It keeps you up at night, it’s the constant mental burden that causes you stress and anxiety. Money problems — it can feel impossible to solve and according to a Stress in America survey, two-thirds of respondents say it’s their number one reason they worry.
In a recent Well Kept Wallet survey of 1,000 consumers asking how financially stable they are, 40 percent admitted to not even having a savings account. Plus, 38 percent said they don’t have a monthly budget.
This problem is indicative to some of the challenges facing Americans today, why they fall into such financial binds, can’t seem to save money, and live a debt-free life.
Reasons Why People Face Money Problems
It’s easy to assume that those who face challenging financial situations is because they’re irresponsible and perpetually overspend on their credit cards. While this is sometimes the case, many times money problems occur because of sudden debt and very little to no savings to remedy the situation.
Medical bills are the no. 1 reason for bankruptcy. It’s not uncommon for a family member to suddenly get sick and not have enough health insurance to cover the costs, or worse, not have any insurance at all.
This was exactly what happened to a friend of mine. She injured her leg during a ski accident and as a result, found herself suddenly facing $55,000 of debt. She didn’t have health insurance at the time and the aftermath of the accident required several surgeries. This was over five years ago and she’s stillpaying for that debt.
Other times, money difficulties arise from a failed small business or loss of a job.
Abusing Credit Cards
Other times, the problems are completely preventable and caused by a lack of saving, budgeting, and understanding how to properly manage money. Try Googling “how to get out of debt” and you’ll see tons of stories about people making drastic changes to get out credit card debt that they quickly racked up without even realizing it.
Keeping Up With Your Peers
Lynnette Khalfani-Cox, also known as The Money Coach, often recalls her $100,000 credit card debt that she accumulated simply because she was using credit for everything and not keeping track of how it had snowballed out of control.
Keeping up with a lifestyle that doesn’t truly match your income is a common reason people face financial difficulties. It baffles me to think about it, but I know people who spend more than 50 percent of their net income on rent because they haveto live in a nice building that has a pool and a doorman.
Paying too much in rent or having a high mortgage with very little in savings sets you up for failure if something goes wrong.
A lack of liquid savings also makes it really easy to spiral down a stressful situation should something happen, like getting fired from a job. Sarah Li Cain and her husband stashed away savings in their account each month for years, and because of that, it gave her the freedom to quit a miserable job without worrying about finding another job immediately.
Quick Glance: Money Problems and Solutions
Here are reasons why people face financial difficulties and possible solutions. No matter what the problem is, earning extra income through a side job would help the situation.
- Problem: Lower income, or loss of income because you got fired. No savings.
- Solution: Create a budget, cut drastically on spending.
- Problem: Illness, physical accident that automatically put you in thousands in debt.
- Solution: Call the hospital and try to negotiate the bill to a lower amount. Set aside money each month to pay it off as quickly as possible.
- Problem: Divorce, and loss of support from a spouse
- Solution: Sell the house or property, if you have one. Rent a room in your house.
- Problem: Overuse of credit cards because you think you need to rack up as many points as possible.
- Solution: Pay off the debt immediately and create a balance of using credit and your debit card for purchases. Create a budget.
Figure Out the Why
Money problems won’t go away until you address the root cause of the behavior.
For example, a common psychological reason people spend is because they feel a strong emotion. It even has its own name — retail therapy. You feel happy, you buy yourself a treat, you feel blue, you go out and splurge on a new pair of shoes because it’ll make you feel better for a few hours.
Think about why you have these cravings to spend and what triggers those feelings. Is it boredom? Sadness?
When you feel the urge to spend, try replacing the habit with a brisk walk, calling a loved one to say hello, check the balance of your accounts, or how much debt you have left to pay on your credit cards.
Create a Budget: It’s a Few Action Steps but the Rest is Mental
You’ve heard this before — create a budget, use your willpower to stop spending. A budget isn’t about willpower. It’s about automating the process to set you up for success. This means doing things like automatically moving money each month from your paycheck to your savings account and being more aware of where your money is going.
Budgeting is mental, more than anything else. Start by writing down your daily purchases — this keeps you aware of what you’re spending and makes every single purchase stand out.
How to create a budget and how detailed you want to get is really up to you, but if you’re trying to overcome financial problems, you should definitely be vigilant about checking in with your budget and how much you’re spending and saving on a weekly basis.
Use Mint to Track Your Spending and Income
Mint is a free online website you can use to aggregate all of your accounts in one place and track your spending and saving. It takes some time upfront to connect all of your credit card and bank accounts, but once you do, it shows you what your net worth looks like.
