Making a Financial Turnaround (Blog)

[Savage]

Use this thread to discuss the following entry from Steve Pavlina's blog:

Making a Financial Turnaround

[nafai]

Worrying about my finances is probably my #1 stress in my life. I'm not so far gone I'm not paying my bills, but I am not making significant progress on my tens of thousands of dollars of debt.

My wife and I decided to start getting serious about this. We track everything we spend and we know how much money we have. We're doing better about living within our means. I've taken on a small side consulting job, trying to do *something*.

But it just feels hopeless at times. I read personal finance books and most of the advice we're already following or don't apply to our current situation. A big example, Richard Bach's "Latte Factor". Basically, "all the money you spend on coffee and eating out, etc adds up". Well, guess what? We don't eat out except for the occassional date night. All my snacks are provided at work. I use my credit or debit cards maybe twice a week. I cut out the data plan for my cell phone, I've finally cancelled that gym membership that I don't use, etc. But it still feels insurmountable.

I guess the only solution is this:

"While cutting costs can make things easier in the short-term, it's usually much more productive to focus on boosting your income, so unless your expenses are irresponsibly high, I suggest you invest most of your planning attention on the income side."

Thanks, Steve. Most personal finance writers constantly harp on the fact that increasing your income is not going to help you. It's decreasing what you spend. Yes, this may be true for most people (it used to be for me -- that's why I got in this mess!), but there are those of us to whom it doesn't apply.

I just wish I knew what the answer to the focus on the income side is for me.

[Savage]

At one time I also took the advice that you should focus all your energy on budgeting, gaining tighter control over your finances, gathering more accurate data, etc. But that only gets you so far, and it's not a particularly enjoyable way to live.

While it's entirely possible to make more money and still get into trouble, irresponsible spending may not be your problem. Your problem may simply be that you're earning too little money. If your spending habits are reasonable, then earning more money may be all it takes to solve your financial problems.

More money can solve some problems, and getting out of debt is one of them. Think of what would happen to your debt if you doubled or tripled your income while keeping your expenses roughly the same. Even with higher income taxes, the problem would basically be solved.

In some careers like sales, doubling or tripling your income may be an achievable goal. In other fields it may be nearly impossible. One of the important factors in increasing your income is to make sure you work in a field that gives you enough control -- if you committed to doubling your income, could you do it?

Brian Tracy advises setting the goal to increase your income by 50% within the next year. For most people that's a challenging but achievable goal that can be turned into a workable plan. One of the best things you can do is to find people in your field who are already earning 50%+ more than you, and ask their advice on how to get there.

[mjukr]

Nafai, I was in a situation much like yours up until June of this year. We had over $40,000 in debt and were getting nowhere. We tried many "budget" plans (I think "The Total Money Makeover" by Dave Ramsey is the best, most no-nonsense approach in this area), but decided we simply weren't making enough.

So I took a chance on a job 2400 miles away. I don't have the constitution to handle self-employment, so in my case getting a higher paying job was my best option. I'm now making 50% more in an area with a 20% lower cost of living (that's also closer to family and friends). My wife landed a better job as well. Together, we're making almost 65% more than before.

With our current plan, we'll be COMPLETELY debt free in about 18 months! So, yes, in our case, with such a high debt load, getting higher paying jobs was the fastest route. We suffered with this debt for a long time before deciding that the financial stress was too much, and that finding higher paying work--even far, far away--might be necessary. And we're glad we did!

[KeithHandy]

I'm thinking a possible advantage of the necessity of "baby-stepping" -- setting smaller goals than simply going straight from total scarcity to total abundance -- is that it reinforces a belief that there is some distance between the two states, hence a "cushion". If it was too easy to make the full leap all at once, you would feel like there's not much between you and a return to poverty, and that would make you very fearful with your newfound wealth. You may achieve material abundance while still retaining a scarcity mindset.

The simple, man-on-the-street version of this is the old saying, "easy come, easy go".

[norbert]

The focusing on contribution idea keeps popping up on my radar and it started getting part of my core values but I couldn't make it a habit yet.
I don't remember if you have any relevant article on getting serious about this?

[investorblogger]

I liked the article, but I think a few real life examples, Steve, would help to make the message more effective for your readers, esp. if the examples were drawn from people you know about. Otherwise it's a little dry, if you know what I mean!

Kenneth

[eternomi]

Originally Posted by nafai

I just wish I knew what the answer to the focus on the income side is for me.

The "knowing" part isn't hard.. The "doing" part is..

How does one make money? You provide a service to someone else who either doesn't know how to do it for himself or doesn't want to spend the time to do it.. That's all.

The path of making money always goes through serving others... In other words, contribution.

Thus, you need to have skills and knowledge that others need and find valuable.

When you intersect the set of skills and knowledge above with what you find interesting, BINGO!

