Putting down the shovel

This article may not apply to “you,” but I guarantee that it applies to many of the people you interact with daily.

A quick internet search shows that the median level of savings in the U.S. is $1,200, and I have a feeling that this figure is not “net of credit card debt.” I think we can all agree that if you want to be financially secure, the bar is quite a bit higher.

There is no way to offer a course in personal finance in 600 words or less, nor am I qualified to do so, but I can offer a place to start: the concept of compound interest. For most people getting into debt or getting back on solid ground rarely happens all at once. It takes time and the cumulative impact of a lot of small decisions which, when compounded, results in a fundamental change, one way or the other. It is the truth behind “the rich get richer, and the poor get poorer.” But you don't have to start off rich to become financially secure. There are lots of people in nearly identical life situations where one lives comfortably, and one is persistently struggling. The key difference, often, is their spending and saving habits, and change starts by addressing this issue.

I would consider getting to $1,200 without the credit card debt as level financial ground and, if that math is negative, you are in a hole. I would also add that to reach a basic level of financial security — you should have at least $10,000 in an interest-bearing account you have no intention of spending.

Credit cards and why $10,000 … compound interest works both ways. Credit cards are financial vampires, if you have the balance out over two months you are paying interest on your interest charges, and it will drain your financial resources at an increasingly alarming rate. Of course, other debts matter but you must start somewhere. The $10,000 in savings is an arbitrary amount, but it represents about 3 months of expenses or two big hits. If you own a home, are self-employed or have children, that $5K can disappear very quickly so $10K lets you absorb a hit and rebuild without feeling like disaster is one envelope away.

Now the how: There are lots of books on personal finance and home economics and I would encourage everyone to find and read one or more of them. They will help, but at its most basic:

1. You can't change the past.

2. It will take time and it won't be easy.

3. Make a budget to save, not an excuse to spend: Take a hard look at your take home and adjust your spending to a level at least 15% below it. Most people spend more of their “discretionary income” in small purchases than they do on large ones so pay attention to the pennies and the dollars will follow.

4. Pay yourself first: Find a number that works for you, ideally less than 10% of your take home or more, and set it aside, before you buy anything, and pay that EXTRA on your credit cards. Once those are paid off, pay off other debts and then put that money in savings.

At first, putting down the shovel is going to hurt, but it will get easier. One trick to help keep you on track: multiply every spending/saving habit you have by a year. $5 a weekday for coffee is $1,250 a year, lunch at around $15 is $4K… Door Dash, dinners out, impulse buys add up FAST!