Saving In The Southwest

Last week, we broke down how to categorize your finances. This week, we will discuss three areas:

1. Explain why 50-30-20 is important as a financial formula, and why it works

2. Show you where you are in each category

3. Discuss THINKING TRAPS- the stumbling block of success, or BALANCE!

If you have formulated where you are as a picture financially, one thought that may be crossing your mind is “Why this formula? Why is this idea any better than any other plan to get me out of debt?”

Well, it’s pretty simple. I started this series telling you, I personally got myself out of 50,000 worth of debt. It wasn’t magic, I didn’t hit the lotto, no one helped me out- I just did it. I didn’t do it quickly, and it was hard. Fixing your money thinking is like changing your diet- you tend to be more comfortable backsliding!

Why specifically 50% on your NEEDS category?

1. Anybody can live on Ramon Noodles for a week. You can’t live on it for your entire life- you would die from malnutrition- literally. You can go without water, unhealthy choice- but it can be done, for a limited amount of time. You can go without sleep for a limited amount of time- you can’t do it for a lifetime {Unless you expect your lifetime to be very short!} The same applies to your finances- you need to look at them just as seriously as you do eating, drinking, living. Think about what financial stress, or any stress, does to your body- even if you COULD live that way for a long time- why would you WANT to? We don’t- we just don’t know how to formulate a plan that includes really LOOKING at where we are! 50% of your income on absolute necessities is something everyone can manage as a goal. It leaves Fun Money and Savings money.

2. It’s actually a safety plan for your everyday living. What if you got fired? What if you got laid off? What if, God forbid, you lost your spouse and main source of income? What would you do right this minute, looking at your finances? In this economy, it is absolutely possible to have your financial situation turned completely upside down in less than a day. Did you know that receiving an unemployment check is meant to cover your absolute essentials? Look at your 50% goal for your income. It is entirely likely that unemployment could take care of your NEEDS should you lose your job if your finances were in balance. Most disability checks from an accident do the same. If you are at 50% and your spouse loses their job, half of your income being lost you can usually survive with cutbacks. 50% NEEDS also allows you breathing room- which is worth so much more than the price of gold these days! It puts YOU in control.

3. Last but not least, previous generations {as we talked about in the very first part of this series} lived and survived well on exactly this formula- half for needs, half for other things. In that era they put money away routinely, which was the norm. Everything cost less, rates were lower-the list goes on.

Why 30% for Wants?

You DESERVE to have some fun in life, and relax and enjoy that money spent while taking care of bills and having money in the savings! Isn’t that what most of us want? Remember- this series is not about leaving everything and becoming self employed, becoming a millionaire, and living the dream life. This is about getting yourself OUT OF DEBT! This is about finding balance. You can’t even begin to get to the point where you can live a huge dream life until you learn to manage your finances to start with! You must have a budget that gives you a strong mental picture of what you need to work towards. So, half your money for bills, half of the rest for….What? Well, if we were to say put the other half in savings and have no fun, how long would that last? It would be like one of those fad diets that last about a month if you’re lucky. You must start with a budgeted amount of WANTS money, put a top cap on it, and stick to it NO MATTER WHAT. That doesn't mean borrow from your needs category. If you can give up money for a NEED- it better go to another need or into savings! Additionally, your WANTS money should not ever compete with your NEEDS money. There should be enough for both, with always the plan to cut first your WANTS money if something happens and your income situation becomes dire. You pay your NEEDS first, your wants after that –no exceptions. You would be totally surprised at how much less stressful it is to spend your 30% stress and worry free. It becomes enjoyable to give yourself permission!

20% Savings-- Really!?

Yeah, so now we are at the part that people generally LAUGH at! 20% for savings! How is that even feasible in my situation, you ask?

Savings is at the end of your formula so you know how to find the money and what amount to aim for. With 50% for NEEDS, 30% for WANTS, it just happens that the remaining 20% goes into savings. I was SO skeptical of this when I first heard it from a gentleman that lived by the 20% rule. I thought it impossible, but I can personally tell you it is NOT. This happens when you get to 50% and to 30%. Just so it is clear, the 20% is something you do not start out with. You will start with where you are, then work towards 50-30.

