One of the biggest questions I hear from clients is about the debt/savings balance. It's a dance along a tightrope for many, especially the self-employed. And though I've lived it and researched it, all the articles I've found have frustrated me in that they either only focus on paying off your debt and saving money by living at home with mom and dad or by only talking about retirement savings for those who can afford it. Unfortunately, for many of us, just moving in with the parents is not a solution. Also, saving for retirement is confusing if you have student loans, credit card debt or are self employed. So, I'm starting a series of articles here for those of you who have these same questions and concerns.
This week, we will start with Step One- Determine your current spend status.
Get a piece of paper or a spreadsheet and start writing down the following, without judgement and as accurately as you can. You might need to pull up some bank statements for this, do a little research. Take your time.
How much do you need for rent/mortgage a month?
How much are utilities- gas, electric, water, internet?
What's your cell phone per month?
Any subscriptions/memberships- Netflix, Hulu, Audible, gyms, clubs, etc
How much is the minimum due on each credit card (we'll worry about interest rates, etc later)
How much is due for each/any loans each month (car loan, consolidation loan, tax installment plans, student loans, etc).
How much do you need for gas for the month? (think about how much you spend right now, assuming no adjustments)
Food- what are you spending every week on average at the grocery store for food, not including alcohol or cigarettes or other items we'll call "entertainment"
Pets- what are you paying each month for pet food, pet meds, etc?
House stuff- what items do you need that are outside of groceries each month- think trash bags, laundry detergent, etc.
Entertainment/fun spend- what are you averaging right now in entertainment- that includes basically anything that is not sitting at home eating your groceries, such as restaurants, bars, buying alcohol or cigarettes or vapes or whatever it is. I'd categorize those too so you have a good feel for what each item is costing you.
Taxes- if you are self-employed this number HAS to be included in your monthly list, not a yearly list. What do you need to be paying out monthly?
Now total all that up. Compare it to your current monthly income. Where are you landing? Is there something still left over? If not, we have get real about the spending- because you will NEVER, EVER get out of debt if you are running in the negative on that number every month. There will be no savings either. So, that's our starting point.
If you are living in the red, it's time to make some changes. Unfortunately, un-doing a habit is REALLY difficult and it takes a lot of effort and willpower. So you have to want this change. You have to want to prioritize getting out from under debt and creating a safety cushion for yourself over the draw of instant gratification and play all the time mindset. Note that this advice is coming from an admitted hedonist. I love living life today. However, I don't want to be drowning in debt when I'm 50.
So, if you are in the hole, it's time to look at that list and figure out exactly what's putting you there. If your spending isn't out of control but your income isn't enough since you took that new job/started your business/got laid off, then the focus has to be on the income side as well. If you did start a new business and need some help figuring out income planning, please reach out- it's not easy when you're new to the self-employed world and I work with a lot of self-employed people. Take some time to reflect on the money in-flow. What's not working and why? What are some options? Are there any side jobs you could do until business picks up?
If it's the loan payments that are killing you, then there are some options we'll discuss in the upcoming blog series.
If it's your fun spend, then, you know what needs to happen. You need to start trimming away at any of the items that are not necessary to get you into the black. Because the goal is to have enough money left over to get to Step Two- the savings cushion. The savings cushion has to come before the real debt payout happens or you just end up right back where you started.
About the spending: The problem with spending is that it can become an addition. It can be an escape from whatever it is you feel like running from. It can also become a habit or a drive to keep up with others, to be seen as "successful" or to lead the life you feel you deserve. So psychologically, you also have to be ready to address the things that you are escaping or the root of your spending habits. Is it boredom? Depression? Not wanting to be alone? Or are there some deeper issues like alcohol dependence?
So no, it isn't a simple answer such as turn off your Netflix or stop going out to eat all the time. Only you know the real story. Your story. However, it is incredibly important the you get acquainted with your story, and really look it in the face. It's all part of Step One. Whether you decide to write it down, record some notes for yourself or just have a quiet conversation in your head you need to tell yourself the story. What is really happening? What are your spend triggers? What are the emotions that are tied up in the spending? What are some challenges in stopping the cycle of the spending?
Something I find when I'm considering buying something is comparing the price of the item to something really important and relevant. For example, the stand up paddle board that I want is the same price as TWO MONTHS of car payments. Hm. Maybe I should just rent for now. Those awesome pants at REI cost double my cellphone bill, or the same as four tanks of gas. How much am I really going to enjoy the item? Is it worth a month's car payment? Sometimes this helps. Sometimes it doesn't. It's not going to be easy. Nothing worth doing is ever easy.
On the next article in this series we will discuss creating the savings cushions. Yes, more than one cushion!
If you need help or an accountability partner, I also offer counseling on financial planning. You can email or call 919-525-1975 if you'd like to set up a time to talk.