Introduction: Steak on a Hamburger Income
It's been said that "Broke is a temporary condition, poor is a state of mind." There is a lot of truth to that. I would add that wealthy is also a state of mind. If you have what you need, and some or most of what you want, you are wealthy. Financial councilor Dave Ramsey likes to say that the paid-off home mortgage has replaced the BMW as the status symbol of choice... To which I say, "What if I have a paid-for house and a paid-for BMW??" Because I and my husband have both of these things, plus another (reasonably) new car, plus no debt and money in the bank, on an annual income in the $35,000 range, so I know this stuff works.
Many of the people we meet think we're independently wealthy because of our lifestyle, which is not extravagant but comfortable, and (mainly) because we don't have money woes to whine about and lose sleep over.
- I am not trying to sell any "Proven Wealth-Generating Program," or any such rot. I'm simply sharing what has worked for me, so don't worry about being blind-sided by a sales pitch.
- Your mileage will vary depending on your personality and your circumstances. We've been fortunate not to have had any major heath crises, for instance.
- I am not a disciple of Dave Ramsey. I mention him only because I do agree with most of his principles, but I arrived at them independently. If you need a financial councilor, though, his website might be a good place to start.
- The book of Proverbs (Old Testament) is also a good place to look for all sorts of financial and life advice.
Step 1: Get Out of Debt!
The Bible says, "The rich rules over the poor, And the borrower becomes thelender's slave." (Proverbs 22:7, NASB) This is so true. When you borrow money, part of your income is spoken for before you even see it! You are, quite literally, a "Wage Slave."
You say, "How can I get out of debt when I'm barely making ends meet?" In order to live the abundant financial life down the road, some sacrifices in the short term may be necessary. You may need to eat rice and beans for a while before you can afford steak. The rewards will be worth it! You won't lose sleep worrying about your money, your odds of a happy marriage are considerably higher (Money problems are one of the top 3 reasons for divorce), and you will have control of your financial future. Understand here, I am not advocating never having debt; it is sometimes necessary when buying a house or car. What I am saying is, don't enter into debt lightly and don't stay in debt any longer than absolutely necessary.
The first thing to do is also probably the most obvious: Don't borrow any more money! The first rule for getting out of a hole is stop digging! Cut up your credit cards if you can't pay them off every month. You can always get more when (IF) you've learned how to use them wisely.
Getting out of debt takes time; it's not going to happen overnight. If you have more than one debt you owe on, pay off the smallest one first, while making minimum payments on the others. Why? Because you will then have visible progress that will encourage you. Then attack the next largest debt, and so on.
So, eat at home instead of eating out, watch TV instead of going to the theater, don't buy that $4 cup of fancy coffee every morning, and use that surplus to assault the debt in your life.
Step 2: Spend Less Than You Make
To paraphrase and modernize Charles Dickens' quote in David Copperfield, "Annual income $20,000, annual expenditures $19,500, result happiness. Annual income $20,000, annual expenditures $20,500, result misery." Despite Government attempts to disprove this, when outgo exceeds income, sooner or later the well runs dry.
In order to know how much your monthly expenditures are, you need to write them down and add them up. Save all your receipts from purchases, and compare what you're spending with what you're making. Then you'll be equipped to make a plan for the use of your money. This plan is called a Budget. And don't tell me, "I don't have any money to budget with!" What did you buy your last hamburger with, if you don't have any money? Everyone needs a budget. A low income means you need to know where every dollar is going.
The easiest way to get started with a budget if you've never had one before is to get a budget book like this one. You can find these at almost any big-box or office supply store. You can also try the envelope budgeting system. Put the money you can afford to spend in labeled envelopes for each category. Decide what you need to spend on the essentials first, then allocate the rest for savings, paying off debts, giving, and finally, everything else.
