According to financial expert Scott Galloway, getting into the habit of saving $100 each month is one of the healthiest ways to become financially responsible. By adopting this habit, you’re paying yourself first, and if you invest that $100 in a high yield savings account, the power of compound interest will boost your returns. “If you get used to saving just $100 a month…you’re immediately in the top 10% of most financially responsible people in America,” Galloway said. “Most people can’t do that.”
I’ve actually been following this principle for 15 years now, without any prior knowledge of Scott Galloway’s advice. By setting aside $150 per month, every single month, in a high yield savings vehicle, I was able to create my emergency fund. I started this habit when I was still paying off credit card debt, reasoning that $150 per month would be relatively painless, and once the credit card debt was completely eradicated, it was even easier to set that money aside. Now I have a nice safety net.
Trust me when I say that this method of building wealth works.
I’m sure that the title of this blog post will irk some people, and that’s actually part of the point. Unless you use credit cards only to make large purchases which you will pay in full when you receive the credit card bill, you are playing with fire. Using unsecured credit and carrying balances are sure signs that you cannot afford the items you are buying. I know these are strong words, but credit card debt remains one of the most insidious and dangerous types of debt to carry.
Here are some key reasons why it is so difficult to pay off credit card balances:
You don’t prepare to pay the balance each month, so the amount continues to grow until it becomes unmanageable.
Interest rates change over time, and if you miss a payment, make a late payment, or go over limit, your interest rate will syrocket, digging the debt hole even deeper.
You don’t have enough wiggle room in your budget to make more than the minimum payment each month, so the interest charges often exceed the minimum payment amount, and you slide even more into debt.
As someone who had struggled with credit card debt twice in my life, I know firsthand how much of a challenge it is to surmount such obstacles and get out of debt, but I also know that IT CAN BE DONE. The first time I racked up credit card debt ($30,000 in my 20’s), I eventually managed to pay it all off, then 20 years later, I found myself saddled with $40,000 of credit card debt. Once that was paid off in its entirety, I completely changed my attitude towards credit cards and with money in general, and have spent over a decade with zero credit card debt. I absolutely refuse to go down that road ever again.
If you need to pick up a side gig to make some extra money to pay extra over the minimum monthly payments, then definitely do it. You can either tackle the smallest balance first and work up, or tackle the balance with the highest APR and work down, until everything is paid off. When starting out, just focus on paying extra on the first card, and pay the minimum on the other cards. Once the first card is paid off, employ the “snowball effect” and apply the extra dollar amount you were paying towards the first card to the next card. Continue this strategy until you pay everything off. I have done this, and it absolutely works.
Another thing to consider is to sell items in your home that you don’t need, and apply those funds towards your credit card bills. Once your credit card debt is paid off, keep the card accounts open to ensure that your credit is not damaged by closing accounts. However, cut up the cards, and do NOT use the accounts at all. What I did for the first year after paying off my credit card debt was to use a debit card to keep my spending in check, since the funds were coming directly from my checking account.
Having been completely free of credit card debt and a car note for close to ten years, I feel incredibly liberated and financially healthy. Trust me when I say that paying off your credit cards, and never jumping back into the pool of credit card debt, is the most wonderful feeling ever.
I stumbled upon sobering news from the Bankrate Emergency Savings Report, which reported that only 44% of Americans would be able to cover a $1,000 emergency if it arose. The remaining group of Americans would do the following (according to the December 2023 Bankrate report):
“35% would borrow money, including 21% who would finance with a credit card and pay it off over time, 10% who would borrow from family or friends and 4% who would take out a personal loan.”
It turns out that over 20% of Americans have no emergency savings set aside, leaving them completely unprepared should they experience a significant financial loss such as termination of employment. Another staggering report from Bankrate is that more than one-third of Americans have more credit card debt than emergency savings. Granted, more than half of the U.S. population according to the poll has more emergency savings than credit card debt, but the mere fact that such a large portion of Americans is saddled with significant credit card debt is sobering.
If you are someone who either has no emergency savings, or an insufficient amount to cover at least 3 months of regular expenses, it would be a good idea to focus on putting even a small amount of money into a high yield savings account in order to build up your emergency fund. It’s a good idea to get into the habit of depositing money into an emergency fund at least once a month, especially if you automate it. This way, you are protecting yourself by fattening up your emergency fund on a regular basis. Make sure to steer clear of traditional bank savings accounts, since the average yield on such accounts is 0.59 percent APY.
*Note: This is an updated version of an article which I had posted back in September of 2020, entitled Do Your Finances Need A Tune-Up?
Now that restrictions are lifting after the COVID pandemic and lockdown from 2020, we are now in an especially critical situation due to the financial beating and recession which has negatively impacted the majority of the population. Whether you are someone who already had emergency funds and retirement savings in place before the pandemic hit, or you are hoping to finally start setting aside those funds for the future, it is important for you to review your financial health on a regular basis and to find ways to protect yourself so that you are prepared for any potential financial emergency. What if you don’t know where to start? The most important principles to follow in the quest for financial health include paying down debt, establishing an emergency fund, finding other means to generate income, and continuing to contribute to retirement accounts. Another vital component in good financial health is establishing a budget and really examining your spending habits. Almost invariably, people find out after they create a budget that they are spending money needlessly on frills that they don’t need. By eliminating those hidden money drains, it becomes easier to cover living expenses, thus reducing some of the stress involved in getting by financially.
