In my first college chemistry class the professor told us to look around the auditorium, which was packed with nearly 500 students. He said, “Look to your left, look to your right. At the end of the semester one of you will have failed.” That wasn’t a shock tactic – at the end of the semester roughly one-third had failed. Of those, some would go on to correct course and some would go home.
Sadly, the same is true about the average American’s finances – one in three is facing significant financial challenges. These challenges can come in many different shapes and sizes, ranging from job loss to living above one’s means to a crush of debt that stubbornly won’t go away no matter how hard you try. If you’re in this group that is facing significant challenges with your current financial situation it is time you take command of your personal financial situation. It may seem like a daunting task, but financial stability and independence is something that we can all achieve.
Although each of the bullet points below is examined in more detail in other articles here at Caveman Cash, here is the basic journey that we will be taking toward financial independence.
Stop the bleeding
If your spending is greater than your income you need to take immediate action to reverse this – it is an unsustainable situation that will eventually lead you down a path toward a lifetime of debt. There may be short periods where this is unavoidable, such as when you’ve lost a job or suffered an injury that keeps you from work, but unless your last name is Gates or Buffett this will be untenable over the long term.
Identify and eliminate your worst investments
Since we here at Caveman Cash view every dollar we spend as an investment we need to go through and find and eliminate our worst investments – and I’m not talking about those in your stock portfolio. I’m talking about the unnecessary investments such as the 3-4 premium TV packages, the subscriptions to services you don’t use, car payments you can’t afford, and over-priced credit card debt. Recurring monthly and annual payments all need to be examined.
Get your debt in order
There is a priority order to debt that you need to understand – the highest cost debt is the debt you need to eliminate first. In most cases this is either credit card debt or pay day loan debt. Both of these debts are generally structured in a way to keep you paying the debt load for as long as possible. Until you have eliminated these two don’t even think about trying to pay off any of your other loans.
Make a detailed budget
If you’re in financial distress I suggest that you make a budget of what you think you will spend every month on each of the major categories – Food, transport, housing, debt repayments, clothing, entertainment, etc. Do this without looking at your previous spending and then go back and see how your actual spending compares to your proposed budget. This type of reverse budgeting is an excellent way to spot areas where you are overspending.
Chip away at the worst debts
Debt is not something to be feared. Debt is a tool that we can use to make many sensible purchases such as cars and homes that we otherwise couldn’t afford. However, not all debt is created equal. As mentioned above, credit card debt and short-term loans are often the most onerous, but any debt that costs you more than 6-8% annually is debt that needs to be paid down or refinanced because getting a risk-free return on investment of more than 6-8% annually is nearly impossible.
Save for the future
Once you’re on a more stable path, and have eliminated your worst debts, it is important to start saving for the future. Savings are critical and should not be overlooked – they are what will keep you out of credit card debt in the future if you lose your job, get injured and can’t work, or need to pay for an expensive car repair. Savings are also what will form the foundation of your retirement and keep you from slipping into poverty as a senior.
Here at Caveman Cash we believe that everyone can achieve personal financial independence, and we’re dedicated to helping you along this journey. If you haven’t already done so, please consider signing-up for our newsletter which will bring some great deals to your inbox every week and let you know when we are running our Financial Freedom courses.
Have questions? Drop us a message with questions about your finances and we’ll do our best to get them answered during our Friday Q&A.
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