Most people don’t make wise financial decisions. They are trying to keep up with the Joneses. They just don’t realize that the Joneses are broke, too. And high income is not wealth. It may enable avid consumerism, but there are millions of high income broke people.
CareerBuilder reported that 78% of Americans live paycheck to paycheck. This means these people probably have no savings. In fact, they also report that 66% — two-thirds! — would have trouble coming up with $1000 for emergency.
Failing to plan is planning to fail. The best and simplest plan is The Total Money Makeover by Dave Ramsey. This financial plan has helped millions of people eliminate debt, save money for rainy days, invest for a dignified retirement, and attain a financial peace.
So what are 3 main struggles?
1. No Budget
So why don’t most people use a budget? I call it “tomorrow is Monday” thinking. I’ll eat that cupcake Sunday, because my diet starts tomorrow. Then one day, there is no tomorrow. Budgeting is simple. Not easy, but simple. And it takes practice to get good.
Going with the flow takes you over a waterfall. If you want to change your direction, you have to aggressively steer your financial ship to start moving in the direction you want to go. It won’t happen if we don’t make it happen.
Make a budget.
That oar is a budget. The best first decision we can make is to create and follow a monthly budget. A budget is nothing more than telling your money where to go instead of wondering where it went. The budget prevents having too much month left at the end of the money.
Automate savings.
Automatic savings should be a part of the monthly budget. Automatic payroll deductions and checkbook transfers to a Roth are the best way to…
Practice forced scarcity.
No matter which personal finance expert you listen to, living on less that you earn is the cornerstone for long-term success in the money game.
Remember the big picture.
Having a cash flow plan enables you to start a structured plan like the 7 Baby Steps found in The Total Money Makeover. I am also a follower of The Money Guy Brian Preston‘s Financial Order of Operations. Probably because I’m a math teacher.
Part of the big picture is knowing your “why.” For many I have coached, it is simply this: They got sick and tired of being sick and tired. The “why” keeps you engaged in the program. Winning with money is a marathon, not a sprint.
Credit cards are not out friend.
Broke people typically use debt to buy things they can’t afford to look (and feel) rich. Over time, some become a slave to debt.
According to creditcards.com, the average credit card APR is now 17.30%. That’s up from 16.14% 3 years ago. Is is important to pay these off as quickly as possible. For many, a credit card is a no-go. Typical credit card debt is just north of $8000, and it is mostly 20-somethings.
If you utilize credit cards, pay the entire balance of monthly. If you can’t do that, cut them up and close the accounts to remove all temptations. Rip off the credit card band-aid, and go cold turkey.
2. Buying Too Much Car/House
The home and automobile are the biggest areas where broke people make bad financial decisions.
Car Tips
In fact, most Americans spend more money on their car payment than they invest in their retirement accounts. That should be the other way around.
Auto loans are a disaster, because cars drop about 30% in value within the first to years. And when people trade a car in that isn’t paid off, they can owe more on the car than it’s worth. So they roll that into the new car loan, and the situation gets worse.
The typical emerging millionaire or millionaire next door buys quality used cars like Toyotas and Hondas, because they don’t lose value as fast, and they are very reliable.
Dave Ramsey says car expenses (payment + insurance + maintenance) should not exceed 10% of our net pay. Remember the 20/4/10 Rule?
- Down payment is 20% (or more)
- Term is 4 years (or less)
- Payment is 10% of net income (or less)
House Tips
Next to the car we drive, the house we live says a lot about our success. There are a few tips listed below. But the worst financial decision is having a payment that is 35% of our net pay. Lending institutions often use a 40% debt to income ratio as a cut-off, and if the house already has you at 35%…
Here are some tips to remember…
- Down Payment is 20% (or more) – this also avoids PMI
- Fixed rate loans only (Dave says 15-year only, but 30-year is most common)
- Payment + Insurance + Taxes is 25% of net income (or less)
- House should be paid off by retirement
Mindless Spending
Broke people nickel and dime themselves to death with numerous small budget items that add up to big numbers by the end of the month
Subscriptions
Think about all the things people can subscribe to. Netflix. Hulu. Peloton. The list goes on. According to the Market Watch, the average monthly amount spent by Americans on subscriptions is $237.
Restaurants
The U.S. Bureau of Labor and Statistics reports that Americans spend $288 a month eating out. Without a written budget, this one is hard to get a handle on. Broke people should not be in restaurants unless they’re working there. Buy groceries. Brown bag lunches and home-cooked meals take effort, but they save lots of money in the budget.
Of course spend money on things that make you happy. Remember money dials? Just make sure the happy things make your budget happy. Cut mercilessly on all the things that aren’t important to you.
Clothing
Clothing is another budget item that can be challenging to track. On average, we Americans spend $156 a month on clothing items.
3. Delayed Gratification
Delayed gratification is absolutely essential to build wealth.
We live in a fast-food, microwave, and insta-fix world. Winning with money is more like a crockpot than a microwave. The earlier you can start, the better. The best time to start a Roth IRA was 30 years ago. The second best time is today. But get started, because time is needed for magic to happen.
That guy or gal on My 600-pound Life didn’t wake up suddenly obese. Their condition was the cumulative effect of repeated bad choices. So they’re not going to lose 400 pounds in a few weeks, and we’re not going to get to Baby Step 7 overnight either.
Stay the course. It’s a long road. Be patient. It can be done.
As Always…
Thanks for reading! I hope this information provides food for thought. Remember that I am not a certified financial planner, a certified public accountant, a licensed real estate agent, etc. My content is for educational purposes. I am a math educator who happens to have a finance degree. Like they say, never take financial advice from a math teacher! (Do they really say that?)
But you should spend less than you earn, invest the difference, and stay out of debt!
I would so appreciate your sharing my content with anyone you feel could benefit. And if you would like a free exploratory conversation or just want to shoot the breeze about personal finances, call me and leave a message or send a text to 570-731-0425.