With soaring gas prices, financial market instability, and inflation running faster than a Christiansen kid at an Emery High School track meet, financial preparedness deserves a closer look. While inflation is as certain as death and taxes, it is quite often referred to as the worst type of tax because sometimes it’s affects will go unnoticed for long periods of time, and it seems unstoppable. Inflation impacts every household, but especially those that live hand-to-mouth, living paycheck to paycheck. I think we all know that we should do our best to run a balanced budget (spend less than or equal to what you make), and it is prudent to take deliberate steps to create financial stability as soon as possible. Financial stability is different for every household. I would like to address some simple steps to setting up a budget and trying to prepare for future uncertainties. In addition to inflation, these uncertainties include but are not limited to: medical expenses, car repairs/maintenance, loss of income or job change, a death in the family, etc.… The benefits to being financially prepared are significant. One of the most significant is improving your mental health. Study after study show us the link between financial instability and poor physical and mental health conditions. Studies show an even higher link between debt and suicide, substance abuse, and depression. One of these studies I recent read said that 86% of the people surveyed stated that their current financial situation significantly worsened their mental health problems. When finances are stable, marriages and romantic relationships fair much better and this inadvertently improves the quality of life for children as well.
Financial preparedness is something that we know we need to do, but is definitely one of the hardest things we attempt in our life. Many of us have worked very hard to save money only to realize it is never enough to take care of all our bills and responsibilities. I recently read a book called All Your Worth: The Ultimate Lifetime Plan. This book demonstrates a simple way to categorize your expenses and enables you to get these expenses under control and in balance. The authors Elizabeth Warren and Amelia Tyagi show us how to place our money into three categories: the Must-Haves (required bills every month), the Wants (fun money that isn’t tied to an actual bill), and Savings (to prepare for the future and build a better tomorrow). This book caused me to look at how I prioritize my spending and helped me get my finances on track so I could look towards our uncertain future without fear. Budgets and processes I had tried in the past were generally too complicated with too many smaller categories, they also didn’t take into consideration that we are going to spend money on non-necessities, no matter how disciplined we try to be.
When we look at the Must-Haves, we are including: rent/housing, utilities, loans (car, student, etc…), credit cards, gas, life/homeowners’ insurance, and anything else you are on the hook for contractually. Their recommendation is that you allocate no more than 50% of your income to these Must-Haves, 30% on Wants, and 20% on Savings. To figure this out you will need to keep an accurate record for one month and categorize all of your expenditures. Every time you spend money, it needs to go into one of these three categories. A good example of this is if you and your spouse’s combined income is $3,800/month, and you spend $2400 (63%) on Must-Haves, $1100 on wants (26%), and $300 (7%) on savings on wants, it doesn’t quite work. The idea is to get that balance of 50%, 30%, and 20%. This balance gives you the flexibility to respond to issues as they come up vs. creating additional Must-Haves in the form of credit card or other debt. Of course, this is easier said than done. In order to get yourself in balance, you may need to increase your income in the short term. There are a couple of different ways to go about this. You can pick up a second job, or find another job that is higher paying. As of today, there any many employers looking for workers, unemployment in Utah is at an all time low. The energy industry is looking for workers like never before, and generally they pay well. There are also agencies like the Department of Workforce Services that are here to assist us in getting jobs or better paying jobs.
The next option is to decrease how much money you are spending on Must-Haves or Wants in order to bring better balance to you budget. This can be difficult, but a couple ideas are to look for ways to decrease expenses by finding a less expensive and more fuel-efficient car, less expensive insurance, less expensive cell phone and service, less expensive clothes, less expensive food (making more meals at home and eating out less). A popular Dave Ramsey method of paying off credit cards or other loans is the snowball method. You do this by paying more than the minimum on one debt, once it is paid off, you keep that amount and add it to your next one, snowballing the pay off.
Once your budget is in balance and even before you pay off debt, your savings should go towards building your savings for use in an emergency or a planned expense. This fund might be a months’ salary ($3,800 in case of our example) more or less depending on your personal situation. This will create immediate breathing room and you will be prepared to meet small scale emergency events. After you have established this savings, you should continue to pay down debt. Reducing debt will create more freedom and bring in the good benefits of financial stability (better relationships and less stress). At this point it is important to maintain your less expensive lifestyle, living within your means and continue to build for the future.
Once your spending balance is achieved, it is important not to overlook the most important investment you need to make. Yourself. Investing in yourself through education and certifications will not only increase your earning potential, but make you an asset to your family and friends. When investing in yourself, it is best to develop a deliberate plan that enables you to improve your situation. Sometimes this introspection can lead to a new career, or a closer examination of your current career and where you want to be in the future. Achieving balance in your spending will demonstrate to yourself that you have the discipline and motivation to create a better, more secure future for you and your family.