How to get financial stability?

At some point in your life your income will stop but your expenses will not. Ideally this scenario would be the result of a well-planned and well-deserved retirement, but for the unlucky, it may happen through illness or injury.

Although government income support programs may help, few people can live on these payments alone.  As a result, it is imperative that you plan and save to support yourself and your family. Saving requires that you prioritize your financial safety net over more immediate spending temptations. In other words, you must live within your means and have something left over to invest for the future.

Saving Strategies

Recognize your true hourly wage

Spend a few moments determining what your actual take-home wage is. For example, if you earn $40,000 per year and you work a standard 40-hour work week, you would earn approximately $19.23 per hour before deductions ($40,000 / 40 hours per week / 52 weeks per year).

Want a reality check? Try adjusting this hourly rate for standardized payroll deductions in your jurisdiction such as taxes and health care premiums. There are many online tools that can help you determine what you make after taxes.

The rate that you decide on can then be used to help you decide if your purchase is worthwhile. Simply divide the purchase price by your true hourly wage to determine how many hours you will need to work to earn that money back. Some purchases will seem worthwhile while others will not.  

Look beyond the “latté effect”

Instead of depriving yourself of every last convenience and pleasure, consider cash management as an opportunity to be selective in your spending. As I have discussed in previous columns, you should buy things that you really want or things that will improve your quality of life rather than spending meaninglessly and unconsciously.  

Borrow only to purchase assets

Hardly anyone can afford all of life’s expenses out of their cash flow. Some expenses, such as home or car purchases, require that we borrow money to buy them, but borrowing on a regular basis to sustain your lifestyle, will lead you toward financial turmoil.

The most important lesson you may ever learn about debt is that you should only borrow only to purchase assets, not to sustain your lifestyle. Practically speaking this means never carrying a credit card balance or using loans and lines of credit to sustain your lifestyle. Any time you find yourself accumulating debt to sustain your lifestyle means that you should immediately reassess your budget and get back on track.

To thine own self be true

Know yourself. If you are prone to abusing credit cards, go back to a cash-only regimen. Using cash to purchase everything – especially large purchases – encourages discipline as you see a direct connection between your expenses and your bank balance. Furthermore, having to go to the bank to withdraw cash for a purchase helps you avoid “impulse purchases” and allows you time to think twice about your purchase.

I understand that many people are hesitant to carry large amounts of cash – if this is the case, use debit cards rather than credit cards because you cannot extend yourself beyond your available balance (or overdraft).  Debit cards withdraw funds directly from your bank account, which imposes limits on what you can spend.

Scrutinize your family budget

When you prepare a family budget you will come to notice the difference between necessities (shelter, food, clothing, transportation) and discretionary expenses (hobbies, entertainment, technology, etc.). When looking for savings opportunities, focus on your discretionary spending. It is also a good idea to look at your credit card statements and remind yourself of the monthly charges to which you have subscribed. Lastly, you may wish to evaluate your telecommunications packages (cell phone, cable, and internet) to make sure that you are getting the services that you need and to avoid paying for services that you are not using.

Impose an automatic savings strategy

Pay-yourself-first strategies, popularized by David Chilton’s book The Wealthy Barber, help to promote saving because they are painless. These strategies involve setting a pre-determined automatic transfer from the account into which your pay is deposited to a savings vehicle like a high-interest savings account. The amount can be a set amount (such as $100 per month) or a percentage of your income (10 percent).

The automatic nature of the transfer means that the funds are set aside for goals and emergencies before you have an opportunity to spend them. Many clients have reported to me that these savings programs have made a significant difference in their attitudes towards money. Having committed to a pre-determined and automatic savings strategy, they are practically free to spend what is left without regret. Of course, the success of this strategy will depend on your ability to stretch your remaining funds to accommodate your expenses.

Use checking and savings accounts correctly

Checking accounts are designed for transactions, so they pay very little interest. Savings accounts promote accumulation by paying more interest. To optimize these accounts, you should leave only enough money in your checking account to cover monthly expenses (as determined by your budget) plus a minimum to avoid banking fees, and a reasonable slush fund. By transferring the rest to a savings account, your money will earn more interest and you will make saving a priority.

Having a comprehensive understanding of what your money is doing for you, and how it’s being saved will ultimately ensure your financial stability and preparedness for retirement, or any unforeseen circumstances. Be prepared!