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Why becoming debt-free is like going on a long car trip
It’s coming up to the end of the financial year here in Australia, the time when all business owners, accountants and bookkeepers are stressed to the max, trying to get all the information together and make sure they can pay all their tax bills.
It’s the time of year when I make the commitment to keep on top of things and never, ever get behind on my bookkeeping and tax info again.
However, this year is different. This year, I’ve actually made some changes that have drastically altered the way I deal with money…
And how much money I have in the bank.
They’re not huge changes, they’re not difficult, they don’t leave me feeling stressed out or deprived or (yikes!) poor. They’re tiny little things that didn’t take a lot of effort to put in place (just a bit of determination and focus and a big enough reason to want to do it!) but the difference they’ve made…
Well, let me just say that my whole world is different.
So is my bank balance.
There’s no time like the present to make a change if things aren’t working out. Stop whining about it and putting it off till tomorrow, take responsibility and get into action.
Imagine how you’re going to feel, knowing that whatever unexpected bill comes in, you have the money to pay it.
Imagine knowing that if you lost your job tomorrow, there’s no need to worry because financially, you can survive for a year or more.
Imagine owing NOBODY any money!
You can do that, it’s achievable. In less time and with less effort than you think. Start with these changes and move onto bigger changes as you grow more confident. But these changes alone will transform your finances.
I’m going to use an analogy to explain why these tiny little changes are crucial.
Say you wanted to drive from Dallas to Toronto, you’d know to head kind of north, but beyond that, how would you get there? You need to have a car to get you there and you need to know how to drive it. The car also needs to work. If you don’t know that you need to look at the fuel gauge, you’ll soon run out of fuel. Plus, you need to make sure that you have enough money to buy whatever you might need along the way, right?
Our finances are like that long distance car trip: if you don’t know how to drive, you don’t have a car that works, don’t have a map, no money for fuel or food or places to stay, it’s not going to be a pleasant experience.
But, if you manage the trip well, do a little preparation and pay attention to things, it’ll be amazing.
It’s time to plan the trip.
1. Check your vehicle: Check your money DAILY
As your dad probably used to tell you, before you take any long car trip, you need to check the car over, make sure there’s enough fuel, water, oil, make sure the tyres are okay, that kind of thing.
We need to do the same thing with our finances.
So, how often do you look at your bank accounts?
When you’re at the checkout to make sure you have enough money to pay for your groceries?
When you get a notification to say that a payment has bounced?
When it’s time to send the info to your bookkeeper or accountant?
For as long as you’re burying your head in the sand like I did, you’re always going to feel out of control, irresponsible and not good enough. And while you may not actually BE those things, you’re behaving as though you are.
It may not be the easiest thing in the world to do but it’s absolutely necessary if you’re going to be, well, rich. Or at least debt-free, which, to be honest, is rich, isn’t it?
Get an app for your computer & phone (such as MoneyWiz, Budget or Debit & Credit - read this article about the best money apps), load all your information in there and check it…
Every. Single. Day.
You have a certain amount of fuel for your trip, you need to manage it, know how long it’s going to last, what it needs to cover and when it needs topping up. You also need to know whether you need to bring in some extra money
2. Decide where you’re going: Set Goals for Your Money and Review Them Regularly
The more complex our goals, the less likely we are to stick to them. This goes for most things; let’s take this long distance car trip as an example. If someone gave you detailed instructions for the whole trip, they’d be pages and pages long and you’d just go straight into overwhelm.
Instead, set clear, concise, easy-to-understand goals.
And be realistic about them!
Setting a goal of saving $500 a week when you earn $1,000 a week is neither realistic nor achievable. Not unless you’re living in a tent on a self-sufficient allotment, anyway.
Setting that kind of goals is just self-sabotage.
If you set an unrealistic goal, and then fail at the first fence, the chances are you’ll give up. This is not empowering, financially or otherwise.
Instead, set a clear and achievable financial goal. It might be to save $100 a week or month.
You might do the dollar day thing where you put $1 into your savings on a Monday, $2 on a Tuesday, etc., till you put $7 into your savings on a Sunday and then start again at $1 on Monday.
It might be that you give yourself a budget for socialising or buying clothes.
Or maybe you walk or cycle to work and put your transport costs into your savings.
Whatever the goals are, make them SMART: Specific, Measurable, Achievable, Realistic and Time-Framed. Write them down and track your progress against them.
Don’t beat yourself up if you’re off track, just honestly reassess things, create a new goal and get back on the road.
You will also want to review your goals because you’ll find that as time goes on and this new savings thing becomes a habit, you’ll find it much easier to put away a lot more money than you first thought was possible.
