How is your Financial Health?

Are you in a financial emergency? Do you need to dial money 911?  Certainly, our economy is, and so even if you are not in an emergency state, a full financial check up might be in order.  In times of financial uncertainty people are more aware of their money.

The issues of what to spend money on are elevated in the importance of decision making.  Because of this increased focus, it can be a great time to make life changes when it comes to how you deal with money.  Unfortunately most people make only minor surface changes and, after the storm is over, quickly change back to their previous poor money habits.  However, if you change your understanding about money, and develop new habits, the changes can result in lifelong financial peace.

Dealing With The Emergency and Developing Financial Peace

1. Assess the Situation: Be Honest With Yourself

Most people struggle with being honest with themselves about their financial condition.  It is very easy to be in denial about the need to make changes and the need for help.  Here are a few questions to ask yourself:
* Do you have credit card debt?
* Has your overall level of debt increased during the past year?
* Do you have a car payment?
* Does it ever feel like the month lasts longer than the money?
* Do you find yourself struggling to make it until the next payday?
* Are you finding it hard to save for the future?
* Do you and your spouse often fight about money?

If you answered YES to any of these questions, then you need a financial surgery.  If you answered YES to more than one of these questions (or maybe all of them!) then you are in desperate need of changes in you life.  Admit that you have financial struggles and begin to change.

2. Stop the Bleeding

The first step is to stop the bleeding.  You do this by changing your spending habits. This will mean changing your lifestyle.  Let’s face it, if you answered YES to questions above then you are living a lifestyle that you cannot afford.  You need to scale back to a lifestyle you can afford.  The longer that you’ve been living a life you can’t afford, the further you will need to cut back your current spending.

There are many common changes that need to take place in this step.  You may need to:
* Stop eating at restaurants
* Put a hold on any purchases other than food, shelter, and utilities
* Cut out a monthly expense (like your cell phone or cable tv)
* Sell you car to eliminate car payments – by purchasing a small car with cash
* Commit to not buying anything on credit again

The more difficult your financial situation (ie. the more often you answered YES in part one) the more of these steps you will need to take. You may even need more drastic measures.  Part of cutting your spending is to develop a clear, written budget.  Most budget systems are complex and set people up for failure. Here is how to set up a simple budget system.

3. Give Yourself Oxygen: Increase Your Income

Your financial equation has two sides, your expenses and you revenues:  what you spend and what you make.  Once you have stopped the bleeding in your spending you need to look for ways to increase your income.

There are endless ways to increase your income.  You can:
* ask for (and do what it takes to earn) a raise
* have a second spouse enter the workforce
* get a second job
* start a home business
* sell some of your ‘things’ on Ebay or by having a garage sale

Again, the more difficult your financial situation the more ways you will need to find to increase your income level.

4. Consider Alternative Treatments: Have a Plan B in Place

In order to find true financial peace, you will need to develop a “plan B”.  “Plan B” is the preparations you will take in case something unexpected happens to your income source.  This could mean that you lose your job, you get a pay cut, or you get hurt or disabled and are not able to work.

The first part of having your plan B is to develop an emergency fund. Author Dave Ramsey of the Total Money Makeover (one of my top 10 book choices), suggests having an emergency fund of $1000 set aside immediately, even before you begin to pay off debts.  Later you should increase this fund to covering six months of expenses.  If you are concerned about the possibility of job loss in the near future, then get the emergency fund up to six months of expenses right away.

The second part of plan B is to create alternate sources of income. This is where having a home business that allows you to create residual income (also known as passive income) comes in.  Other plan B options include developing new skills and more education or getting your foot in the door at a new company by starting a part time job.

5. Make Long Term Life Changes: Get Out of Debt

After you have a plan B established, have done what you can to increase your income, and have made any necessary changes to your spending it is time to do everything you can to get out of debt.  Again I would suggest following Dave Ramsey’s teaching here.  Dave teaches that you begin a debt snowball by paying off the debt with the lowest balance.  This allows you to gain some quick success.  The snowball effect occurs because once you pay off the first debt you add the original payment of that first debt to your extra debt payments and start attacking the second debt.  Your goal is to pay off everything other than your mortgage right away, and then over time attack your mortgage.

6. Continue to Focus on Long-term Financial Health: Save for Your Future

The next step is saving your future.  This is long-term savings for your retirement.  You need to start to do this only after you have paid off all your debt other than your mortgage.  Your goal is to fully fund your retirement account, to create extra sources of residual income, and to continue to live frugally while you save, save, and save.  Included in this step will be saving for specific purposes such as your next car, vacations etc.  You never want to use debt again.  You will also likely want to contribute to your child’s education fund.  Always buy things with cash by saving for them first.  This gets money working for you instead of against you.

Written by:
The Success Professor – Danny Gamache

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