When you get to 50-30, the 20 just happens- it truly does. Why 20% into your savings? You need to let go of financial stress, especially for emergency or unexpected things happening. Imagine right now, today, something happening- perhaps you are living it. Car breaking down, plumbing, etc.- and you have money readily available to just take care of it, with no whipping out the credit card to do it! 20% is also an amount that you can gain a build up fast- it’s feasible. In this category it also allows for loan repayment, such as payments above your bottom line on bills. You are saving for your future by doing this. Savings is not only for your FUTURE- it’s also for you’re here and now. Many, many people do not look at savings as a way to live comfortably now- but you need it for your peace of mind. You need a savings so you can grow older with smaller amounts of stress! You also need it to build finances and habits that last a lifetime. It works!!

The Breakdown

So, you have your own formula, correct? You know where you stand, and now you wonder – how bad am I with my formula exactly? The majority of people that I counsel are in the 80-20-0 range. Let’s break this down.

NEEDS:

Under 35%: A+ and pretty self explanatory- you have a strict budget and you have not let your spending own you!

35-50%: Balance! This is actually where you want to be. It’s the place that your finances will start to work for you.

50-65%- You are headed for trouble. If you are in this category, and your must have continue to climb, you will be in real financial trouble that will take 3-5 years to get out of. Take action NOW to get yourself back under 50%.

65%+- You are headed for a crash. If you are over 80%- especially if credit cards are involved, you will end up in bankruptcy. It’s nearly a guarantee- IF YOU do nothing about it! If you are over 65%- you are probably living paycheck to paycheck, struggling, and you may not even know why. You are cruising along and you are telling yourself that everything will be ok, something will work out. You are headed for a crash and burn. We will talk later about how to cut down on some of te MUST haves to get you balanced. Hang in there – you will learn the tools you NEED!

SAVINGS:

Includes 2 things- Traditional savings plans, then paying off your debt {extra payments}. This is in the savings category because if you have $1000 in savings, you can grab it later. If you pay off $1000 credit card, you save the payment, the interest (Much higher than a savings account interest) and you are protecting your future and the money in your pocket at a later date.

20%: Amazing saver, you are on track!

10-20%, Fairly strong saver. You are on your way

6-10% You are on your way, but you need to get a little more aggressive with your security.

0-5% You don’t have any security. Your back up plan is not paying a bill, or using a credit card. This is going to upset every part of your balanced money formula. You need a plan.

Less than Zero (In the negative) –We haven’t gone into this because the negative area is for people who have a tremendous amount of credit card debt, pay the minimum, but end up owing MORE at the end of one year than when they started. This is a special circumstance- if it applies to you, we need a 1 on 1 session of how to manage this! {You figure up your credit card debt 1 year ago, then now- and subtract the difference. If you owe $1200 more now than a year ago, you take the $1200, divide by 12 months, and add it to your MUST HAVE credit card bill in the NEEDS category}. I can provide more details if applicable.

WANTS

<20%: No fun, all work. You are going to have a heart attack young and not enjoy all you are working for! Okay, maybe that is drastic, but seriously- cut yourself some slack!

20-30%: Balanced!

More than 30%: You are splurging. If well over 40-50%, are out of balance somewhere else. Likely, if you are high on your WANTS category, your money is going out the door and you don’t really know where it is going. Adjusting here is the easiest category to fix!

Last but not least in Part 2- Thinking Traps!

Working on everything sounds great- but if you do not change your thinking, it becomes self defeating.

“I can’t save, I live in California, I am single, I have a lot of kids, my family is too large, I’m old, I’m so young, I don’t understand money.”

Oh, stop that inner voice!!! People from every walk of life have financial balance. You can too- you just have to know how! Recognizing your thinking traps is the most effective, and powerful way to fix your finances. No one grabs your bank and credit cards, or your checkbook, but you. If you are in control, and not your spending, you will succeed.

Identify your negative thinking traps. Remember the times when you just started getting ahead, and something happens? Well- did you think in life everything would be easy without struggle and work? Of course not! Once you start thinking you can not do something, well, you are right- you can’t! Here are the most common of the traps:

1. ALL or NOTHING “I will never stick to a budget. Why bother? I’m not getting anywhere anyhow.” These all add up to one thing- if you can’t be perfect, why try, right? Maybe you look at this formula and thing “Well, that’s not me.” Well, what portion of it COULD be you! Could you bring your 80% debt down to 70% immediately? Could you bring it down lower than that? Could you bring it down within the next 3 months- especially with income tax returns looming, bonuses from work, etc? Could you go without that extra TV a package, or upgraded phone? Nearly everyone can. If you can not be perfect, be BETTER.