If you find out you're spending more than you can afford, start looking at cutting out non-essential spending. Some of the stuff today's society deems essential really isn't. The absolute essentials are:
- Food. Eating out is a luxury, though. Buy large sizes of stuff you actually eat, but don't buy sizes so big the food goes bad before you can eat it. Non-perishables like the aforementioned beans and rice can be bought in the largest sizes you can store.
- Clothing, but nobody needs designer clothing.
- Shelter, including basic utilities such as electricity, gas, water, and phone. Your house might be too big for your income.
- Transportation; You might not need a car as much as you think you do. Look into alternatives like public transportation, carpools, and bicycling.
- Savings. We'll look at that in a minute.
- Giving. We'll look at that in a minute, too.
Just about everything else is not essential:
- Cable or satellite TV. You won't die without entertainment. Read a library book, or look into cheap alternatives like Broadcast TV, Netflix and Hulu.
- Internet service. While this can save you a pile of money and hassle properly used, you don't need the fastest speed offered. Drop to the slowest speed and, while you won't be watching Netflix in HD, you'll still be able to do stuff.
- Cellphone service. While this might be necessary, almost no one needs to spend $100 per month on a cellphone. There are plenty of prepaid plans out there that can save you hundreds per year.
Step 3: Save for Emergencies
What would you do if a storm blew your roof off, or an injury prevented you from working for 3 months? This is why you spend less than you make. The rest goes into savings. Save a little bit every month. Put away your savings before you spend money on nonessential things. A whole lot of budgeting is about setting priorities. After food, clothing, shelter, and transportation are covered, and before you start spending money on non-essentials, put aside some small amount for those unexpected expenses that always arise. Make it a percentage, say 5-10% of your income. Put it in a separate bank account, stash it in your mattress, put it somewhere separate from the rest of your funds. I don't care where you put it, just do it. Using savings for emergencies is far wiser than putting that roof repair on a credit card.
A good rule of thumb is savings equivalent to three to six month's income. Once you have that, and are out of debt, you can start thinking about investments. I'm not going to cover investments here, that is an advanced subject for another day.
Step 4: Balance Your Checkbook-Every Month!
Here's some more financial wisdom from the Bible that really works: "Know well the condition of your flocks, And pay attention to your herds." (Proverbs 27:23, NASB) In Biblical times, flocks and herds were a major source of wealth. Paraphrased for modern times, it might read, "Know well the condition of your bank account, and pay attention to your investments." If you don't know how much money you have, how will you know how much you can spend? And those overdraft fees can be murder!
Who knew the Bible could be so relevant to modern life??
Write every transaction down in your checkbook as soon as possible, and calculate the current balance. If you buy things with a debit card, keep the receipts (You're keeping all your receipts anyway, so you can write the amounts down on your budget, right?), and, if you don't carry your checkbook when you shop, enter the purchases as soon as you get home.
If you don't know how to balance a checkbook, ask someone at your bank or try this link. Basically, you check off in your checkbook all cleared items on your statement, take the bank's figure of your balance from your statement, subtract any debits and checks that haven't cleared, add any deposits that haven't cleared, and your new total should match your checkbook balance.
You say you don't have any investments? Do you own a house? A car? A computer? A bicycle? A microwave oven? The point here is everything you own is an investment of some sort. Take care of that stuff, and know what your assets are.
Step 5: Give Generously and Cheerfully
God loves a cheerful giver. (2 Corinthians 9:7)
Whether you believe in God or not, many people in both the sacred and secular worlds are convinced that giving to help others is one of the great secrets of happiness and prosperity. Prosperity, you say? Yes, prosperity. We have found that giving 10% of our income somehow makes the other 90% go farther. Of course this is counter-intuitive, but many things in life are, and they are true nonetheless.
