Clients are calling up to ask for help. “We’re making a lot of money but can’t make ends meet. Help!” I tell them to grab as many statements as they can from every bill they’ve got and every account they’ve got and bring the whole pile to me. Here’s what I know about people’s expenses: the overwhelming majority have expenses that nearly exactly match their income, except, perhaps, they spend about $50/month more than they earn.
This is just how people are. All money finds a place to go, and then some. This isn’t just you, this isn’t just some poor slob I’m writing about, this is nearly everybody. (By the way, identities and circumstances have been blurred to protect privacy in this story. This could be about nearly anyone at this point.)
A recent client’s problem was harder than most: her cash outflows nearly exactly matched her cash inflows, as I expected, but most of her cash flows are debt service on a vast number of debts. Oh, the ordinary ones you’d expect: car loans, student loans, a mortgage… but there were also a whopping number of credit cards. Her total indebtedness, excluding her mortgage, was about 1X their gross annual salary.
How do people get that far into consumer debt? Oh, so easily! They work a lot of hours (and make good pay) but use their down-time to go out to dinner, to shop for nice clothes and furniture, to go on pleasant family vacations. None of these things individually is bad. But somehow, somehow, they manage to spend roughly twice their take-home pay on consumption. It’s so easy! They just open up a new credit card! They have card after card at a department store where you save 10% for opening the card or get 0% down for nine months. But then the they forget a payment or wait too long and the rate goes soaring up to 26%!
These credit cards are the equivalent of elastic waist sweat pants. Instead of having to pay back $400 for the shopping spree the next month, they have to pay back $10 as a minimum payment. So easy! They can afford that! So next time they go to buy furniture they don’t think, “I have $400 I have to pay this month”, they think, “I’ve got $10 I’ve got to pay back this month.” Except they don’t even think that, because who bothers to factor in $10/month into their gestalt? Instead of feeling the pinch as their debt grew, they didn’t feel the pinch until their debt SERVICE grew too high. By that time, holy cow. They’re in debt up to their eyeballs.
Here’s what I told them.
1.) Build up a savings account. Split the automatic deposit from your paycheck so that part of it goes into a savings account at a DIFFERENT BANK than your debit card is at.
How much? We added up in the budget area all the “intermittent expected expenses”. Cars need repairing. Heating oil needs buying. Homeowner’s insurance only comes once a year, and so does vacation. How much are these things expected to be? Divide by 52 and put that amount in a savings account. It’s not for a “rainy day” or something you “can’t afford right now” – these are expenses you’ve already got. Put something away to meet them and, in the meantime, you’ve build up an emergency bank account.
If that amount is just unsupportable, then start wherever you can. If you can’t put $100/paycheck into savings, can you put $10? Then how about $30? Okay, what about $50? Just start somewhere. (And consider what it means that the amount you’re spending is insupportable if you divide by 52. What does that SAY?)
2.) Don’t keep waiting for windfalls to wipe out your debt. (Christmas bonuses, tax returns, etc.) That’s like losing weight via liposuction. If you don’t change any habits you’ll be right back where you were. Much better is to use the “spotlight” method where you target a debt and really put some effort into it, changing habits as you do it. Don’t go out to eat until that debt is paid off. Pay that debt once a week when you get paid before you do anything else. Get a part-time job (or take on extra hours) just until you kill off that debt. Make the minimum payment on every other debt and really whale away at the spotlight one with all available cash, including windfalls. When that’s killed off, take the cash flow you’ve freed up from its monthly payment and go tackle the next one. Now you’ll have the taste of success and know how it’s done. Now it’s just a matter of time. Instead of the mountain of debt looming over you, now you’ve got a plan to topple them one by one.
3.) Those debit cards? I added them up for two separate sample months. OMG. So, here’s the thing. What you’re spending? Let’s not judge it right now. Let’s just acknowledge it. Say you’re spending $1600/month on stuff on the debit card: gas, quick trips to the 7-Eleven, cash at the ATM, whatever. Okay, that’s $400/week. How about you take $400/week out of your bank account and just use CASH for a while. Not forever, maybe a month. It’s a cliche, but it’s true: it’s harder to let grimy green back bills pass out of your hand than to swipe a card. Did you really want pizza tonight if all you’ve got left in your wallet is $18? Sure, you can afford it. But would you rather have that $18 still in your wallet?
4.) I detailed out where the money was going. Some people think “budget” means restriction, the way they think “diet” means restriction. From a nutritionist’s point of view, though, your diet is an observation, not a judgment or even a prescription. It’s what you’re actually eating. That’s the way I look at a budget, I put down what you’re actually spending. It certainly can be illuminating, though. Look it over. Are you spending money in line with your values and goals? I really can’t make these decisions for people, so I hand them their actual budget back and let them go examine it on their own.
No matter what happens, I think they’re better off for having looked. In the case of today’s client, I don’t think she had EVER gathered together all her bills in one place. Talk about illuminating!