Not having any money sucks. Have you ever been to the point where you’ve run out of money? It’s not very fun. In fact, when you don’t have any money, difficult challenges are compounded by the fact that all emergencies also become financial emergencies. Living from crisis to crisis is both painful and expensive. You may know someone like this. It may be you, your friend, or a family member. Someone who is stuck trying to break the cycle of impecuniousness. And what you’ll find is that financial fitness often has surprisingly very little to do with income. The irony is that life is actually more expensive when you don’t have any money. When you don’t have money: debt becomes more expensive, margin is gone, planning is difficult, risk mitigation is expensive and even your stress and your time management are affected. When you have money you can relax. You can plan. You can develop margin and efficiency. You can develop a life that is much less expensive to maintain. The goal here is to begin the process to break the cycle of broke. To create a little buffer that leads to more relaxation, financial peace, and ironically, money to spare.
So, what do you do? Well, the first step is pretty simple. In fact, it is so simple it is often overlooked. The first step is simply to decide. To make the choice if you want to be broke or not. It really is a choice. There is someone else out there who makes half of what you do and has plenty of money to spare. It doesn’t even start with earning lots of money or crushing your expenses. It starts with the decision to start. To begin the process. To make the choice that your life can look completely different a year from now.
If you have read any of other posts on SE you will quickly understand that we are not very fond of debt. But my disdain for debt is even greater for expensive debt. When you have no money, lenders will charge more (in interest) to loan you money. They know that people without any money are less likely to repay so they must charge a higher rate to offset the risk. For example: a low risk person will currently pay $284,000 (5%@15) for a 200k house vs. $631,000 (9.5%@30) for someone who is broke with a bad mortgage! That is crazy! It is even worse for credit cards and auto loans. Debt is expensive- how much are you paying a month in debt? If most individuals simply became debt free they would have plenty of money! You must get rid of expensive debt if you ever want to have money. It must be a priority.
Margin, Planning & Strategy
When you have time to plan, you can save money. Have you ever tried to buy a plane ticket at the last minute? It is brutal. Likewise, if you need a car today, you have little room to shop around and look for a deal. Having a little margin gives you flexibility, time, and choice when making buying decisions. People don’t plan on borrowing money on credit cards. Life happens without a plan and Visa picks up our slack. Organization is an essential step towards efficiency. Often, when we begin to optimize, we realize that not only do we end up with more money but also more time. When we have time to plan we can consider the second stages of income planning and investing. It doesn’t take long, but simple steps like tax-deferred investing (401k) can save thousands of dollars in taxes. When you don’t spend all of your money you can dramatically decrease your tax liability. Lastly, having a strategy in place helps individuals maximize the miracle of compound interest. The “secret” to not having money vs. becoming wealthy is interest. It is either working for you or against you. You have the ability to plan how it affects you. Quit spending all of your money on worthless interest payments and start investing and enjoy the benefits of interest.
Insurance is one of those things we hate to buy but often need. The goal of insurance is to pay a little to transfer risk that you are unable to accept. Almost everyone needs some form of health insurance due to the fact that an uninsured bad hospital stay can scramble even a large nest egg. However, after we start to accumulate some money we can self-insure in many areas and decrease both our need for insurance and its cost. The cost of insurance inherently includes both the cost of coverage and the cost of marketing/commission/profit for the insurer. In addition, we can dramatically decease the cost of necessary insurance by increasing our deductibles. However, you need money if you want to increase your HSA to a 10k deductible or your homeowners’ to 5k. If you have money you can self insure and save lots of money over time. Even the need for items like life insurance go away after your investments are sufficient to insulate your family from a tragedy.
Quit being broke
How do you stop the cycle? It starts by deciding you want to. Have the hard conversation with yourself or your spouse. Then come up with a simple game plan. You can start with a basic book like Dave Ramsey’s Total Money Makeover or jump right into advanced reading with Joe Dominguez’s Your Money or Your Life. You can choose to be broke the rest of your life or you can begin the process of building wealth. Once you get organized and start to build a little margin your expenses actually decrease and you start to gain the benefits of investing. Start with getting rid of bad debt and optimizing your expenditures. Break the cycle of having no money. It doesn’t cost any more than you currently make and it is a better way to live.
Most people will choose doing nothing over action. What about you?