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As sure as an empty whiskey bottle brings on the dread of a long night, so does a high interest rate on your credit card hint at some possible financial reckoning. And for that reason alone I love credit cards. That high interest rate does not lie. It says you have a financial problem.
It is one of the things I look for when taking on a new client. Few other things tell me more about the state of their financial affairs.
The reason for a financial crisis is often more difficult to diagnose than it is to identify, and often it is a challenge to reverse. Most folks experience that easy slide down the consumption slope. I call it that, as we are now a culture that exists on 100% consumption: from the bread we eat, the mortgage payment that goes on forever, the car(s) payment that renews itself every five years or so (I won’t even mention the car lease that squeezes the tiny bit of equity you might think you have in a car to where the search for dark matter is a greater possibility), clothes, utilities, so on and so on. And the slide down is easy as the advertising whisper in our ear that all is well and we deserve everything. It will all pay for itself somehow.
We no longer actually provide anything for ourselves other than money. We are totally dependent on others. Every paycheck has a list of creditors to appease, and a waiting list of items that must be purchased. Any new anomaly to that equation and the darkness of financial distress commences. Once inside its grasp it is easy to assume that borrowing and staying power will turn things around. But the slide continues. The odds are strong that once begun, the ride will not stop. How do I know? One, I’ve been there, done that. Two, for forty years I have witnessed the pattern with a litany of folks and circumstances.
First let me say that’s it’s not a good idea to try and dry your clothes when you are swimming as fast as you can to make it to the shore, and a shark is on your tail. So, stability is a mainstay to change. I know, an oxymoron of sorts. What I mean is that you need to have a plan, and part of that plan should include a job with some reasonable chance at its continuing. There are a few other factors but the steady job(s) has the biggest impact. And that’s it. You’re done. Congratulations!
Ok, ok, here’s the easy part. We’ve all heard the expression, “living within our means.” It’s right, and yet it does not tell a story that has any use. Are my means something that a ten dollar bill can take care of? Is it based on some average standard of living? Is it based on 80% of my paycheck, and the other 20% going to savings? And so you can easily conclude, living within your means is one of those expressions that nicely inscribes a concern, without providing any reasonable answer as to its parameters.
This blog would go on for some time should I expound on an entire plan. So, I will move to central methodology that will make that high interest rate credit card go away—funds. Yes, funds. No, not as funds is often used to depict money; rather as it was meant to mean … a holding place for money that is to be used for a prescribed purpose. You need to sit down and create a chart. If you have Excel, then all the better; if not, a notebook will be fine. With thought and a little looking back you will easily trace where all of your money goes: mortgage, car payment, food, clothes, eating out, vacation, credit card, savings, etc, etc..
When you are done you will then go back and mark each one as “set” “variable” “discretionary.” Next, you know when you get paid. Take each paycheck and deposit it into the fund such that there is enough there to meet the obligation when it becomes due. Each and every check will put something into each and every fund on a pro rata basis.
Yes, this will be a challenge at first. This is where you find out if your means can be satisfied by your paycheck. Some things might have to give. Maybe no eating-out for awhile, or maybe a second job, or maybe a bigger change—the house you are in is unaffordable.
The funds will tell you what is possible. It is simple and it works.
Are there other considerations? Yes, but I’ve seen the fund system change lives, take you away from being a slave to bills and the never ending spiral of worrying how to stretch a paycheck.
Is it magic? No, it’s a solution that’s based on logic and common sense. And it works.