Archive for November 2010

Fiscal Literacy Friday / Financial Literacy 3 Keys to Debt Free Living

November 19, 2010

Debt is consuming the lives of millions of people.   Debt is what keeps us from pursuing our hopes, goals and dreams for our lives.  Debt robs us of our future.  The only way we can take control of our financial lives and our future is by becoming debt free and never going back into debt.  Debt free living must become your passion and your unrelenting goal.  Debt free living can be a reality for anyone that is willing to commit to the goal.  What if you were debt free?  How would it change your life?  What could you do or pursue if you were debt free?  Here are 3 Steps to help you become debt free.  

 

1.  Cut Expenses – We live in a consumer driven world.  Our spending habits are consuming our future.  We must take control of our spending habits to start moving towards achieving debt free living.  Therefore, the first step towards achieving debt free living is to cut out our unnecessary expenses.  When was the last time you reconciled every dollar you spent for the last 30 days?   When was the last time you looked at every charge on your credit card statement?   I challenge you to track every expense for a minimum of 30 days to see where all the money goes every month.  My family and I just completed this exercise.  I was blown away at how much money we wasting every month.  We were only able to identify these unnecessary expenses by tracking every dollar and keeping every receipt for a minimum of 30 days.  This simple exercise has dramatically impacted our spending habits and has freed up a lot of money.  Therefore, I challenge you to use this exercise to look for ways to reduce your unnecessary expenses and start saving money.

2.  Payoff Debt – Our debt is typically the result of the lifestyle choices we make on a daily basis.  We never stop to realize that with every swipe of the credit card we are consuming our future.  We never stop to think how much the new car, boat or other luxury items we purchase with a personal loan costs us over our lifetime.  Until one day we wake up and realize we have nothing to show for all of our hard work.  This is the reason millions of people are unable to retire and enjoy life the always dreamed of living. Therefore, nothing is more important than paying off your debt and taking control of your financial future.  We must create a plan to systematically eliminate all our debt one debt at a time.  We must commit to stop using our charge cards and only paying cash.  This will require a change in lifestyle and discipline. However, the financial freedom and rewards of debt free living will change your life forever.   It will free you up financially to pursue your hopes, goals and dreams for your life. 

3.  Cash Cushion – It is a lack of personal savings that forces us to use our credit cards or obtain personal loans to pay for the expenses we incur in our lives.   Many of these expenses are unplanned expenses for car repairs, kid’s braces, home repairs, etc.  We also use our credit cards for pay for other large expenses i.e. vacations, holiday shopping, home furnishings, etc.  These large expenses dramatically impact our overall debt, increase the costs of every purchase due to the interest we pay over time and also reduce or eliminate our ability to save money, fund retirement, etc on a monthly basis.  Therefore, we must commit to establishing and funding a cash cushion account or emergency funds account to pay cash for these expenses as opposed to charging the expenses.    

A cash cushion is an emergency fund that is created to cover your living expenses for 3-6 months.  It is also used to cover unforeseen expenses, repairs, etc. that come up in everyday life.  The purpose of a cash cushion is to keep you from incurring expenses on your credit card when emergencies arise.  A cash cushion will also provide you peace of mind that you have 3-6 months living expenses in the bank at any time.   I encourage you today to set up a separate bank account and start funding your cash cushion account

I hope you have benefited from this post on Financial Literacy.  If so, leave a comment.  In addition, please forward this to anyone you think might benefit from this short financial literacy lesson. 

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Fiscal Literacy Friday – Financial Literacy Lessons Principle of the Piggy Bank

November 12, 2010

 How many of you had a piggy bank when you were growing up?  I had one of the classic ceramic piggy banks that you had to break at some point to get out the money.  I always remember how excited I got every time I dropped coins into  the piggy bank through the small slot of top of the piggy bank.   I would pick up the piggy bank to feel the weight of all of the coins and shake it to hear all of my money in the bank.  It was an incredible day when I got to break open my piggy bank and see all  the coins spill out on the table.  My eyes lit up with amazement at all of the money that had accumulated.  I could not wait to take my hard earned money that I had saved and spend it.   It was an incredible feeling to walk into the store with all of my money and pay cash to buy that cool toy I had been dreaming about for months. 

 Now that I am an adult, I have had a change jar for years where I deposit my loose change at the end of every day.   I am still amazed at how fast and how much money accumulates in my modern day piggy bank.   In today’s high tech world, I take my change to the coin counter at the grocery store.   I pour in the coins and watch the total build up until all of my coins are counted.  I am sure you have a change jar or spot where you deposit your change every day.  

 These memories from my childhood got me thinking about The Principles of the Piggy Bank.   What can we learn from our childhood lessons on money that we can apply to our financial lives today?   Here are some key points that can dramatically impact your personal finances.

 Set-up a Piggy Bank Account – The piggy bank works for kids because it is lockable. It cannot be easily accessed.  Therefore, the money is saved and not spent.   It is essential that you set up a savings account that is separate from your normal bank account.   Do not get a debit card / ATM card or any other way to easily access your piggy bank account.  

 How bad do you want it? – Do you remember how obsessed you were over the latest toy as a kid?  That obsession was your motivation to put as many coins as possible into your piggy bank so you could save up the money you needed as fast as possible.  You need to rekindle that same motivation today for saving money, reducing expenses, paying off debt and achieving your financial goals.  Crystal clear goals will inspire you to take action and remain committed to achieving your goals. 

Change (Coins) Happens. –  Everyday we accumulate change from all of our cash purchases.    We typically never think about spending our change because it is too small to spend.  Once we set our change aside we never think about spending it.  We need to apply this principle to our monthly income.  We need to set aside a portion of our monthly income every month in our piggy bank account.  We need to look for ways to save money each and every day so we can take the dollars we save each day and deposit them into our piggy bank account.    The power of small financial changes can dramatically impact our personal finances.

  Time – As kids we did not fill our piggy bank over night.   We worked hard, saved a portion of our allowance, etc. to fill our piggy banks as fast as possible.  We need to understand that it is going to take some time to fill our piggy bank accounts.   The key to remaining committed is the same today as it was when we were kids.   We need to stay focused on the prize or the goal we set for ourselves just like we remained committed and focused on filling our piggy banks as kids.      

 Compound Interest A Grown-Ups Secret Weapon – As kids we saved our coins in a piggy bank.  We never earned one penny of interest.  We had to save every penny.  However, as grown-ups we can set up our piggy bank account using a variety of savings and investment accounts that earn interest.  It is the power compound interest than can dramatically multiply the results of our piggy bank account over time.  I will devote a separate post to explaining and illustrating the compound interest.  It is a simple financial concept that can have a dramatic impact in our lives.   There is a money quote that states “Those who understand interest earn it, and those who don’t understand interest pay it. 

Cash is King –  One of the most important lessons to be learned from the Principle of the Piggy Bank is the discipline of saving and paying cash as opposed to using a credit card or getting a loan.  This single point has the ability to transform your life and your finances if you are willing to commit to only paying cash and living debt free.   Millions of Americans have consumed their futures as a result of their spending habits.  However, it is never too late to take control of our personal finances.  It may be as simple as implementing our childhood lessons we learned from our piggy bank into our adult lives.  It may also be an excellent opportunity to use a piggy bank to teach our children the principles of the piggy bank. Simple lessons that can have a profound impact on our lives.

I hope you have benefited from this post on Financial Literacy.  If so, leave a comment.  In addition, please forward this to anyone you think might benefit from this short financial literacy lesson. 

You can follow Fiscal Literacy on Twitter and Facebook.