2. Money is too Hard- I don’t understand it. Most people don’t want to hear me say this to them, but it’s true: If you are smart enough to make it, you are smart enough to manage it! I have counseled lawyers, bankers, homemakers, dentists, you name it. If you are a stay at home mom, you manage more jobs than most women in America. If you work outside the home, you make a hundred and one decisions a day. Let’s take an honest look- you would rather NOT look at your money because maybe it will all work out….right? Or, you know how to pay your bills and how to get one paycheck to another, but investing is out of your reach? Well, try investing in the most important thing you can invest in- you and your family!!! You have already taken a step to see your financial picture. Now you know where you stand!!! Next step: doing something about it! Find the RELIEF in that!! Knowing how to invest in the stock market is all great if that’s what you want to do, but you can’t get there without financial balance to begin with! If you have stuck with me until this part of the series, you are smart enough to figure this out. You are a genius for taking the step to see your financial picture. That is a fact! I once told a lady- do you go to the checkout line at the grocery and ay “Here’s all my money, I don’t know how much you want but just take it!” Of course not! Do you tell your boss “Pay me whatever. I don’t understand my paycheck anyhow!” Of course not there either. You are so much smarter than that- you are a brilliant, thinking human with the ability to stand up for yourself. Apply it NOW!

3. Finger pointing: “It’s all my husband/girlfriend/boyfriend/parents fault. I didn’t get into this debt.” Maybe all of that is TRUE! Does it help pay the bills? Nah- not so much! The thinking trap here is telling yourself you are not responsible for the debt, and you are giving yourself permission to keep spending when you shouldn’t be. There will ALWAYS be a reason why something effects your finances, but the reality is only YOU can stay focused and manage your money. When I was divorced, I was left with $35,000 that was not mine. I was furious, took bad advice from a lawyer, sued, was awarded a settlement- and to this day have NEVER seen a penny of it. Finger pointing was leading me to bankruptcy, and endangered me keeping my kids. I refused to go that path- there was absolutely NO way!!! Taking myself along this path was unhealthy. Deciding to balance my budget and live strictly by it was the best gift I have ever given myself and my children. How do you get past it? Well, I told my two babies they must get a job, I used the exes jeep payment to scoop dog poop out of the yard, I burned his credit card bills, and drew pictures of him with a dress on. When I was done with all that nonsense, I let it go, opened the next set of bills, and dealt with it. I accepted it was hurting ME, and put it in its place. I then went and got a second job, worked my tail off, and worked SLOWLY at fixing that crazy financial situation.

4. Waiting for the Lottery. Really? You know where this one is going. You have a 1 in about 8 million chance of becoming a lottery winner. Here are the thinking errors: Your income is going up, so you will catch up someday. Inflation will not let you if you are over 65%- promise. You’re young, it’s all good. Well, we were all young once, and the debt doesn’t go away – it accumulates! You don’t need retirement, it’s like, 70 years away! By the time you get to be 50 and want to start saving for retirement, it’s going to be a lean future! Deep down, you probably know these are not true. It’s another way of thinking about it later- like overall finances have been addressed. It’s not working- time for something ELSE!

5. Last but not least- Counting PENNIES. You can’t get into financial balance by counting pennies. You have to count your DOLLARS. That $5 rebate or 30 cent coupon is not going to fix this. Spending countless hours saving pennies does not work for helping your finances. It’s not to say you should spend away- it means that if you are spending time on pennies, you are wasting valuable time on saving your DOLLARS. Would you rather spend 2 hours saving yourself $5.30, or 2 hours calling the utility company saving yourself $30 a month? That’s the difference between pennies and dollars!

How do you break away from these traps? Keep these things in mind:

1. Identify your thinking trap. Name it, tell it YOU are in control!

2. REMEMBER YOUR GOALS! Write them down so you see them every day.

3. Fight your thinking trap. Point by point, remind yourself why your thinking trap is not going to WIN!

MAKE YOUR COMMITMENT THIS WEEK!!!!

Next week we will cover:

· Make your DOLLARS {not Pennies} work for you

· Goal Setting

· Where to make cuts

· When it’s ok to stay above 50% on your NEEDS

· When to revisit your formula

Saving In The Southwest

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