If you do believe in God, look at the only place in the entire Bible where God tells his people to test Him:
"Bring one-tenth of your income into the storehouse so that there may be food in My house." "Test Me in this way," says the LORD of Armies. "See if I won't open the windows of Heaven for you and flood you with blessings." (Malachi 3:10, GWT)
In ancient times, the tithe, or tenth, was the benchmark for giving. We have given one-tenth or more of our income for decades now, and I can testify to the truth of this passage. You don't have to give one-tenth. If you can, great, but if you can't, give something on a regular basis. I'm not going to tell you who to give to; that's up to you, but if you're a churchgoer, your local church is a good place to start.
The Bible has more to say about money than it says about Heaven and Hell combined.
Step 6: Take Care of Your Stuff
Even if you are "Poor," you have stuff. Some of it is expensive stuff, such as a car. None of your stuff is "Maintenance free," although some things come close. I know you're busy, but taking just a few minutes here and there to care for your stuff could save you a ton of money later!
My Daddy always told me, "PM does not just mean After Dark." PM in this case stands for Preventive Maintenance.
On a road trip once, I came across a lady in a broken-down car. She told me, "It just quit, and I have gas in it!" I checked the oil, and there wasn't a drop of oil in the engine. She had just bought herself several thousand dollars in engine repairs, simply because she had never taken 30 seconds to check her oil... Don't be that person! It doesn't take a rocket scientist to do some simple things that will often prevent a minor repair from becoming a major repair.
Form Good Habits:
"A place for everything and everything in it's place" is a good (Although unattainable in practice) idea. What you can do, however, is designate a particular place for the important things in your life: Your keys, your cellphone, your wallet, etc. This won't directly save you money... Unless you're late for work because you can't find your keys! It will help de-stress you, though. Keep your cabinets, pantry, and refrigerator organized. This will help you keep from buying duplicate items when you can't find something.
If you own your home:
- Paint your house every few years. Like washing your car, you'll see things that you might otherwise have missed.
- Check your plumbing insulation before winter sets in. Frozen pipes will do a lot of damage.
- Do not neglect any minor plumbing leaks; they will only get worse.
- If you blow fuses or circuit breakers often, find out why, before your house burns down.
- Clean and inspect your cooling and heating plant before the start of each season; change or clean your air filters.
- If you smell gas and you can't find the cause, vacate and call the gas company pronto!
- Every couple of weeks, and before any long trips, check tire pressure in all 5 (including the spare, if you have one) tires. Read your owner's manual for the correct pressure. Look at the treads; make sure they have sufficient tread and are not wearing unevenly. Uneven tire wear is a symptom of something else worn or out of adjustment.
- If you have a spare tire, know how to change it. Again, read the manual. If you don't have a manual for your car, ask your dealer, or you can probably download one for free from the manufacturer's website.
- While you're checking your tires, also check all the vital fluids in your car: Engine oil, transmission fluid, brake fluid, power steering fluid, and engine coolant. All these things are under the hood. The complete tires and fluids check takes about 3-5 minutes. The manual tells you how.
- And check your battery: If it has removable caps, open each one and see if there is liquid visible. Top off batteries with distilled water Only. "Maintenance-free" batteries have a colored "eye" that should be green if the battery is in good shape.
- Check your gas mileage once a month or so. Record your odometer reading when you fill up. The next time you fill up, subtract the previous reading from the current one, and divide by the number of gallons. Don't expect to get the advertised mileage, but monitoring this over time will give you early warning of parts wearing out.
- Carry a few basic tools: Portable air compressor (This sets you free from having to buy air at a gas station), the tire changing tools that came with the car (Jack and lug wrench), jumper cables (You may be able to give someone else a jump and save their day), flashlight (My last flat tire was in the middle of nowhere in the middle of the night!), some means of warning traffic if you're broke down (Reflector, flares, or a flashing light), and a small first aid kit.
- Wash and wax your car every couple of months at a minimum. If you wash it yourself, you'll see things that you might not have noticed, before they become problems.
- You can join AAA if you can afford it and it makes you feel better, but if you follow the preceding tips, you may not need it often enough to pay for itself. I've never needed it.
- Make sure you have antivirus.