I have had a budget in place for over 30 years, and I have seen the power it wields. By following a budget, I was able to pay down all credit card debt, pay off a car, establish an emergency fund, and put money aside for retirement, so I know it can all be done. I have lived without credit card debt or a car note for almost a decade now, and I will never fall back into the debt trap ever again. I am also acutely aware of my budget at all times, and I review it on an almost weekly basis to make sure I am on track. The emergency financial cushions which I have established give me peace of mind, because I have successfully created and maintained my own safety nets. By no means am I wealthy, but I know that I am not in any precarious financial waters either.
Source: pigly.com
If you need help in establishing a budget, you can use a budget calculator. I found a wonderful budget calculator on Pigly.com which is very easy to use, and extremely thorough. It helps you break down all expenses, from the essentials to debts and savings so you can target all your goals and ensure that your income is allocated optimally. All you have to do is plug in your income, and the calculator will automatically generate a low end and high end for all the categories. So even if you have never established a budget before, you can set one up instantly.
When budgeting, don’t be afraid to contribute to your retirement accounts right now, as long as you have your debts paid down and you have an emergency fund in place. I am a big proponent of Dave Ramsey’s investing philosophy, and I am grateful that I educated myself on financial wellness and dug myself out of what once seemed like a desperate situation. It was only after I had paid off all of my credit cards and established an emergency fund back in 2013 that I began aggressively started putting money aside for retirement.
Source: 123rf.com Image ID : 129764462 Copyright : Romolo Tavani
The fact is, we are living in uncertain times, and need to be prepared for whatever hits. By buttressing our financial health, getting creative with income streams, and following a budget, we will be better equipped to survive the ebb and flow of the current economy.
Not too long ago, I went shopping at a retail home goods store with a good friend. When we approached the checkstand, my friend experienced a bit of sticker shock, because she kept adding things to her cart and hadn’t kept track of how much she was spending. When I suggested that she might want to review what she had in her cart and perhaps pare down, she responded with, “Well, it will somehow work out. I still have some room on my credit card.” We kept chatting as the sales clerk rang up my friend’s items, and she continued with, “I never know how much I have in my checking account, and I don’t keep a budget, so I always hope and pray that I make it each month.” By this time I was cringing at what my friend was saying, and I also became very concerned for her financial health.
If you are like my friend and choose to throw caution to the wind by refusing to follow a structured budget, you have signed up for a rocky financial future. You may argue that you have the same fixed expenses each month, such as mortgage/rent, cell phone, and your car payment, and that you somehow always know approximately how much you spend on groceries and fuel for your car, but if I challenged you and asked you to itemize those expenses, I would bet that there is some overspending occurring. If you are also forgetting about discretionary expenses like a regular Starbuck’s habit, or even worse, you are neglecting retirement savings or contributions to an emergency fund, then you are skating on very thin ice indeed.
You might be thinking, “But I don’t know how to make a budget!” The whole idea of sitting down and creating a budget may sound daunting, but all it entails is writing down all of your income sources for each month, then creating a separate list of all of your monthly expenses. Once you have the basic framework of your regular expenses, you can add in your occasional expenses, such as personal care items (haircuts, etc.), auto insurance, upcoming vacations, etc. so that you are aware of the need to cover them. If you really dig deep, you will probably encounter hidden expenditures you weren’t completely aware of, such as streaming movie rentals, outdoor dining, or even online subscriptions which you might have forgotten about.
Once you have determined how much money is coming in each month, and how much money must be spent on fixed and variable expenses, you can see which expenses are unnecessary or frivolous, and you can also determine what other financial goals for which you can earmark part of your income. Examples of good financial goals are the following:
Paying off credit card debt (make sure that you add your monthly payments into your monthly budget!)
Vacation plans
Retirement planning
Adding to an emergency fund
Once your budget is completed, make sure to refer to it at least once a month, and as you reach certain financial goals (especially paying off credit card debt), you can make adjustments to your budget. Funds which were previously being funneled in one direction can be redirected to another goal, such as cushioning your retirement accounts or emergency fund. I can’t stress enough how important it is to focus on eliminating any credit card debt, because nothing erodes financial security more than this type of debt. Think about it: if you are paying 19.9% APR on a credit card balance of $2,000, that means that the credit card company is making an extra $400 in a year (this is a very rough estimate, since you would be making payments each month on that original balance). The other problem is that most people will add to a credit card balance, which pushes you into deeper debt. With credit card debt, it’s like taking one step forward and two steps back, so if you have credit card debt, HELOC’s, or another high interest debt, your primary focus should always be on aggressively paying those balances down. Once you are free from credit card debt, I strongly recommend that you curtail usage of any credit cards and use cash or a debit card instead.
When you stick to your budget, you may be surprised by how much it will improve your financial picture. A budget establishes a framework which enables you to move towards financial goals you might never have thought you could ever reach. Another great thing about an effective budget is that it doesn’t have to be static, so as your goals change and you reach certain markers, you can make adjustments to further fortify your financial position.
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