So ,check in on yourself at least once or twice a month and make sure you’re still heading where you want to go.
3. Pre-Start Check: You Must Do This Before You Spend Any Of Your Income
Here’s what normally happens when our pay cheque arrives: we pay the bills, pay the mortgage or rent, buy some food, maybe go out and have a drink or splurge a little on some new shoes, then whatever we have left is “savings”.
Only, most of the time, there’s nothing left.
Here’s what you need to do: pay yourself first.
Before you pay anything – anything at all – pay yourself.
Now, let me share with you what I thought ‘pay yourself first’ meant for many years. I thought ‘pay yourself first’ meant ‘go out and buy what the hell you like and then use whatever’s left to pay your bills’.
And I wondered why I was in financial hell.
But no one had explained to me what ‘pay yourself first’ actually meant. It means invest it, save it, put it away for your future, but do not spend it now.
Scott Pape, aka the Barefoot Investor (you can get his life-changing book here) suggests that you put 40% of your income away BEFORE you spend anything.
David Bach in his bestselling book, The Automatic Millionaire, suggests you simply pay yourself for one hour each working day.
However you decide to do it, save first and spend what’s left over.
Because once you’ve invested your ‘self-pay’, budgeting is irrelevant. You can spend whatever you like with what you have left (just be responsible about it and pay the bills first!).
If you want to really set yourself up for success in this, automate your self-payments. Set up a regular transfer to your saving or investing account on payday so you don’t even have to think about it. Your money will simply be working nicely for you in the background and in an unbelievably short amount of time, you won’t even miss the money.
4. Be Prepared: Plan For Emergencies
Think about our car trip; what could go wrong? All cars must carry a spare tyre or a run-flat tyre in case of punctures. Also a wheel jack. On trips out bush, you might have a can of fuel and water. We’re prepared for emergencies because that’s the sensible thing to do. The people who go out bush in Australia without things like that tend to die, so preparing for the worst is something you definitely want to do.
How often do we do that with our finances, though?
We may have thought about it and even tried on several occasions to squirrel away a nice little saving fund only to have the entire amount soaked up because the car breaks down or one of the kids gets a broken tooth or the washing machine dies a sad, ignoble and really inconvenient death. Suddenly, our nest egg is back to being an empty collection of twigs and we give up on the whole savings thing because it just never works.
That’s kind of how it’s always gone for me, for sure.
The thing is, stuff happens and we need to have that fund for when it does. My dad was sick recently; he lives in the UK and I live in Australia. What would happen if I needed to hop on a plane to go and see him? What would happen if you lost your job? What if (heaven forbid) there was some major disaster and you couldn’t work? Then what?
We need a fund that will see us through those emergencies: an Emergency Fund!
This is part of the 40% of your income that Scott Pape, the Barefoot Investor, recommends you put away. He says to put:
10% of your income into savings (pay yourself first),
10% for you to splurge on anything you like, and
20% towards your Emergency Fund, aka your Fire Extinguisher account.
That 20% of your income is your own insurance against all of those things that life throws at you.
You do not want to have all your hard work at paying yourself first and saving up knocked back to square one because of some unexpected disaster.
Plan for it. Insure yourself against it. Create a Fire Extinguisher Fund and put 20% of your income into it.
Imagine how much more easily you’ll sleep, knowing that no matter what life throws at you, financially, you’ll be okay.
5. Use Your Resources Wisely: Spend Less Than You Earn
Imagine we’re bobbing along on our car trip. We have a certain amount of money for the trip to buy fuel & food. Every night, we book ourselves in to a 5-star hotel, order room service and a maybe nice bottle of Champagne.
Pretty soon, we find that the money has run out. As we’re walking down the street, wondering what on earth we’re going to do, we see a sign in a shop window saying “Run out of money? You can get some here!” So we go in and get some of the money. We know we’ll have to pay it back at some point, but at least we’re okay now and off we toddle to our next five-star hotel.
Not long after, the same thing happens: we run out of money again. All that money that we borrowed from the nice shop in that town we passed through has gone, plus they’re taking some of that money as payment towards the money they loaned us, so in actual fact, we don’t have as much as we thought we did.
We see another sign: “Need money fast? We can help!” and in you run to get some more money quick. And on it goes.
It sounds silly, doesn’t it? Why didn’t we just go to a more reasonably priced place, cook our own food and make sure that we had enough money to get to our destination? It seems silly, right? It wouldn’t be that difficult to do.
But this is how we are around money: we borrow more and more, get more and more cards, bigger and ‘better’ loans, until we’re drowning in debt. The thing is, if we’d taken care of our money in the first place, we could have scheduled in times to stay at those nice five-star places as part of our budget.
