I Want Off the Roller Coaster

What can I say, I love statistics. I tend to follow certain statistics like some folks follow their favorite baseball player. I know, I’m a nerd. One of the most intriguing stats out there that I follow is the American savings rate.

Back in January of last year it was negative (approximately -0.4% depending on the research data). Imagine that – a negative savings rate! When I teach our Past Due Boot Camps, I always ask a member of the audience to help me with some math: “What’s $40,000 per year minus $42,000 per year?” Of course, the response is typically collective laughter as the audience recognizes the point I'm making.

But why is it that we all laugh at something as preposterous as spending $2,000 more than we make in a year? The average person is doing it. Well, the average person was until the impact of the “economic downturn” really started to take effect back in the summer. One year after Americans had a negative savings rate, the Commerce Department reported that the savings rate was 3.6% of after-tax income.

We can infer from this data that when times are good in the economy, we tend to throw caution to the wind and “let it ride”. When there’s as much money floating around like there was just a couple years ago, we figure that we’ll just reach out and grab some if a negative event occurs. We can always out-earn our bad financial decisions, right?

When times are tough, though, we go into lock down mode. Batten down the hatches and hold on to your hats because we don’t know where this wild ride ends! I think that’s a pretty stressful way to live. Talk about a roller coaster. This isn’t just about the amount in your bank account, it’s about the burden and pressure on each of our shoulders when difficult times motivate us to save some cash.

The trick with savings is making it a habit and a priority all the time. Recognize that saving money is essential to cover emergencies, to get great deals on big purchases, and for long-term wealth building. There just isn’t any other way about it.

Since the average person reading this has been able to save more money in the past few months, I encourage you to continue building on that discipline even as our economy recovers. Making it a habit will diffuse financial “management by crisis” and restore peace and hope to your home.

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Getting out of Debt: The Debt Snowball

A little over a week ago we had a freak snowstorm here in North Carolina. Four inches later, all the kids in the neighborhood were in their yards sledding on trashcan lids and using beach toys to gather up the white stuff for snowballs. Some of the kids had never seen snow, but they all wanted to build snowmen.

The first step to building a snowman is gathering up that chunk of snow that you can start rolling across the ground. The more you roll, the bigger the ball gets. Before you know it, there’s a real-life Frosty keeping watch over your home. Those kids were rolling snowballs all over the ground, delighted to see them grow larger and larger.

Being a financial coach and certified nerd, I immediately linked the snowman process to dumping debt for good. I teach clients a process called The Debt Snowball for completely eliminating their consumer debt – typically in 24 months or less. Here’s how it works:

With the debt snowball, you list the debts from smallest payoff to largest. While paying minimums on everything else, you attack the smallest debt with such a vengeance that it can do nothing but hit the bricks. I’m talking about selling stuff, tightening the budget to free up cash, and doing whatever else you can to kick that first debt out of your life for good.

Once the smallest debt is gone, you take the minimum amount you used to pay on it and roll it into the payment on the next debt – along with any other funds you can free up. Remember, we’ve already discussed putting your foot down and being done with debt; your ferociousness can shine in all its glory now. Once that second debt is paid off, you roll its payment, the first debt’s payment, and any other cash you can scrape together into the third debt. Just like a snowball for a snowman, as you pay off a debt and roll the funds into the next, your payments get larger and larger.

But, why wouldn’t you pay off the debts in order of interest rate – from highest to lowest? I get this question all the time. Personal finance is much bigger than numbers and interest rates. We’re talking about emotions and behaviors here. It’s personal. If the debt with the highest interest rate has a huge balance, it’s going to take a while to pay it off. It won’t take long before you lose your enthusiasm and motivation. But when you taste some victory by paying off a small debt you’ll be invigorated to push forward and kick that next one out of your life.

I’ve worked with people who were able to throw thousands of dollars each month at their largest debts after they’ve gotten rid of smaller ones. That’s a huge snowball rolling downhill, destroying every debt in its path! Thousands of others across the country have used this process to achieve debt freedom, so what do you have to lose? Debt.

Don't get Stuck on "How"

As I'm coaching someone through a career transition and especially into the formation of a business I find they often get stuck on the "how".  As an idea begins to form thoughts begin to enter their mind: "I don't have the money for that", "I don't have the time", "I'm not smart enough", "I don't know the right people", "No one will take me seriously."

If this describes your thought process I encourage you, as I do with my clients, not to get hung up on the "how" and instead focus on the "what."  Until you fully know the possibilities the "how" doesn't even matter much.  I've found that it's easy to get hung up with worry before an idea is halfway developed.

So take the time in the beginning to fully develop your "what."  Only then should you start planning the "how."

Getting out of Debt: Expect the unexpected

My wife and I were driving home from my in-laws a few months ago when I hit a pothole. Lo and behold, the darn thing blew out my tire and put a nasty dent in my wheel rim. That little pothole cost me nearly $600! You know what, though? I knew it was going to happen before it ever did.

Sorry, no Magic 8-Ball here. Money magazine says that 78% of us will experience a major negative event in any given 10-year period. Now, busting up my tire and wheel don't qualify as "major" in my book, but because we know that life happens - usually unexpectedly - my wife and I have an emergency fund in place for when the rain comes.

Remember that the first part of getting out of debt is changing the way we view debt and making the choice not to go into debt any more. If you have an emergency, you have to cover it with your emergency fund - not your VISA. Putting emergencies on credit cards will keep you locked in the vicious cycle of debt.

For most of us, having $1,000 in a savings or money market account is the First Step on the road to freedom!

Getting out of Debt: Putting your foot down

Debt has a way of lingering, always for too long. So, if the debt is lingering how can we get out of it? What is the best method of getting out of debt?

There aren't any magic pills that make debt go away. If someone on a late-night TV ad or on the radio tells you they have the secret to eliminating your debt without any effort, they're lying. To start getting out of debt you have to do one simple thing: stop going into debt. It's crazy, I know!

I think about it like this: when I was a boy, I joked with my friends about "digging a hole to China." Imagine digging a hole - a big hole - so deep that you'd need a ladder to climb out of it...but you don't have a ladder. So you're stuck in your hole with a shovel. If you want to get out of that hole, obviously the first thing you're going to do is stop all that digging, right?

Proverbs 22:7 says "The rich rule over the poor and the borrower is slave to the lender." If you want to get out of debt, you must stop going into debt and allow for a paradigm shift in your way of thinking. Debt doesn't build the prosperity we've all been led to believe by our culture. When surveyed, 75% of the Forbes 400 (the 400 richest Americans) said they got there by becoming debt free. So, instead of putting the cart before the horse by talking about how to actually go about eliminating debt, we first have to change the way we think about debt altogether - otherwise, we'll wind up right back where started...in that hole.

Know Your Vision

"Where there is no vision, the people perish." - Proverbs 29:18

What is your vision? Do you want to improve your practice or business? What about becoming debt-free or improving your health? You need to develop a clear plan and put steps in place to carry that plan out.

It's not enough to simply have an idea in your head. If you really want to bring it to fruition, you must write it down and develop a time line to make it happen.

If you want to improve your business, how will you do it? Will you focus on a marketing aspect? What will you do? When will you launch it ?

Focus on the long-term when planning and then pull out the short-term things that you really need to do right now.