- Don't mindlessly click on stuff that tells you your computer needs a tune-up.
- Don't click on links in emails.
- I've written extensively on computer security; For more info, click these links:
Step 7: Repair, Don't Replace!
Today's society is a disposable society, and that's a tragedy. So many things wind up in the landfill because people just assume they can't be fixed, or that it will cost too much, or it's too much hassle.
Lots of things can actually be repaired cheaply and easily, especially if you do it yourself. You will have fewer repairs to do if you practice the good maintenance in the previous step.
Computers can often be repaired inexpensively. Most computer problems are software-related. Software problems, no matter how bad, can be fixed with a Factory Recovery disk. All new computers will nag you to make one of these; Do It Now, because when you need it, it'll be too late.
Home repairs are often not too hard to do yourself. Plumbing and electrical repairs require some degree of knowledge, but are still not that hard. You can replace light switches and faucets without calling a professional! Here's where the internet can save you a pile of money. If you don't know how to do something, Google is your friend. There are all kinds of how-to articles online, for anything you can imagine. Just make sure you look at several and compare them, because not all internet advice is good advice.
If you don't know how to fix something, you can't find any trustworthy advice, and you're about to throw it away anyway, open it up and take a crack at it. You have nothing to lose except some time (Which you'll be spending shopping for a replacement anyway), and, at the very least, you'll gain some valuable experience.
Step 8: Get Rid of Stuff You No Longer Use
The downside of taking care of your stuff is that it takes time, effort, and (usually) money. If you have more stuff than you can fit in your house, you need a place to store it, and that costs money. A car you're not driving still needs licensing, and so on. If every corner of your house is cluttered up with stuff, you'll be stressed because you can't find things, and you won't have any room for new stuff.
All these problems can be fixed by selling or donating things you have but don't use. Now, I understand that you'll be attached to some stuff for sentimental reasons, but if your closet is bulging or you're paying rent on a storage unit, maybe it's time to streamline a bit. Have a yard sale, donate that Nehru jacket you haven't worn since college, sell that jet-ski on Craigslist, and file the remaining stuff neatly.
Step 9: Be Patient
If you're one of those people for whom Instant Gratification takes too long, you need to slow down some. A bit of pre-planning and patience can help your budget a lot.
Don't wait until you're out of something you use before buying more. Put it on your shopping list before you run out. This saves those emergency trips to the convenience store that not only cost you gas, but more money than the grocery store.
Lots of things can be bought online for a fraction of what they'd cost in a brick-and-mortar store; Even small stuff like watch batteries are dirt cheap on eBay. How cheap? You can buy 10 watch batteries on eBay for what you'd pay for one in a store. You will also find a much greater selection at online merchants like Amazon, because warehouse space is so much cheaper than retail space. You'll save gas and time, too. I buy so much of my stuff online I'm on a first name basis with the UPS guy... Sure, you have to wait for it to show up in the mail, but that's where the patience and planning comes in. Plus, getting that box and opening it up is almost like Christmas Morning!
Another part of being patient is knowing what you want and waiting for the right deal to appear. Chance favors the prepared mind!
Step 10: Put Big Purchases on a "Wish List"
This is related to the previous step. We all make big purchases from time to time, but making big purchases (or even small ones) on impulse will kill any budget. Here I'm talking about things you want, not things you need. Don't be like the woman who went to the dealer for new tires and came back with four new tires and a new car attached to them.
Whenever you get the urge to buy something big, write it down on a list somewhere you'll see it every day. When you look at it, ask yourself some questions:
- Why do I want this? Is it just because it's the latest thing? To keep up with the Joneses? To show off? None of these are good reasons.
- Do I actually have a use for it? Will I use it enough to justify the expense? Or will it be put on the shelf as soon as the "new" wears off?
- Will it make my life better? Or just more cluttered?
- Will it benefit my personal growth, or will I just use that fancy new phone (for instance) to waste more time watching stupid cat videos?