You don't have to quit your job if you enjoy it. You could jump to a better paying similar job, or start something part-time on the side.

The reality is that neither Steve nor anyone else could tell you exactly what to do because it is all situation dependent. The best that could be done is personal coaching, but even then, you'd have to find someone successful in your situation.

Personal development gives you the outline only. You need to think about how to apply this outline to your life on your own.

Successful people are the ones who understand their environment and know what they can bring to the table to support their environment. It is quite possible that you either don't know about your environment, or don't have much to bring to the table.

Now what? Think about what you like, and how it could serve others. Find out about what others need, and see if any of it interests you.. Go go go!

[MamaDuck]

I think Nafai is very right, we also don't go out to eat, spend in ways which are normally advised in which to cut back, etc. - we're always trying to spend less money but the issue is really that not enough money is coming in to begin with, which is why this article really touched that.

[Lyman]

Excellent article. Much like norbert said, the contribution idea has been showing itself to me more and more.

I've been thinking a lot about Russell Conwell's Acres of Diamonds speech. So many times we go looking for our wealth outside of our immediate area of influence (set huge goals that we can't wrap our minds around), and we become frustrated when they don't materialize quickly enough for us. It's much easier and smarter to look at where we are now and what we already have that can provide for the increase (like the salesperson mentioned).

A 50% increase in income over the next year? Completely doable. Here I go!

[Rohok]

In this day and age it's really easy to go to an electronics store for example and drop U$500 on a credit card on a camera for example.

We are obsessed with the gotta have it NOW mentallity. I would advise people to slow down and think 10 times before buying anything.

In my household we have a rule that we do not buy anything above U$200.00before waiting a full week. That gives us time to think the purchase over and in a LOT of the cases we end up not buying the item.


The other thing is to set up and automatic withdrawal from your bank account. I started mine about 6 months ago, two times a month. Once on the 5th and the other on the 20th, I get paid on the 1st and 15th. This is absolutelly addictive because you see your savings growing and you barelly feel any pain.

[Dave Kaminski]

Originally Posted by Rohok

The other thing is to set up and automatic withdrawal from your bank account. I started mine about 6 months ago, two times a month. Once on the 5th and the other on the 20th, I get paid on the 1st and 15th. This is absolutelly addictive because you see your savings growing and you barelly feel any pain.

I love that idea.

[helgi]

I started an automatic payment into a savings account a couple of months ago and it's great to see it grow. It feels like a more solid commitment that way, as opposed to doing it manually.

[Pat P.]

Nafai,
The problem of getting out of debt is a real close one for my wife and I. After a couple of years of rationalization and no results, we continued to be in debt (about $25,000 in early January 2006). Although we were making more money than ever before, the debt didn't seem to go away. So we decided to try a different approach. After reading D. Ramsey's "Total Money Makeover", we started a plan with a fix goal: to be out of debt by the end of the year.

Since I am a bit more organized than my wife, I took the job of playing with budgets and determining if the goal of being debt free by the end of the year was achievable with our current income. I determined that we needed to have $2,500 a month for debt (car loans, credit cards, medical bills) reduction.

After a couple of hours of work, I came out with a budget. We discussed the pro's and con's of the plan and after some modifications, we we're ready. After the first month, we had to do some changes, but the general structure was mantained. After that, we were on automatic pilot. We used the snowball debt reduction method (order your debts from lowest to highest, and make payments in that order).

Today, it only remains to send a payment of $500 for American Express and we will be done. Yeah, we didn't achieve the original goal, but the due date is Jan 2nd., so I don't mind if we missed the original goal deadline but a couple of days.

Now that I have told you my story, I will outiline the plan:
0) Prepare a budget. Fill first your housing and food, then transport and finally debt. This is suitable for both fixed and variable incomes. If you have some savings, stop it for the moment. Create an emergency fund of $1000, and take the rest toward debt reduction.
1) Add up the minimum payments for each one. If you have enough proceed to step 3. If not go to step 2.
2) Increment your income. Deliver pizzas, do freelance jobs, sell stuff your not using and is draging you down; what ever you need to get out of this situation. It is only termporary.
3) Make minimum payments in all except the smallest debt. Pay as much as you can on this one. If you don't have enough to knock it out, don't worry, you can do it next month. On the contrary, if you made a payment in full, proceed with the next smallest debt and repeat.
4) Next month, repeat from step 3.

The idea is that your total figure towards debt reduction remains constant month to month. Then, if you have fewer debts, you can make larger payments (hence the snowball effect) and get out of debts faster.

This is not an optimal plan, in the sense that it is possible to pay more in total interests than using other methods, but it will get you there sooner.

I hope my description is not too complicated, but if you have any doubts, do not hesitate on leave me a PM.

Good luck,
Pat