Chief Financial Officer at Grand Island Express
Accounting Update: Personal Finances
As a business, our job is to manage company finances, to make sure we spend wisely, negotiate pricing, plan for cash flow, save for future capital and equipment needs. It’s imperative we do all these things and we take the responsibility very seriously. What about personal finances?
Are you on a budget? If you’re like me, I dread the thought of a budget. I don’t want to spend time tracking each purchase or having to look at the harsh reality of overspending. Instead I wonder how on earth I spent so much at the end of every month and wonder why there isn’t more left? I can speak from personal experience, when you follow a budget and track spending; you have more left and you feel better. It’s like dieting and exercise, it’s tough, but long-term discipline pays off.
38.1% of all households carry some sort of credit card debt. The average for balance carrying households is $16,048. On average, an American between the ages of 18 and 65 has $4,717 of credit card debt. According to CreditCards.com, the average credit card’s interest rate is 15%. At the minimum payment of $189, it would take 10 years and a month to pay off that $4,717. The total payments would amount to $22,869. That kind of math should motivate everyone to work to pay off credit card debt!
So, what if you’re in that category of many Americans and don’t know what to do with all that debt? Financial advisor Dave Ramsey recommends the Snowball method. Before starting the Snowball method, he wants everyone to create a $1,000 emergency fund. Sound impossible? Use small budget ideas – eat out one less time a week, cancel cable for a few months, you get the idea. Once you are current on all your bills and have $1,000 saved in a starter emergency fund, begin the debt snowball method.
Snowball Method – List all your debts (except the house) from smallest to largest. Start paying off the smallest debt first. Use any extra money to make extra payments toward the smallest debt until it’s eliminated. Once paid off, take what you were paying on that and any extra and apply it to the next smallest debt. This method helps you stay motivated while paying off your debt by starting with the smallest debt and working your way up to the largest. But wait, doesn’t it make sense mathematically to pay on the debt with the highest interest rate first? Wouldn’t that save you the most money? Maybe, but if you begin with the biggest one, you might think you’re not making fast enough progress, lose steam, and quit before you even get close to finishing. It’s important to pay your debts in a way that keeps you motivated until you’ve wiped them all out. Those quick wins will pump you up! Once you’ve wiped out debt, you can work on growing a bigger emergency fund (three-six months) and then investing for retirement or paying off a home.
Budgeting and Spending Less – Here are a few tips.
1. Articulate your goals – know what your reward is once you accomplished a goal, so you have something to work for.
2. Create a spending plan. Most people spend about two-thirds of their income on three essentials: food, housing and transportation; in addition to debt payments, savings, household costs, and optional items like entertainment. Create an annual budget by allocating spending goals for each category.
3. Resist retailer advertisements. Stores are in the business of getting us to spend money. If we know their tricks (reward cards, flash sales, BOGO), we can better resist the temptation.
4. Track your spending. Keeping track of every expenditure over a month can offer insight into unnecessary wastes.
5. Negotiate prices. Prices are often a lot more negotiable than we think, even in big-box department stores. If you’ve seen a lower price listed elsewhere, don’t hesitate to ask the store clerk if he can match it. The worst-case scenario is getting a “no.”
6. Research “big ticket” items online before visiting the store. Go to product review sites, coupon code sites, and know if you are getting a good price or if an item can be found cheaper elsewhere.
One last idea I’ve had friends have great success with is the Envelope System. It requires discipline and a change of lifestyle, but it works and has enabled many friends to become debt free.
The Envelope System – What’s the envelope system? Put together a labeled envelope for each spending category (entertainment, groceries, eating out, clothing, rent, etc.). Include an envelope for savings or debt elimination. Put a set amount of money from every paycheck in each envelope. Try to be as realistic as possible. Do not spend any more in that category than what is in the envelope. When the eating out or entertainment envelope is empty for the week, you’re done until can you refill the envelope with a portion of your next paycheck. This method is meant to force spending limits and to limit spending to only what you’ve earned, leaving you with something in the most important envelopes – debt elimination and savings.
Hopefully, these ideas can trigger a little Spring Cleaning in our personal finances. Speaking of Spring, I can’t wait for more sunshine. We’ve gotten a few teaser days and I can’t wait for more permanency.
Chief Financial Officer
Grand Island Express