Moving from Financial Stress to Financial Wellness Part 2
In our last installment we focused on two methods for improving your financial wellness and lowering your financial stress. These methods included taking control of what you can control and letting go of what you can’t. We also discussed the concept of counter-productive coping and how people tend to spend money in order to make themselves feel better. Like emotional eating this form of stress-relief is often short lived and eventually leads to even more stress and more problems.
In this installment we’ll look at the following five tips for reducing financial stress:
- Spend less than what you earn
- Get rid of high interest store credit cards
- Have money taken out automatically from your paycheck and put into a savings plan
- Trade in your credit card for a debit card and keep track of all your purchases.
- Start a mutual fund retirement account
1. Spend less than what you earn. You may already be thinking: How am I supposed to put money aside when I don’t have any extra money to spare? And for a lot of people, that’s a very real problem. This is a situation where you have to develop steely discipline. There’s no easy way to save money when you are trying to get by on so little.
In order to start saving when you have almost no money to spare you have to look at ALL the little ways you can save. For many people that includes reducing your rent or car payments right down to what you are spending on coffee every day. You may be able to dramatically reduce the cost of housing by simply moving to a neighboring town. You can buy a used car for 30-50% less than what you would pay for the same new car and you can make your own cup of coffee in the morning for pennies each day rather than dollars. Check out this true story of an underpaid school teacher who became a self-made millionaire by the age of 36 by saving in every imaginable way.
2. Get rid of high interest credit cards. A good place to start saving BIG is to pay off store credit cards. Typically store credit cards have a very high rate of interest, usually 20% each year or higher. That means if you are carrying $10,000 in store credit card debt, (add up all your different cards) you are paying $2000 a year just in interest payments. So, whenever anyone asks you to start a store credit account your answer should immediately be NO. Whenever you get an unexpected lump sum of cash like an IRS refund, put at least half of it to paying off this kind of high interest debt.
3. Have money automatically taken out of your paycheck. Whether you are working as a cashier at a local grocery store or a stock trader at a fortune 500 investment bank, having even a little money taken out of your paycheck every month and put into a savings plan like Fidelity or Vanguard, can really pay off over the long run. The research tells us that automatic savings plans really work to help people sock money away. There are legendary stories of people working at places like Home Depot and Amazon whose stock savings plans have made them rich.
4. Trade in your credit card for a debit card and keep track of everything you spend. We waste a lot of money without even realizing it. Whether you track everything you spend on a debit card, or save receipts from everything you pay cash for, (or a combination of both) the idea is to monitor your spending in different categories like entertainment, food, restaurants and take out, car, home, etc. The results of your tracking will be eye-opening: One three-dollar cup of coffee, purchased 5 days a week plus a $3 egg sandwich will cost you about $1500 a year. (See # 5 below for how much just that amount of money will get you if you save it every year instead!) As long as you don’t get socked with overdraft charges, debit cards are ALWAYS better than credit cards because you won’t have to pay interest charges or late fees on the items you purchase.
5. Set up a retirement account. If you were to set up a retirement account at the age of 25 and start saving $100 a month into a relatively safe, stock market investment account. (If you can keep your money invested over the long haul, look for mutual fund accounts that have consistently earned over 10% for at least 10 to 20 years.) With this strategy in place, you could be looking at over a $1,000,000 in savings by the time you retire. That’s the power of saving a little bit, each month. (And this could all be achieved by NOT buying that coffee and egg sandwich every day and saving it instead!)
Putting aside money takes discipline but you CAN do it. Whether you earn a lot of money or a little, following these five steps, and really keeping careful track of what you spend on necessary and unnecessary items, will set you on the road to financial wellness.
James Porter
Author