The best part about Mint is that you can set goals for saving money or paying off debt and keep track to see how you’re progressing. For example, I used a travel fund to track how much I was saving for a year-end trip. I decided I would save $200 each month, which would add up to a total of $2,800 after 12 months.
How to Set a Goal on Mint
One of the best features Mint offers is setting up financial goals.
Tip: As an alternative, Personal Capital offers similar features and benefits to help you track your money.
When you first set a goal on Mint, a list of options appear, such as pay off credit card debt, save for an emergency fund, or buy a home. It also gives you the option of creating a custom goal. Then it asks you for more information to help you figure out a specific dollar amount to accomplish your goal.
For example, when you choose “save for an emergency” it asks you to enter your average monthly spending and how many months you’d your emergency fund to cover you — one to 12 months.
Then you get a recommendation for how much to save based on the numbers you put in. You can even connect a specific bank account to this new goal or choose to open a new one.
It also asks you to choose how long you’d like to save for and then breaks down the monthly cost of how much you need, in order to reach your goal by the target date. Brilliant!
Create a Plan
After you get set up on Mint, create a monthly budget for yourself so you can start making moves to alleviate some of the financial problems and difficulties.
Set a plan and then execute.
Find Out How Much Your Monthly Income Is vs. Money Going Out
You know how much you make each month, but you may not know how much is going out. Write down your income and fixed expenses for the month.
If you freelance or have an income that fluctuates each month, grab the average of the last three months and use that number. Be sure to use the net income (income after taxes), not your gross income. If you freelance and pay your own taxes on a quarterly basis, remove that portion in the fixed expenses.
We’ll use example numbers for a fictional character named Joe, to make this easier to understand.
Income also includes:
- Child support
- Property rental income
Then list all outgoing fixed expenses for the month, including:
- Car loan
- Student loan
- Personal loan
- Medical bills
- Cell phone bill
- Taxes (if you freelance)
Joe’s net income is $5,000 and his fixed expenses are $3,000.
Your income minus expenses is the number you’re working with each month to save, pay off debt, and invest for retirement. In Joe’s case, it’s $2,000.
Trim the Fat
Look at what you spent money on in the last three months and scrutinize the “extra” items you purchased that aren’t a part of your fixed expenses. These could include:
- Dining out
- Entertainment (movies, theater, concerts)
- Tech gadgets
- Lyft/Uber rides
Add those up and see how much you’ve spent here. The point is to peel back the layers to see where you can start cutting corners.
While these things are fun to spend money on, they’re not necessities and if you really want to make a difference in your saving and spending habits, this is the easiest place to start making cuts.
After Joe looked at his spending in these categories he noticed he spent close to $1,500 in a three-month timeframe, which breaks down to $500 each month. This is where Joe will trim the fat. If it’s not an absolute necessity, it can wait.
Start a Money Journal
Journaling is an effective way to become more self aware and more mindful of how you’re spending your time and energy. Keeping a daily journal could actually have a strong, positive impact on your physical well-being and actually strengthen your immune cells.
Money has a strong impact on our daily lives from the stresses of thinking about it to spending it, so writing down your thoughts and feelings each day might be beneficial. Writing about stressful events help you to recognize them, address them, and acts as a stress management tool.
I would strongly recommend a money journal to write down your thoughts and feelings around spending and saving. If you overspent on one day, write down what happened during the day that might have caused it.
Start figuring out what caused you to overspend or make that spontaneous purchase. This will start helping you identify what potential triggers make you feel like spending.
Why Saving Money Is a Non-Negotiable
Whatever financial bind you’re in, chances are you aren’t saving properly. The saving I’m referring to is liquid saving in an online account, for emergencies.
The reason the money should be saved in an online savings account is because it earns more interest and you can easily pull the money out should an emergency arise.
There are so many reasons why a savings account like this is necessary for your life, but the words that come to mind for the why include: peace of mind and freedom. Emergencies or unfortunate life circumstances often occur, so being prepared for that is crucial to not spiraling out of control in debt.
The freedom part is more of a long-term, ongoing strategy of saving no matter what. Having this savings account gives you options. It gives you breathing room to have options to do things like:
- Quit a job you hate and take your time in the search for a new job
- Treat your friends to an expensive meal
- Buy a car without having to finance it
Maybe these things sound unattainable at the moment, but all it takes is some planning and diligence to be mindful of it every single day.
