“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.” — Will Smith
Seventy percent of Americans live paycheck to paycheck, according to Dave Ramsey, author of the best-selling book Total Money Makeover. Most of us like to think we’re in the “good” 30 percent, but what would happen if you encountered an unexpected financial emergency such as needing a new furnace or having to replace the tires on your car? If you would have to resort to credit cards to take care of this expense, you are living paycheck to paycheck.
Any financial coach will tell you that credit cards should not be used for temporary loans. If you cannot afford to pay your credit card balance each month, then you need to put them away and get on the money makeover train. Exiting denial and realizing that you need a money makeover is the first step to financial independence.
The next step is committing to make changes in your money habits so that you can break your credit card dependence and begin paying down your debt. I will be the first to tell you from personal experience that this is MUCH easier said than done. When I graduated college and moved to Cincinnati, I took the summer off to enjoy life. By the time I started my first “real” job, I had acquired more than $8,000 in credit card debt. As the minimum payments crept higher with interest rates increasing, my budget squeezed tighter and tighter. I knew that I needed to change my ways when I only could afford to eat Ramen noodles for a week while I waited for my next paycheck.
Taking control of your spending and merging onto the road of credit card pay-down is a long process. Much like a diet and exercise plan, it requires discipline and patience to stay the course before you will see real results. Most people fail because they make sudden, drastic changes that are not sustainable over the long haul.
Rather than putting yourself on a tough plan with no wiggle room for error, try to start small. Perhaps the first step is just to increase all your debt payments by $5 each month. The next month try increasing $5 more. I tried this with my debt, and before I knew it I was paying double my minimum payments.
Next, open a savings account and have $25 automatically deposited from each paycheck. Don’t look at this account and try to forget that it is there. In six months you will have saved $300 if you’re paid bi-weekly. You will be surprised at how you won’t miss that extra money if it is never there to spend.
There inevitably will be times when you fall off the wagon and splurge on something you don’t need and can’t afford. It is important not to beat yourself up about these times. Just get back on the ride and be gentle with yourself. And as you come across little windfalls of money like a larger tax refund than expected or a work bonus, commit to putting most of this money (if not all of it) toward paying down debt. You’ve already spent that money, now it’s time to pay it back!
Of course these tips are just the beginning. If you are serious about making a difference in your financial future, I highly recommend Dave Ramsey’s aforementioned book, “Total Money Makeover.” If there is enough interest in going through the exercises with group support, I would be thrilled to form a book club to assist readers with getting on the wagon together. Just e-mail me at kclmoneycoach@gmail.com, and if there are enough people, I’ll make a plan for the New Year to get us all together.
Take that first step today and watch the debt melt away.
A version of this post was published in the Cincy Chic column “Cents & Sensibility” on December 14, 2009.
Spring Cleaning Your Finances
Monday, March 15th, 2010Cleaning up your finances doesn’t have to be a big chore; you can do it while catching up on your DVR one evening. Not only will you put a better system into place to reduce clutter, you will also re-connect with your money and hopefully begin taking control of it.
Start by getting organized. Gather all your documents in front of you — grab your files, empty that basket, pull out your bills and round up your receipts. Next sort them into the following piles:
ï‚Ÿ Receipts, paycheck stubs, bank and credit card statements and monthly bills
ï‚Ÿ Investment statements (401k, brokerage, IRA, etc.)
ï‚Ÿ Tax returns and the documents used to prepare them
ï‚Ÿ Insurance policies, ownership deeds, etc.
ï‚Ÿ Warranties, user manuals and their corresponding receipts
ï‚Ÿ Identification documents
Next, place your identification documents (also called “forever docs”) in a fire-proof safe in your home. This includes birth certificates, passports, marriage license, divorce decree, will, trust, power of attorney, death certificates and other original documents. For all of the other piles, create a folder for each and add new papers as you receive them.
Some folders will then have folders within them. For example, in your folder for monthly bills, you might have a separate folder for electric, cable, credit card statements and so on. If you can, keep these files in a fire- and water-resistant safe. If that is not possible, at least keep them together in a drawer or on a shelf.
Then let the de-cluttering begin. Read on for guidelines on how long to keep what type of documents.
RECEIPTS, PAY STUBS AND MONTHLY ONGOING BILLS
Utility bills: Keep for one year, unless you claim a home office deduction, in which case they become tax documents.
Pay stubs: Keep for one year until you receive your W-2. As long as your last paycheck matches your W-2, you can toss them.
Bank and credit card statements: Keep for two years, as you may need them when applying for a mortgage or other loan.
INVESTMENT STATEMENTS
Keep your monthly or quarterly statements until you receive your annual. If you make any trades, keep the trade confirmation for a purchase as long as you hold the asset and for a sale, for at least three years. If you make any non-deductible contributions to your traditional IRA or convert to a Roth IRA, save the IRS Form 8606 until you withdraw during retirement as proof that you’ve already paid the taxes.
TAX RETURNS AND SUPPORTING DOCS
Keep everything for at least three years. For questions on IRS recordkeeping guidelines, check out IRS Publication 552.
INSURANCE POLICIES, OWNERSHIP DEEDS, ETC.
Keep all as long as the policy is in effect or as long as you own your home or car. Consider placing this file in your fireproof safe as well.
WARRANTIES AND USER MANUALS
Save all active warranties. Toss any that have expired or for items you no longer own. Try to weed this file out on an annual basis. I like to staple the receipt showing proof of purchase to the warranty in case I need it. If you are comfortable using the Web, I recommend tossing user manuals. Manufacturers now have downloadable versions on their Web sites, so you can rid yourself of this clutter.
As far as ATM receipts and other receipts for purchases, you can toss these after you’ve checked them against your bank statement. I keep receipts for clothing until I’ve worn and washed the item and for household items until it has been used at least once, unless it has a warranty.
As you are de-cluttering and tossing unneeded documents, be sure you shred them before putting them in your recycle bin. Even if it is a statement for an account that is closed, you don’t want to tempt identity thieves by offering your name, address and an account number on one page.
Finally, once you have your important papers more organized and up-to-date, make a note to revisit your files on an annual basis to weed out those no longer needed and collect and add any new documents collected.
A version of this post was published in the Cincy Chic column “Cents & Sensibility” on March 15, 2010.
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