In his book, The Secret Language of Money, David Krueger says “through justification, luxuries have a way of evolving into necessities overtime. The special coffee becomes a routine, the better restaurant becomes the assumed standard and our expenses sneak upward and expand laterally”.
What this means is that if you go over your spending limit one month, then the chances are you’ll think, ‘oh well, I can do it again’, the next month. But this is a slippery slope, one that you don’t want to start on, so avoid spending justification at all cost.
I’ll let you in on the Big Secret to becoming rich and financially free: spend less than you earn.
Boring, I know, but it’s true. When Thomas Stanley and William Danko were researching for a book about millionaires and how they got wealthy, they first went to wealthy suburbs, where people drive flashy cars and live in huge, opulent mansions. What they found was that these people didn’t have a lot of money, they spent a lot of money. These people were stressed and anxious about money and had little or no reserves of wealth built up.
Stanley & Danko changed tack and searched elsewhere for the elusive millionaires. They found them in normal, average suburbs, driving normal, average cars. They are The Millionaire Next Door.
6. Learn How To Drive and Read A Map: Become Financially Savvy
We’re not allowed in a car until we’ve passed a test to say that we know the road rules, then we have to take lessons to learn how to safely control the vehicle before we go for another test and show someone that we can drive well enough to be allowed in a car by ourselves.
We understand that a car is a deadly weapon if mishandled. It’s dangerous to both us as the driver plus other people around us.
We don’t consider money in the same light yet how much emotional misery is caused by money? Because we don’t know how to handle it and we head for disaster unknowingly?
There is no real formal education for money, we need to do it ourselves.
I’ve put together a heap of resources here, with the books that I recommend, particularly the ones I’ve mentioned on this page.
Reading is one thing but doing is something else. I found that playing games was incredibly effective in having me understand what I’d read and learning how to apply the principles and there are two games that I’d recommend:
Learn how to use your money and what impact every little financial action that you take has on your goals. Applying the knowledge through these two games is fascinating and well worth the cost of the game; you’re not just playing, you’re learning.
7. Use Your OWN Car Not Someone Else’s: Get Out of Debt – and Stay Out
Picture this: we’re about to set off on our Big Road Trip but then we look across the road and we notice that our neighbour has a much nicer car than the one we’re about to set off in. It has air conditioned leather seats, shiny bits on the side and it can even do a dance for you when you’re parked up (don’t believe me? Check out what the Tesla can do).
We’ve seen the TV ads, we’ve seen all those ecstatically happy people on social media, standing by cars that look a lot like this one (even though I suspect that most of them have never owned a car like that; they just hire one for the photos) and we decide that, hell yeah, we’re going to get one of those, too! We’ll look so great and we’ll feel so flash, it’ll be so much better than in the car we were planning to use for our trip.
As a society, we’re taught that we can just spend, spend, spend because the banks and the credit card companies will always give us more money.
We constantly see ads and social media that tell us that if we buy this car, we’ll be happy. If we buy those designer clothes, we’ll feel rich. If we have that handbag, we’ll be the envy of all our friends.
We’re constantly encouraged to go further and further into debt.
You know what The Millionaires Next Door all had in common?
Of any kind.
Debt kills off our ability to grow financially. No matter how much debt you have right now, you can pay it off much quicker than you think you can.
Remember The Barefoot Investors’ Fire Extinguisher Fund? The first thing our Fire Extinguisher Fund is used for is to pay off our debts. Once we’re down to just our mortgage, then we can really start to motor ahead, and it won’t take long.
(NB These are external links, they'll take you to another site)
Read this article about a young family: How We Paid off $266,329.01 in 33 Months
Or this one: How I Paid Off $40,000 In Student Loans in 7 Months
Or this: This is What Happens When You Pay Off Debt – You Find Money!
We feel great as we’re setting off for our road trip in the flashy, dancing car, but then we realise that the payments on the car are eating up all our spare cash, and then some. We can’t pay for fuel. We have to sleep in the car because we don’t have enough money for a hotel. We can’t go anywhere because all of our money is going towards payments for the car. We’re stuck. We can’t move.
That’s how we live. We live our lives in a constant state of fear about debt payments.
Make it your priority this year to pay off as many of those debts as you can as quickly as you can. It will be a massive step towards your financial freedom.
Happy new financially successful year!
Over to you…
What small shifts can you implement this year that will have the biggest impact on your finances?
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Hi! I’m Karen O’Connor, Along with my husband, John, and my brother, Alan, we are the YouTube channel, Stop Being So Poor - The hows, the whys and the fun in making money.
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