Happy New Year Everyone! It’s that time again, when we look forward into the unknown with optimism and make goals for ourselves. It’s New Year’s Resolution time.
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I don’t know about you guys, but my resolutions are generally the same stuff every year. I thought maybe I should try some different resolutions this year, so I did a quick google search to see the top resolutions of 2018. According to statista.com, the top 3 resolutions this year are:
- Eat Healthier
- Get More Exercise
- Save (more) money
Looking at this list made me think back to January 2010, when I was in my second semester of graduate school. I can’t remember for sure, but I would bet money that one of my resolutions that year would have been to save more money. I was working part-time while going to school, but I didn’t make much. I made so little that I had to move back in with my parents in 2009. I just couldn’t afford rent by myself. To be completely honest, I couldn’t really afford anything.
As a result I had accumulated about $5,000 in credit card debt. Add that to my car loan and I had about $11,000 in total debt. I knew I needed to do something about the situation. I was constantly stressed about it. I felt as an accounting major I should have been better at managing my money. In late January, classes started for the semester. I was particularly excited about my Financial Planning class. I was hopeful that we would learn something that I would actually be able to apply to my situation.
Have you ever sat in class while a teacher was lecturing and thought to yourself “When are we going to use this in the real world?” I have too. However, that was not my reaction to this class. In fact, here were some of my reactions to this class on the first day: This is freaking awesome. I’m going to use this crap all the flipping time. Why is this graduate class? Seriously, why didn’t they teach this in high school?
Through the semester we covered budgeting, taxes, investments, different types of insurance, and estate planning, in addition other topics that I can’t think of off the top of my head. But don’t worry, I won’t bore you with everything we covered in the class. Instead, here are a few things that I remember most that helped me get out of debt.
To get to where you want to go, you first have to know where you are
One of the first projects the professor assigned was to look over our own finances, and make our personal financial statements. that show our income and expenses, as well as any assets and liabilities. The professor explained his reasoning for assigning this task by telling the following story (this isn’t word for word, but I think you will get the point).
A businessman had received a call from his superior that informed him that he needed to be in an important meeting in another city the next day. Knowing that he didn’t have much time to get an airplane ticket, he called a travel agency.
“I need a ticket on the next plane to New York. I need to pack my suitcase; I will call back in an hour.”
The man called the travel agency back in an hour and asked if they had booked him a seat on a flight to New York. They informed him that they were unable to get him a seat.
“Why not?” He demanded.
“Because, you told us you wanted to go to New York, but we have no idea where you are right now.”
The moral of this story is: In order to get where you want to go, you first have to know where you are.
In order to determine financial standing, you need to know the following:
- What is your income?
- What are you expenses?
- What assets do you have?
- What liabilities or debt do you have?
Once you know the above information, you can make your own financial statements. Income and expenses are shown on the Income and Expense Statement, while Assets and Liabilities are shown on the Balance Sheet. In case you are wondering what those might look like, here are extremely simplified versions of both.
|Income and Expense Statement|
|Credit Card Payment||Xxx|
|Income – Expenses = Discretionary Cash Flow||Xxx|
When making your income and expenses statement, it helps to look over your spending for the last few months so you have an accurate idea of what you are spending your money on, so bust out those bank statements. You will more than likely have more categories than the ones shown above so don’t be afraid to add them in. Try to avoid general categories like “Other” or “Miscellaneous” because they are non-descriptive and won’t really let you see when your money is going. And I can tell you as a former auditor, very few things send up a red flag faster than see a giant number in a miscellaneous category. Also, make sure you include everything. You are making these statements for yourself. If you want to change your situation, you need to be completely honest about your financial situation right now.
Once you have your income and expense statement put together, it is easier to see how much you are spending on each category, and where you might want to cut back. For example, when I looked at my statement I saw that I was spending way more than I should have been on eating out and getting coffee. But I hadn’t really thought about it until I saw the numbers there in my spreadsheet. I made a goal to cut back in those areas. I also switched cell phone plans which made my phone bill drop dramatically. These like small things, but in my situation they had added up. Making these changes helped me make my first step in the right direction.
|Personal Use Assets||Xxx|
|Credit Card Debt||Xxx|
|Total Liabilities and Net Worth||xxx|
You know how on TV, they sometimes talk about a celebrity’s net worth? Well, making a balance sheet will help you figure out what your net worth is. Don’t be discouraged if it isn’t as impressive as a celebrity’s. The first time I figured out mine, it was negative.
Pay yourself first
As part of the class, we were assigned to pick 2 financial planning books to read and write a summary of. The list included books such as “The 7 Habits of Highly Effective People”, “Smart Women Finish Rich,” “The Total Money Makeover,” and, my personal favorite, “The Richest Man in Babylon.” I know that sounds like an odd title for a financial planning book, but I seriously loved reading this book and would recommend it to anyone trying to figure out their finances. The author uses stories set in the time of Babylon to give readers a simple way to achieve financial success. If I remember correctly, there are around 9 stories in the book. For each story, the reader learns a simple straightforward lesson about financial planning.
The story that made the biggest impression on me was in chapter 2. Arkad is telling a story of how he learned to be wealthy. He was working as a scribe when he became acquainted with a very rich man named Algamish. As part of a bargain, Algamish agreed to tell Arkad how he had become wealthy. Algamish’s stated that he “found the road to wealth when [he] decided that a part of all [he] earned was [his] to keep.” This was so simple that it surprised me, and I had a similar reaction to what Arkad demanded on the next page – “But all I earn is mine to keep, is it not?” Algamish then explains how this is not true and that most people pay everyone but themselves.
It was so simple. I realized I hadn’t been paying myself. This was a good place to start making a change. I made a resolution to put aside 10% of my paycheck in a savings account every time I got paid. It wasn’t much but it was another step in the right direction.
After you look at your finances, decide what you can save per paycheck and stick to it. It doesn’t have to be massive. Pick an amount that you know that you will be able to save, that won’t put a huge strain on your budget.
Use the Debt snowball
If you do a google search for “Debt snowball” a TON of website will pop up about the subject. Like 1.4 million pages. It is a huge part of the “Total Money Makeover” by Dave Ramsey. But back in 2010 I had never heard of it. When the professor, who also worked as a financial planner, started to tell us that he recommends that his clients use this method there must have been some confused faces in the classroom. He went on to say that he would have his clients use the following steps:
Step 1: List your debts from smallest to largest.
Step 2: Make minimum payments on all your debts except the smallest.
Step 3: Pay as much as possible on your smallest debt.
Step 4: Repeat until each debt is paid in full.
So I went home from class that day and made a list. Here is a simplified version:
|Name||Amount owed||Interest rate||Minimum Payment||Due Date|
|Credit Card 1||2,100||18%||50||22nd|
|Credit Card 2||200||25%||30||15th|
|Credit Card 3||1,900||12%||40||22nd|
|Credit Card 4||800||10%||46||22nd|
Looking at my list, I knew that I would start by paying off credit card 2. Since my balance on that card was only a couple hundred dollars, I knew it would only take a few months to pay it off. Then I could move on the next one. And it worked. But just like it took time for me to dig the pit I was in, it took time to get out of it as well. If I remember correctly, it took about 2 and a half years before I was debt free. This wasn’t a quick fix, but it was effective. It helped me establish a habit of always knowing what was going on with my money.
I hope this information was helpful to you, and have a great 2018!