Austin Hastings

I’ve been working on gaining better control over my income, expense and use of debt over the last few years and have learned some tricks that I believe can help further safeguard against the hard economic times.  With the stock market having taken a larger nose-dive this past Monday than we’ve seen in decades, and given that I finally paid off my auto loan yesterday, I think this is as good a time as any to pass along some financial tips I’ve learned through research and experimentation.

In the past few years, I felt a sense of urgency to live debt free.  If for no other reason then to reallocate the money I spent on interest and fees towards things of more interest to me such as, oh, world travel and further education.  There’s also the concept that one is a slave to the debt he or she has, as life choices are often made in the interest of what pays the bills, and not necessarily what makes the bill payer happy.  It was my belief that without any debt, I’d have more freedom to make decisions that would make me happy.

I pursued a lot of sources for information on how to not only eliminate debt, but to also create the mentality that would be needed to live this lifestyle.  It’s incredibly easy to want to go out and buy a big toy on a credit card.  Everyone around us has been doing it, the credit has been easy, and it’s a lot more difficult to say “No thanks, I’ll wait a couple years to buy in cash,” but while this is the difficult way to do it, I see immense benefit.

Aside from the benefit I had foreseen for myself in the debt free lifestyle, our present day economy is currently showing us in a loud and clear fashion that our credit habits as a whole are getting us into a lot of fiscal trouble.  And if things continue their current trajectory, it’s fair to say that credit is going to be more and more difficult to attain at reasonable rates.  This is a time that makes me happy to have learned what I’m about to lay out for you.

Create a Budget

Money, like time, goes quickly and easily in all directions if not directed.  Creating and using a budget focuses one of your most important resources towards what is most important in your life.  In my experience, I find that operating with a budget has saved me at least hundreds of dollars a month that would have otherwise been spent on the “wants” as opposed to the “needs” of life.

Use Cash

It seems that one of the reasons why it’s so easy to spend more money than we have or need to spend is because it’s most typically by way of the credit or debit card.  I can recall when I’ve spent over $4000 on equipment on plastic, and I still don’t have a clear understanding of how much money that was.  After all, it was all a digital transaction, and I ultimately didn’t actually see the money transfer hands and I didn’t have to pay it all in a big chunk.  This meant I was open to, and indeed did, buy more than I should have.  Contrast to the times when I’ve held even a few hundred dollars of cash in my hands and felt as if I was captain moneybags.  The point here is that holding your beloved cash, and having to hand it over sends a clearer signal of how much you’re spending, and choosing to use cash versus plastic in the future may impact your buying decisions.  If nothing else, flashing a wad of bills might give you more of a negotiation stance for the same psychological impact of it looking like more money than if it’s merely represented on paper.

Lock Your Budget in with an Envelope System

The envelope system is simple and it’s brilliant.  You take items in your budget that can be paid with straight cash, such as groceries, eating out, your “blow” category (when you just want to blow some money) and others.  In the budget, you should have allocated an amount of money to each category.  Now, create an envelope for each category.  Fill each envelope with the appropriate cash as you’ve set in the budget.  Now, you use this envelope system as your ATM during the month to pay for all expenses in these categories.  The benefit here is that when you deplete your envelope system, you have no more money, so you can’t overspend.  It locks you into the budget.  If you are responsible about this, not a month will go by that you exceed your budget, because you’re only working within the budget.  If you leave the month with extra cash, feel free to blow it or roll it over, though you might consider adjusting the budget to reflect the true picture of your financial “wants” and “needs.”  You can get fancier with the system and include your cash credits/debits by writing them on the exterior of the envelope.

Set up an initial Emergency Fund of $1,000

Before the step of paying off debt, it’s recommended that you save up at least $1,000 and place it in an accessible (but not too accessible) place so that when you have to buy that expensive plane ticket to see a sick relative, you can acquire it stress-free on the spot with cash.  It’s tough to leave the land of credit cards when an emergency pops up.  It’s so easy to put that doctor or car fix bill on a credit card when you just don’t have $700 or $1500 on hand to pay it.  The problem is that because you may not have this emergency money in a moments notice, you have to rely on debt to get by, and often take a while to pay it back.  Then the $700 grows and grows with fees and interest and adds an unnecessary layer of stress onto life.  The idea behind this initial e-Fund is to 1) Acknowldge that emergencies will happen in life, and 2) You can and should be financially ready so the power is in your hands and not your creditors.

Roll the Debt Snowball

Once you’ve locked in your budget, you’ve set up the initial e-Fund and hopefully removed need to lean on credit again, it’s time decimate your debt.  Get rid of those monthly payments, remove the hundreds, if not thousands of dollars a month spent merely for the luxury of owing money.  Many people see the most logical method of eliminating debt as attacking highest interest cards first.  There is merit with this route, as you may save some money in the long run.  I agree with Dave Ramsey’s “debt snowball” personally, which suggests you attack debt from smallest balance to highest.  This means that you take the smallest, say a $400 credit card from AMEX with a $20 per month payment.  You pay it off, take that $20 monthly payment you’d no longer be paying (because the card is paid off) and roll it into the next card, and so on.  It becomes in a snowball in that one cards payment rolls into the next, then the next and before you know it, you have a lot of momentum to attack the big ones.  I think that a lot of our decisions and habits with regard to finance are based on emotional wants, and knowing this, it seems important to have a debt elimination strategy also built on emotion as well as logic.  And for me, it’s an emotional win to see cards get knocked out left and right as I journey on to take out the big debts.  Conversely, it may be a difficult mountain to climb if you go for the big credit card balance first, taking months or years to tackle it until you can finally taste victory.

Set up a 3 to 6 month e-Fund

The $1,000 e-Fund is not enough to cover you for if you’re laid off, have a large medical deductible or anything else more significant in your life.  Upon paying off debt, it’s wise to build up a real e-Fund with 3 to 6 months worth of living expense.  This will allow you the peace of mind to have any number of life emergencies occur and you will be financially ready.  Imagine what it’d be like to know that you don’t have to worry about being laid off from a job because of the resulting financial burden.  If it happened, you’d have money to fund the time you take rest and find a new gig, and your bills will be manageable because you are debt free and live on a budget!

What next?

So, you’ve got your rainy day e-Fund.  You don’t waste a penny on maintaining debt and using it to buy crap you don’t need.  You live on a comfortable budget that suits your wants, needs and what your income can accommodate.  Life is good, you are no longer as dependent upon your job and economy, and more importantly, the money stress is not what it was.

I’ve been applying it in my life for a few years now, and after a lot of hard work, I am on track to be debt free for the first time in my adult life within 6 months.  It’s a truly liberating feeling to know that I will then begin to focus my income on wealth building, investing into my self and those around me as opposed to the typical route of keeping up with financial traces of things purchased long ago.

I’d love to hear of your experiences and thoughts on gaining more financial security in troubled times, so please leave comments…

Austin