- Can I afford to Own it (not just buy it)? This is a biggie. Cost of ownership often doesn't end with, and may exceed, the purchase price. If you Did buy an airplane, you'd need to pay to park it, pay more to learn to fly it, pay even more to fly it, and pay still MORE to insure it, license it, and maintain it. New boat? Boats are defined as "A hole in the water you pour money into." That new cellphone comes with a monthly service charge you'll have to pay. Once you've bought that new TV, you'll be tempted to buy new furniture to put it on, and you'll still have to watch the same C**p you watched on the old TV.
- Can I wait for it? If, after a few weeks, you still want the item, you can wait until you're financially able to buy it comfortably, with cash instead of credit.
Lots of times, the urge to buy something will fade away in a few days... And you've just saved a ton of money by doing nothing! If you still want it, and you missed the sale, just wait. It'll be on sale again.
Step 11: Buy Used, Borrow, Rent, or ReUse
Many things, such as cars and computers, depreciate so fast that they may be worth only half what you paid for them within a few months.
So, why pay the new price when you can get the same thing used for a fraction of the price? This is also related to patience. Sure, it takes a little more effort to buy used (Pre-Owned, in advertising parlance), because you need to take condition into account, but the savings can be tremendous! Most things are okay to buy used; a used car should be checked out by a trusted mechanic, and when buying a used computer, make sure everything works and there is no physical damage whatsoever. Used cellphones are a little trickier; You also need to make sure it's not stolen. You can do this by calling the carrier the phone works with and reading them the 11-digit number (ESN or IMEI) that is under the battery (or on the back if the battery is non-removable).
Don't sneer at thrift stores and yard sales; You can get all sorts of stuff for pennies on the dollar. Just use some restraint; Buy stuff you'll use.
You say you're a Dean Koontz fan and he's got a new book out? The next Star Trek movie was just released on DVD? Do you really need to own all that? Unless it's a reference book or the Bible (Which is actually a great reference book!), you will probably only read it once, because there will always be something new to read. Same goes for movies. I do own some DVDs, but only the ones I've rented first and decided I would want to watch again. I read lots of books, but I very rarely buy them from the store. Your local Public Library has vast untapped resources, not only of books but videos and other services, and you're already paying for it with your taxes, so use it! You'll save not only money, but lots of clutter.
Renting not only works for videos, but a lot of other things. Anything that you need for a particular project might be better rented than bought; Tools, trailers, RVs, even parachutes can be rented when/if you need them, and again, you don't have to deal with it when you're done using it.
I think a lot of the things pushed by the "green" movement are stupid and inane, but reusing things such as the jars and boxes that products come in works great. Large jars that had nuts, pickles, or raisins in them work great for storing everything from flour and sugar to nuts and bolts, plus storing your flour and macaroni in jars keeps bugs and mice out. Don't reuse containers to store food, unless they had food in them originally. Copy paper boxes are just as good as "banker's boxes", and they're free. Look around at stuff you throw away and you'll probably get other ideas. I go so far as to buy groceries partially based on the packaging they come in!
Step 12: Don't Sign Service Contracts or Buy Extended Warranties
Signing a service contract is almost as bad as going into debt. Again, you're making a promise to pay money you don't currently have. Now, as I said about debt, there are times when you might have to break this rule, but contracts are not usually a good idea, unless you're getting real value.
The last time I signed a service contract, it was for DSL service, and the only reason I did it was the monthly fee was a lot lower that way, the monthly price was guaranteed for life, and I wasn't planning on moving anytime soon. That worked out well.
Service contracts for cellphones are rarely a good deal. If you do the math, you'll find that that $600 phone will actually cost you much more than if you'd paid cash for it and went with a no-contract carrier. Here's an example:
You pay $100 for the $600 phone, then pay $110/month for the next 2 years: $100 + ($110 X 24) = $2740 or,
Pay $600 for the phone, plus $45/month on many of the no-contract plans: $600 + ($45 X 24) = $1680.
