Getting out of the cycle of “living paycheck to paycheck”
More families than ever are living “paycheck to paycheck”, according to a recent study — that is the hard truth about the state of many families’ financial worlds.
Among the other sobering findings in the CareerBuilder-sponsored study was that 36% of those polled are not putting any money in retirement plans right now. This means that not only are many Americans struggling RIGHT NOW, many may also be setting themselves up for a FUTURE that is MORE UNCOMFORTABLE than their present. (You can read an article about this study by clicking here.)
This difficult struggle present all around the country right now IS possible to unwind if the family does have some income coming in.
The steps to take to stop the cycle of living paycheck to paycheck, although they may be difficult to execute, are simple in principle:
1) Spend less than you make each month
2) Use some (and hopefully, a lot) of the excess to reduce debt
3) Carefully allocate the excess, during and after the debt reduction period, among giving, short-term savings, and long-term savings.
Sadly, when debt is high, things get very difficult on a family whose income suddenly drops or disappears altogether. Discretionary spending like clothing purchases or trips out to eat and the movies are easy to cut, but mortgage and car payments cannot be done away with easily. During a downturn, then, a family with substantial debt will normally struggle significantly more than a family with little or no debt. This is often true even though the family with debt may, in many cases, have a higher income than the low-debt/debt-free family.
All of these issues deserve more discussion, but I thought it was worth at least pointing out here.
Financial independence for your children
By “financial independence”, I don’t mean an independent financial state where one no longer has to work, although your children could at some point be in such a state — you never know! Rather, I’m referring to the ability of your children to manage their finances increasingly independent of your involvement.
The Fall 2009 edition of USAA Magazine had an article in it that I noticed today on this topic, and I thought many of their suggestions were very good. I’ve listed the key points below.
GIVE THEM A PLAN
Determine what skills, financially, you will turn over to your child at what age, and teach them accordingly. i.e. as they begin to earn their first allowance or income, require they use their own money for trips to the movies with friends.
MAKE FAMILY MONEY VISIBLE
Share your family’s monthly budget with your children as they grow older to help them understand how and why certain financial decisions — and sacrifices — are made.
AVOID OVER-INDULGENCE
Quoting straight from the article: “Keep your teen’s allowance modest enough that he’s motivated to save for things he wants and eventually to get a job.”
MAKE A CONTRACT DEAL
Develop an understanding with your kids to talk with you before signing any financial contracts, such as school loan agreements, credit cards, etc. The article cites a recent Sallie Mae study that claims the average college student carries $3,173 in credit-card debt, a figure that is 46% higher than just four years ago.
DON’T ALWAYS BAIL THEM OUT
I can imagine this might be the hardest concept of all, but it is best to let this happen first when they’re younger, and they run out of money for fun activities, or clothes, or whatever. If this lesson is not instilled at any early age, then one day their financial crisis will be something bigger, like being short of funds for groceries for the week. Help them learn the value of planning now, even if it means them learning the hard way sometimes.
TEACH THE VALUE OF INVESTING
Help your child open a suitable investment vehicle for him or her as soon as they are old enough to understand the concept of saving money — a Roth IRA or even a simple bank savings account at first. Talk with them about how you invest through your personal savings, 401(k), and/or other retirement or short-term savings plan, and show them real numbers to demonstrate to them how your funds go up and down as financial markets swing up and down, and as you contribute and withdraw from the accounts.
EXPLORE FINANCIAL CLASSES AND OTHER RESOURCES
Encourage your kids to take a personal financial class at their high school or in college, if one is offered. But remember, parents have the primary responsibility to teach kids these important skills. There are a number of good books out there to help families teach their children about finances.
TEACH THEM YOUR PRINCIPLES
This is an item not mentioned in the USAA article, but one I’ve added to the list. Although somewhat obvious throughout, I think it deserves strong mention. Most families who are committed to educating their kids about finances probably take a fairly prudent approach to finances, and so best of all these families should actively seek to persuade their kids of the value of savings, giving to others, living under a plan (a budget), buying things with cash instead of credit, the importance of insurance, etc. etc. The area of finances is too critical of an area to let your kids “find their way”. The principles and truths of areas such as budgeting, insurance, savings, and how compound interest works are too important to hope your kids discover and learn about them on their own.
Trying to practice what I preach
This past weekend my wife and I pulled out the ol’ budget and dusted it off. As much as I talk about saving, being a good steward of your money, and creating and living according to the budget, I am not always perfect in following my own advice. Yes, our family spends less than we make, and no, we don’t have consumer debt creating massive stress and fueling bad spending habits. And yet, we don’t do a great job at watching our spending and then comparing it to our spending plan — our budget. In fact, we are friends with a couple who do a much better job at this than we do, and I am glad for people like that in our life to remind me of this very necessary, helpful process.
So, from time to time, we have to pull out our budget, review it, compare it to actual results, and make changes up or down as needed in our budget to meet our present circumstances and needs. That is always a sobering process but it is also a purifying process, as without a doubt I believe we (and everyone I know) spend less when we are aware of what we are spending than if we are swiping our debit cards blindly as the months pass. Because if we are not monitoring our spending, we are very likely spending more than we intended. And usually, that “accidental” spending is in areas that we could have done just fine in if we had spent less, thus freeing up more money to give, save, invest, etc.
Have you pulled out YOUR budget lately? Have you compared your actual spending to your budgeted spending? You may be surprised how much you learn about your spending, and change about it, just by looking at what it has been recently.
There are, of course, a million ways to track your spending–individual envelopes for cash designated for particular uses, or reviewing spending daily or weekly through their smartphone or PC.
We find that there are a few key areas that are easy to lose track of during the month (in particular, dining out and groceries for us). Consequently, we have a sheet we keep hanging on our refrigerator to track daily food spending during the month. That’s it. Combined with a monthly review of spending that I categorize by downloading debit card transactions into MS Money, that has proven to pretty much do the trick.
So, do whatever YOU need to do to live according to the spending plan you (and your family, if applicable) have developed.
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