Automate Your Savings
Joe has decided to make small changes in order to save money in these areas so he can reach his goal. He has opted to cook at home more often rather than dining out, and watch movies at home rather than going to the theater.
He also opened a free savings account at an online bank and linked his checking and savings to automate the process of saving each month.
Online banks also tend to give you more in interest than some big banks.
Based on Well Kept Wallet’s survey, 46 percent of respondents said a high-interest savings rate is important. Even though 1 percent (the average online savings account rate) doesn’t sound like much, it’s still something.
Joe decided to save $500 a month since that’s the amount he spent on those “extras.”
If you don’t have much wiggle room in your budget, start off small and then as your income increases, put more money away. You could start with 5 percent of your net income each month, and then eventually move up to 10 or 15 percent.
Start a Side Hustle
Making adjustments each month and creating a plan to better your finances and change your money habits is a great start. Increasing your income with a side job will move the process along so much faster.
If you have a lot of credit card debt or if you really want to aggressively save this year, get a side job.
If you’re not sure how to earn extra income, Well Kept Wallet has written about easy ways you can earn some money on the side, mostly from home or on an app.
Here are the three easiest ways to start earning passive income:
1. Rent Out a Room on Airbnb
If you have an extra room or space in the finished basement in your home, try Airbnbing it.
You need to take great photos of the space, put a description, and be competitive when pricing the room. Airbnb helps you get all this done.
When I listed my apartment on Airbnb while I traveled, I was able to make at least $300 to $600 each time.
2. Drive with Lyft
If you have a car and a driver’s license consider supplementing your income with Lyft.
The cool thing about it is that you can drive on your schedule. You can pick up passengers based on a particular direction (i.e. work or home) in certain locations.
The other day on my way to the airport, the driver told me he has a long commute and only picks up passengers on the way to and from work.
3. Use Your Handy or Creative Skills
If you have a particular skill, like knowing how to do simple handy work and odd jobs around the house, consider listing your services on TaskRabbit. You can help people do things like put up shelves, clean, or organize their homes.
Do you own a truck? You can list your services to help people move. I’ve used TaskRabbit for moving on three separate occasions and it was much cheaper than using movers.
If you are knowledgeable in graphic design or know how to write, try putting your services up on Fiverr, which is a huge online platform that connects people to specific services, including marketing, social media, and writing.
Side Hustles Don’t Fall from the Sky
Other ways to make side money include babysitting, delivering food, tutoring, house sitting, freelance writing, or virtual assistant work.
You have to be intentional about carving out extra time to start your search or begin your research on how to get going. Set some time aside in the morning and get going.
Pay Off Debt As Aggressively As You Can
If you’re dealing with debt, make this a priority and try to pay it off as quickly as possible. This is where the side gig comes in handy.
Just like you did with your budgets, write down all of the debt you have, along with the interest rate you’re paying. Sometimes, a zero-interest intro balance transfer credit card might be beneficial, but I would look at this as more of a strategy to pay off your debt rather than a solution.
The debt will still be there but it may buy you some time before the introductory period ends. After that, you’ll be stuck paying the same amount of interest. There’s also a balance transfer fee, which is usually 3 percent of the amount transferred. So, if you go this route you should pay off your debt before introductory rate ends.
When you know how much you owe on what credit card or type of debt, you can either try the popular debt snowball method of paying the lowest to highest balances first.
The opposite of this is called the avalanche method, which is a method to tackle the highest interest balances first.
The psychology behind each one may be effective on the type of person you are. If you like to celebrate quick wins to get motivated to move on to your next debt balance, try the debt snowball method. If it’s the opposite, try the avalanche method.
You don’t have to choose either method. Just pay as much as you possibly can to get rid of the debt. No matter what you do, always pay on time and pay more than the minimum balance to get rid of it as quickly as possible.
Stop and Check-In
Be sure to make stops along the way and check in with your finances so you can see what adjustments you need to make. You know yourself the best, and if you know you’re overspending when you shouldn’t, address the habits and vow to do better next time.
When you first start budgeting, saving, working a side gig, and paying off debt, check in once a week. Get the whole family involved and be transparent with your finance with your kids, so you can teach them healthy financial habits from a young age.
Stop Thinking and Wishing, and Start Doing
Getting your finances in order takes planning, intention, and execution.
Having a plan will guide you along, the tools like Mint will help you keep track of how you are doing, and when you start to see the debt side shrink and your savings grow, it might motivate you to learn more about what else you can do to improve your finances, like increasing your long-term investments.
What plan of action will you take to improve your financial situation?