Follow Us on Twitter

Sunday, May 1, 2011

Getting Out of Your Financial Hole

Below is a reprint of an article that we wrote for a local Denver newspaper. Even though the article is now two years old, it seems that things have not changed much when it comes to the economy and the financial outlook of many Americans. Enjoy!

-- You know when Prada has to reorganize their debt that times are tough. Not even The Devil would recognize them. The financial crisis of 2008 and 2009 has hit the wallets of everyone if the rich are not buying their Prada! Where does this leave the rest of us?
Many reaped the benefits of the sizzling economy from ’04 to ’07, from home values to stock market appreciation. Problem is that not everyone was the beneficiary of that economy. Many pay checks were not going up 5% to 10% a year, but our spending habits sure did. 
Now that this ugly step sister of an economy has slapped reality across our face like Alexis Carrington, how do we get straight . . . er, get our finances in order?  It’s time to assess our financial picture.  Boring!  It’s much more fun to spend like Paris Hilton, but we don’t want to be as empty as Paris. 
The following three steps will get us started on that Yellow Brick Road to financial freedom:
1.       Know what we make
2.       Know what and where to spend
3.       Have a plan to get out of debt
Step 1: One fallacy many of us believe is that if we make $40k a year, we can spend $40k a year.  Wrong!  Remember taxes, health insurance, our retirement savings, and we better have one, as Social Security as we know it won’t be around too much longer!  Many items are deducted from our pay even before we receive it, so the easiest way to determine how much we can afford to spend is to look at our pay stub; specifically our net pay.  If we are paid weekly, take that net pay and multiply it by 52, then divide it by 12. If we are paid twice a month, simply multiply the net pay by 2.  That’s how much we can spend on a monthly basis. Here are a few examples:
                Take home $875 every two weeks = $875 x 26 / 12 = $ 1895 per month
Take home $1700 twice a month = $1700 x 2 = $3400 per month
Step2: Now that we have this total, what do we do with it?  We spend it all, of course, and often even more by using our credit cards and going further down the rabbit hole as a result. It’s time to learn how to consciously spend. Our first focus should be on essentials or things we can’t live without; mortgage/rent, insurance, groceries and clothes within reason.  If we have anything left over, yeah us!
What happens if we are in the red? We are spending too much and it’s time to make some adjustments. The fact is that most of us really don’t know where our money goes. It’s time to dump our unconscious spending habits. Part B of the second step, which is a good thing to do even if we are in the black, is to come up with a strategy for our spending. Here’s where we learn the difference between a need and a want. No matter who we are, we can cut back a bit on our wants. Our suggestion is to use our take home pay as a spring board. Subtract 10% and then use the other 90% for our expenses.
Step 3: Plan, plan, plan! This is the essential step to paying off our debt. If we begin every pay cycle with a plan, then we will surely get out of debt. Here’s where the 10% we subtracted above comes into play. It’s time to put it to work by paying off our credit cards. Turn that 10% or more if possible, into a regular expense. Just like the rent check, this payment must go out! Actually it’s best to set this up as a direct deposit or automatic bill pay from our bank. Establish the check to be sent on each pay day so we won’t forget or put off our payment.  The final and most crucial part of the plan is to cut up our credit cards and trash them. To not do so is like putting make-up on in a blue bathroom. You never look any better. 
Getting out of debt is as easy as 1,2,3 if you follow the simple steps outlined above. Take a little time and create a plan, get out of the red and you too will see that debt-free is the new black! "

No comments:

Post a Comment