So, your $600 phone actually costs you $1160, counting the $100 you paid out the door. Plus, the longer you keep the phone past the 2 years, the worse the deal becomes, because the monthly cost doesn't go down, even after the phone's paid for!
The math doesn't lie. Again, you'd need to save for the phone, but you're not locked into a contract, and you actually own the phone!
Extended warranties are rarely a good deal, either. You'll either forget you have it, it won't cover accidental damage, or the product will fail within the factory warranty period. This is especially true of electronics. They usually fail within the first 90 days; If they don't fail then, they'll generally last for years. You're much better off just having the money in the bank, so you can repair or replace the item in the rare event it does fail out of warranty.
Extended warranties on cars and laptops are a gray area. Sometimes they pay off, but most times they still aren't worth the money.
Step 13: Don't Pay Interest
Paying with a debit card is safer for your budget than a credit card, but not as safe from fraud, since the money is directly withdrawn from your bank. You'll have to find a balance that works for you.
If, after getting out of debt, you decide you can use credit wisely, pay off your credit card every month by the due date to avoid interest and penalties. This is the way I handle credit cards. They can be really handy for record-keeping, for instance. I use one card strictly for buying gasoline, and that makes keeping track of that budget category easier. They are also useful for online purchases, and for things such as renting cars. Keep all receipts from credit card purchases until your statement comes in. Read your statement carefully to be sure there are no unauthorized charges. Credit card companies have strong protections against fraudulent charges, but you have to pay attention and notify them if you see one.
If your credit is reasonably good, you may get offers that give you no interest for 3 months or 6 months on a new card. These are great if, and only if, you already have a large purchase planned. You can always cancel the card after paying off that large purchase. Don't feel guilty that you're cheating the card company by not paying any interest; They make money anyway by charging the merchant around 2-3% of every card purchase, so you're actually paying to use a credit card whether you use one or not, unless you're fortunate enough to find a merchant that gives cash discounts.
Again, only buy stuff on credit that you could pay cash for, and the first time you can't pay off your card, cut it up, unless you planned for the purchase ahead of time and you're not paying interest.
Step 14: Use Free Software
You don't have to pay through the nose for most software. Need antivirus? Instead of N$$$ton or Mc$$ee, try AVG free antivirus. Instead of M$$$soft Off$ce, use OpenOffice or Libre Office, both of which can work with Microsoft file formats. CD/DVD burner? CDBurner XP (Which, contrary to it's name, works on all versions of Windows).
Vector drawing? Instead of Illu$trator, try Inkscape.
All of these programs are free. That's right, Gratis, without cost. Why? sometimes, because the writers are big-hearted people. Sometimes, like the antivirus, there is a deluxe paid version available, and they're hoping you'll buy that, but you don't have to. Usually, with the paid version, you get more "bells and whistles" and better support, but the core functionality is the same.
There is even an automated way to install this software. Ninite.com is a site that has all the best, most trustworthy freeware, including everything listed above, and an automated installer that is a fantastic time and frustration saver. It's never a good idea to Google search for software, especially antivirus software. Use ninite.com instead and keep yourself out of trouble.
Step 15: Be Grateful and Content
The last secret to financial freedom is one that's far less common than it used to be, and that's gratitude. Dave Ramsey, when asked how he is doing, will answer, "Better than I deserve." Some people find this attitude perplexing, but think about it for a minute:
- You did nothing to deserve being born.
- You didn't earn the air you're breathing.
- Sunshine and rain are both free.
- You didn't work for the gravity that keeps you from being flung off the Earth and into interstellar space.
Life is a gift, not an entitlement. If you treat it as such, you will be much happier, and probably even healthier. You will want to be a productive member of society instead of thinking only of yourself. You will enjoy your work more. A successful life is not measured by how much stuff you have. Set aside the envy of others and work to be the best "you" you can be. God has given you your life. Live it well.