Start On Your Path To Feeling Rich

1.// Saving Strategy

Saving a small portion of your income every month protects you from the stress of a car breaking down and not having funds to cover it. Or from home maintenance issues that pop up out of nowhere, or an illness, or any other type of family emergency.

After moving out of New York to relocate down south to start a family, I knew that I would take a pay cut. And oh was it a pay cut! At the time I am writing this, my salary is still 30% below what I made in NY. But I feel wealthier now. In NY, I bought designer shoes and bags. But with all the money I was making, an unplanned event would have knocked me off my feet. I was actually living from paycheck to paycheck and only saving through my 401K.

I decided to make a change after my daughter was born. And I went through the process of creating a budget. I wrote a detailed description of this process in my post Budgeting Finances with Quality of Life In Mind. Creating a budget is paramount. It gives you a black and white view of your financial situation. If the numbers don’t support your lifestyle it is time to make a change. My rule of thumb is that you should have at least 35% of your income left after paying off all of your survival expenses. And SAVING IS A SURVIVAL EXPENSE. It is a must-do. 

I remember the time my baby girl ripped the little magnet from the back of a souvenir magnet we had on the fridge. And in true “baby… makes no sense… she won’t eat any actual food we give her” fashion, she ate it. We rushed her to the doctor. After we verified with the doctor that it was just one magnet, the doctor told us to take her home and to wait for her to pass it. We waited… On the third day, still no magnet. So we had to get her tummy x-rayed to make sure it wasn’t stuck. Luckily, it wasn’t. It was just taking its time. And just before leaving, they handed us a bill for over $500. This represented the cost of our out of pocket minimum before the insurance kicked in. This $500 was not in my plan for the month. And if I hadn’t been saving diligently in the months leading up to this event and readjusting my spending to ensure I wasn’t living above my means, this would have been a spend that knocked off my budget for the month. But it didn’t. And it reaffirmed for me that this is what feeling wealthy meant to me.

PIN ME FOR LATER

Income = survival expenses (set) + investing & saving (set) + disposable

Again, I go into this in more detail in my budgeting post, but one thing to point out again here is that I lump all of my other “non-survival” expenses into the disposable income bucket. I do this for two reasons. The first is because that is what all those other bills truly are. Credit cards and personal loans are driven off of purchases of items that are not needed for survival but are driven off of want. If the payments for these items are eating up all of your disposable income, you need a strategy to pay these items off as soon as possible in a smart way.

A big tool I used to visualize my finances was through the Empower app. One big thing the app helped with is the categorization of my spending and the ability to set up alerts for each category. It also contains features that allow for auto-saving and auto debt pay down (paying down debt can be thought of as savings as well as it will save you huge amounts of interest). The app isn’t free, it costs $6 a month. But since I made the decision to stop buying lunch every day as I discussed in my last budgeting post, I had room in my budget.

You can also go the old school route of having a budget planner. I used a planner as well before finding the app. Actually, even with the app, I still utilized my planner. The one I used was from Amazon. It came with stickers and everything. It really made my budgeting feel like an ongoing project. And the app kept me honest. So I think having both really helped me stay on track.

2.// Tackle Your Debt

So here is how I tackled debt. Once you have collected and listed out all of your remaining debt outside of things classified as survival expenses, you need to look into the interest rate that you are paying on each debt item. You need to split it into two categories. The first category being low-interest debt and the second category being high interest-debt. I would say high interest is anything over 7%. So depending on your credit score at the time of obtaining the debt, it could be some student loans and practically all credit card debt. The first thing you need to do is to get rid of all of your high-interest debt.

Good Credit Plan

If you have good credit, the way to do this is by obtaining a personal loan at a lower interest rate and using the proceeds from this loan to pay off all of the high-interest debt. If your credit is good, the rate on a personal loan will be lower than most credit card rates out there. The important thing to remember here is that you MUST NOT use the credit cards again for non-survival expenses.

