Spend Less Than You Make
You would think that this is a common sense, however, according to a Nilson report the average household carries $10,679 in credit card debt (Nilson Report April 2009). This tells us that instead of paying cash for something, Americans are buying stuff on credit cards and paying high and unnecessary interest on those purchases. According to USCourts.gov there were over 1.4 Million Bankruptcy’s filed in 2009. According to the FDIC, one out of every 200 homeowners will face foreclosure each year. I think you get the picture.
This is how we stopped this trend and I have found this is the best way to attack this with a vengeance:
1. Create a Cash Flow Plan aka a Budget
It is of the utmost importance that you track where every dollar goes, this way you can see where you might need to cut back. Here is a link to a standard budget form I created: General Budget Form
2. Use Cash not Credit Cards
I am not as die-hard as some that say you need to cut up your credit cards, but I will tell you that interest is a killer. According to CreditCardMonitor.com the average Credit Card interest rate is 16.28%. So if you don’t pay your card off every month, you are paying much more for you purchase then if you just use cash every month.
So you pay your Credit Card off every month, right? Well, A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash. It is Psychological, if you use cash to make purchases, you have a visible metric that when it is gone you have no choice but to stop spending. Credit Cards portray a bottomless pool to draw from at anytime, so a different spending pattern is developed.
Personal Money Mangement 101
Now look, I am the first to admit that managing finances can be a boring task, however, that can all change. If you understand the basics of money management and how it will benefit you, that can be all the motivation you need to spend time doing it.
There are 3 principles that you need to understand when it comes to your finances:
1. Spend less than you make
It is built into our culture to buy, buy, buy. The problem is that more people spend more money than they bring in. Then they end up having to borrow money just to make ends meet. This is not a good fiscal plan.
2. If you have to borrow money, you can’t afford it
I had a friend recently tell me he could “afford the payment” on a new car. All that tells me is that he can’t actually afford the car. If you can’t pay cash for something, by definition you can’t afford it. If you have to resort to borrowing money to purchase something, I would think twice. A house is the only thing I would say doesn’t apply to this principle.
3. Make your money work for you
Investing is key to have a sound financial plan. Don’t depend on the government (or anyone else for that matter) to pay for your retirement. Take matters into your own hand. There are 2 main investments that I will focus on and they are: Real Estate and the Stock Market.
It is my goal to systematically break down these principles as well as others through this blog to give you a good resource to turn to when making major financial decisions. I will begin to tackle these principles and how to practically apply them to your life over the coming weeks, so stay tuned…
Purpose of this Blog
In Jim Collins book, Good to Great, he introduces the “Hedgehog Concept.” He tells a story of the Hedgehog and the Fox. The Fox is crafty and always looking for ways to pounce on the Hedgehog. However, time after time the fox is unable to take down the hedgehog. Why, you might ask? Because the Hedgehog is good at one thing, self-defense. Every time the Fox tries to attack, the hedgehog just curls up into a ball and the fox gets poked when he jumps on the Hedgehog.
Why this story? This blog is my attempt to put this principle into practice in my own life. I desire to be really good at one thing, and as it turns out Personal Finance is just that. I enjoy taking people from where they are, to where they want to be. Stay tuned for the first blog regarding Personal Money Management.
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