cards at grocery stores, to take full advantage of the many great grocery cash back cards out there.  And it’s fun to kind of stick it to the big credit card companies, using their rewards to produce things of value for you which you might not have gotten otherwise.  It’s not exactly Fight Club, but it feels good to use their money to enrich ourselves for a change.

What maximizing rewards will eventually cause...I think

What maximizing rewards will eventually cause…I think

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Filed Under: Credit cards, Money Savers

Diamonds in the Rough Roundup 3/21/14

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It’s March Madness time!  Already some big upsets with Harvard and Dayton winning yesterday.  Here are some winning articles I came across this past week:

–A Guide to Freaking Out About Retirement Planning by Green Money Stream:  While freaking out in itself is not fun, knowing that retirement is inevitable is a strong dose of reality for everyone.  With this in mind it’s important to start saving early and often.

–Why Having Student Loans Sucks by Student Loan Sherpa:  Student loans are unlike any other loan in that you can’t directly sell them and they don’t disappear if you declare bankruptcy.  They’re not a fun thing to have so get rid of them as soon as you can!

–Cheating on Taxes:  It’s More Common thank You Think by Personal Finance Utopia:  Very interesting article about the prevalence of cheating on tax returns in America.  It might be tempting to fudge a number here or there, but if you’re audited or caught, the results are not pretty.

–How to Become a Leader for Your Company by Modest Money:  It really takes a proactive approach to get noticed in a company.  If you work hard and don’t promote yourself, it is unlikely your work will get noticed.  This is a good post on some things to keep in mind if you would like to advance within your company.

–Is a Backdoor Roth IRA a Good Move by Barbara Friedberg:  A backdoor Roth IRA can be a good way to reduce taxes for some people.  Who doesn’t want to pay less taxes?

Thanks to NZMuse for featuring my article on smart ways to spend your tax refunds in the latest Carnival of Personal Finance.

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Financial Commandment #4: Avoid a Paycheck to Paycheck Lifestyle

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Have you ever seen those pictures or videos of people walking on a tightrope between two very tall buildings?  All those pictures are from a long time ago and it seems not many people do that as a thrill anymore (I wonder why??).  Besides that, they are also extremely scary to watch.  Walking on what seems like a razor thin piece of rope where one false move or breath will send you hurtling to your doom.  Very stressful stuff.

Steady now…

Yet, this is how a lot of Americans are going about their financial lives nowadays.  One unfortunate move or event, and their whole financial lives will come crashing down.  This is a very stressful way to live, exhibited by the large increase in anti depressant and anti anxiety medications being used nowadays.  But it’s not a simple pill that will take people off the financial tightrope.  It’s a dedication to get off the paycheck to paycheck lifestyle that is all too common nowadays.  Having some financial breathing room can make all the difference in the world, especially when the big monthly bills come due.  Here are some immediate steps to take in order to get off the tightrope of financial ruin:

Take stock of your current situation:  You have to know where you stand first before you start towards your goal.  Start tracking your monthly income and expenses.  You don’t have to do a budget or anything like that since budgets are not for everyone.  But it is important to know what your income minus your expenses are.  If your expenses are greater or pretty close to your income, you are living paycheck to paycheck.  This is pretty easy to do especially if you use credit cards for most things.  But if you don’t, a simple pen and paper will do.

Cut as many expenses as you’re comfortable with.  Then cut some more:  Living a step away from financial ruin is no way to live.  It’s not worth cable TV.  It’s not worth having a smartphone.  And it’s not worth paying more than you have to for anything.  Cut out non essential expenses, especially those you don’t use much.  This includes the aforementioned cable TV and smartphones, but can also include gym memberships, subscriptions, and excess eating out.  Also, try to minimize those those things you need like car insurance, groceries and clothing.  Many people pay way too much for these things without even knowing it.

Make more money:  Sounds simple enough.  But it’s tough to implement unless you’re motivated to do it.  And getting out of the paycheck to paycheck rut should be enough motivation.  While you’re minimizing your expenses, it’s important to work on the other side of the equation as well by maximizing your income.  Even something like working one extra day a month can make a difference.  You need to do whatever you can to get out of this situation, and once you do you can resume working as many hours as you’re comfortable with.  But find ways to make more money, be it working more hours, selling stuff or using some of your existing skills as some side income.

Build up a reserve:  By cutting expenses or making some more money (or, ideally, both), you are increasing the amount of money you have leftover for the month.  This “gap” between income and expenses is what creates real wealth and will save you from the paycheck to paycheck predicament.  Now it’s important to build up some sort of cash reserve in your checking account or a savings account.  This money should be relatively easy to access as it should be used for “emergency” situations that inevitably happen such as car trouble or surprises at the dentist.

Such unexpected events would be enough to derail a person walking a tightrope and cause them to plummet, either by forcing them to incur credit card debt or even something as drastic as declaring bankruptcy.  This is the importance of a having a reserve or “emergency” fund.

Make it grow:  By optimizing your expenses and income and having a healthy amount of reserve money, you are ahead of 95% of Americans financially.  I don’t have any figures to back that up, but it’s probably true since the vast majority of Americans are in credit card debt.  At this point, it’s wise to give your money the opportunity to grow over time.  This can be done in many ways such as increasing your 401k contribution, investing in mutual funds, buying rental property or starting that business you’ve always dreamed of.  This is the path to real wealth, and what a steady and glorious path it is.

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Filed Under: Financial Commandments
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