You can still take advantage of the rewards offered by credit cards but only by using the cards to pay survival expenses. You must pay off the full balance before the monthly due date. In this way, you will not be charged any interest. Paying off the full balance every month is paramount or the consolidation of the debt using a personal loan will be for nothing.

A personal loan to consolidate your high-interest debt will reduce your monthly payment. But only if you do not use that credit card again. So when I consolidated my high-interest debt, I just routed my survival cost to a credit card. These costs are part of my baseline budget so I paid off my credit card 5 days prior to the due date. This way I was still able to access the perks of having the credit card and the benefit of showing positive payment history and I reduced my monthly debt burden.

Bad Credit Plan

If you do not have the credit to take out a personal loan to reduce your monthly debt burden, a behavior change is needed. I would still suggest to route all of your survival costs, when possible, through your credit card and pay it off in full every month. But I would also pay down existing credit card debt as quickly as possible. This means making more than the minimum payment every single month. It takes a lot to plan because depending on the size of your debt this will eat up most of your disposable income. However, the money you are losing each month by having large amounts of credit card debt hurts you more financially than not being able to make discretionary purchases for a few months.

Erin Condren Budget Bundle – $39.00
from: Erin Condren

SET UP NO BUYS

I help myself do this by setting up monthly “no buys”. When going over my budget at the start of the year, I set up months where I will not buy anything that is not related to a survival expense. In the “no buy” months, I use ALL of my remaining funds for the month to pay down debt. Now when I was first paying down my debt, I set up 8 no-buy months. My buy months were November and December for the holidays and the months of my daughter and husband’s birthdays. But I also had a strict budget for the “buy” months that I made sure I did not go over.

This may sound aggressive, but it will help you to lighten your debt load in just one year and it will also greatly improve your credit score. After doing this for one year, I was able to get a personal loan to consolidate my high-interest debt.

Now there are a few tools I used to help me with my budgeting. I wanted to treat budgeting as a project. I knew that I would need to visually see my progress every month. This is where the Empower app really helped. It really cut down my habit of impulse buying and made me second and third guess every single purchase I wanted to make.

Now when it came to my personal loan, I shopped around for rates. I would suggest doing this in a very short window of time. So before shopping for rates, have all of your requirements ready. Your requirements are your desired interest rate and your desired monthly payment. Having these two items help to determine the length of the loan you are willing to take. I used Loanmart to shop around for loans, but there are many options out there.

Know Your Debt Interest Rates

You are looking for a loan with a lower annual rate than your high-interest debt. You should look for a loan rate that will lower your minimum monthly payment by at least $100 per month. This will be a yearly savings of $1,200.

Let’s walk through an example to help you visualize how this works. Let’s say you have $20,000 in high-interest debt in the form of credit cards. Your minimum payment is probably around $400 per month.

High Interest Debt: $20,000
Rate: 20%
Min Payment: $400

If you only make the minimum payment each month, you will be paying this off for over 30 years and the amount you will pay the credit card company is over $90,000!

If you get a personal loan for $20,000 at 10% for 10 years, your monthly payment is approximately $265. A personal loan at this rate is not too hard to get having mid-range credit, which you hopefully have after working on your debt for a year. Your total payments for this loan are $63,600. This is a total saving of over $26,000 ($90,000 – 63,600) and a monthly payment savings of  $135.

Now you can either use these monthly savings to add to your disposable income for shopping or eating out, or you can use it to pay down your new personal loan by keeping your budget the same. So instead of paying $265 per month, you continue to pay $400 per month. Doing this will allow you to pay off your loan almost 5 years earlier and save you almost $16,000 in total payments over time.

If you are really aggressive with your budget, you can reduce the time you are in debt by about 25 years and save over $40,000! You don’t NEED to be this aggressive. You make the changes appropriate to you and your needs. But if you utilize the strategy of repairing your credit for a year and then consolidating your high-interest debt with a personal loan, you will DEFINITELY reduce the amount of time you are in debt and your monthly debt payments. You control the scale of the improvement.