Unless you have a specific plan for your money, your financial decision-making process is basically set to “Random.” You’ll make some good decisions and some bad ones, and the bad ones will cancel out the good ones. The problem is that at this level, you’re probably not going to have much in your bank account. When a sudden financial difficulty comes out of nowhere, you’re not going to be able to handle it. This will almost certainly put you into debt, which will drag your already feeble finances down even further. Once you’re in debt, it’s the easiest thing in the world to get into more debt. As you can see, living without a strong financial plan is like treading water…its not something you can do forever.
This isn’t a made-up scenario. The Federal Reserve does a lot of research polling real Americans’ financial situations. Their most recent report has one stat in particular that stood out to me: 47% of respondents said they couldn’t handle a sudden $400 expense without borrowing from friends, selling something they owned, or getting a payday loan. Among those 53% of respondents who said they could handle a sudden expense like this, many of these would only be able to do so by taking on credit card debt. The number of people who actually have $400 in a bank account is surprisingly small….like scary small.
I’m not one to ascribe moral weight to money troubles. Debt happens. Most people aren’t raised with financial education or even good examples of money management. So assuming that most people start out this way, how do we get people to start breaking the cycle of debt and get them on the road to real saving and wealth creation?
I don’t have a one-size-fits-all recommendation for this, but I do have a few practical suggestions. As always, I recommend that people get involved in each other’s lives. If you’ve managed to get yourself out of debt and educate yourself enough to start building wealth, share these things with people you know. Get involved with your neighbors. Make financial education a community resource. That said, here’s the practical stuff:
- Budget Keeping. This one’s painful and boring...at first. But there’s just no other way to get a firm handle on what money you have and where it’s going. Most of the budget-less spend hundreds of dollars more than they realize each month. So if you’re barely making ends meet, keep a log of every penny you spend for a month. Then, figure out where you can save, and start paying predictable, disciplined amounts according to categories like ‘groceries', ‘housing’, ‘utilities’. If you have debt, push specific monthly amounts toward canceling it. Practice this for the rest of your life. This fixes the leaks in your financial boat and gives you the security to make other important decisions.
- Save and Invest Meaningfully. It’s important to have a stockpile of liquid assets sitting in a bank account (for sudden emergencies like the $400 in our example), often called an emergency fund. Once you’ve got that, you’re going to want to put your money in places where it’s going to grow a lot faster. This is the heart of investment. Services like Betterment and Motif make it a lot easier to start investing if you’ve never done it before. Also, buy a home if you are able. This is one of the fundamental tools of wealth creation, due to the money wealth you develop in the form of equity.
- Have a Good Relationship With Credit. If you have no credit history, you should get a good credit card and pay it off every month. If you have a bad credit history, you can fix it. Start by getting the balance of each card beneath 30% of the credit limit. If you have lots of credit cards, cancel all and buy five or so...always leaving your oldest account open. Dispute or pay off negative marks found on your credit score, don’t let utilities and other bills go unpaid, and you should start seeing your credit score rise a lot! This will enable you to get better interest rates on important things you buy, decreases the duration of debts you take on, and may even allow you to make more money at your job! Many people have no knowledge of the state of their credit. Get involved with your credit and take control!
If you can pull off these three things, you’ll be among the 25% or so of Americans who could pay off a $400 emergency with cash. From here, you’ll be able to build real wealth and a better life for yourself. It’s not easy, but it’s not that hard either. Good luck!
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