One of the things I was made aware of just this week is that although I don’t have any debts, I am still in prime position to easily head back in that direction or face some serious financial stress and lifestyle changes because I still participate in the rat race. So what does this mean?
Let’s do a little math…
In my own life I need to make a certain amount in order to maintain my lifestyle.
Let say my rent is $1,000 per month, my utilities are about $100, our cell phones are $100 and to feed our family is about $1,000. That means I absolutely need to make at least $2,200 per month to maintain this lifestyle. It doesn’t sound like much, but when I look at the things that I have signed a contract for; my $1,000 per month rent all of a sudden becomes $12,000 per year, plus a 2 year phone contract ($2,400 per year) and monthly utilities for the term of my lease ($1,200 per year). That’s over $15,000 that I technically still owe! Not including food…
What happens if we didn’t have a savings, lost our jobs, or had an emergency that required more finances on top of what we technically owe or need to survive?
Ok, so that sounds a bit overwhelming and although we cannot plan for everything in life, we can choose to adjust our mental thermostat just a little and spend more wisely.
Here are some principles I’ve learned from life experiences, financial advisors, millionaires and the like, of how to keep yourself out of debt once you get out of debt:
Pay yourself first. It’s easy to get out of debt and feel like the extra money no longer going towards credit card bills is rightfully spent. But the truth is, if we increase our lifestyle spending habits we are just jumping back on the road to debt. Take that extra money and pay yourself first. One of my financial mentors recommends saving 50% of your total earnings.
If that is literally impossible with your current income start with 5-10%.
Have 6-12 months of back up. Having stored income is a great way to give you time to seek options should you be in financial need or pay for unexpected costs; ie. root canal or a car accident premium. If you are continually paying yourself, your savings should be continually increasing.
Spend only 50%. Just like the save 50% rule, the same mentor told me if I am looking to buy an item; ie. a new home, a car or computer… Pretend like the item cost double and spend half, save half. This concept was invaluable to me because when we typically spend money on high priced items, they end up becoming a liability that takes up more cost to maintain. That 50% we just saved will help give some cushion for those costs.
Don’t owe any money whatsoever. So maybe you’re out of debt, however, just remember that when you enter into a contract, you technically owe the entirety of the contract. This concept floored me. As stated above, when signing a contract, the contract may state x-amount per month, but when the contract is for a certain time period, we must multiply the monthly payment with the length of the contract.
So if I sign a 12 month contract for a $1,000 lease it would be a good idea for me to have $12,000 in the bank to pay it off every month. This sort of falls into place once you’ve created the habit of paying yourself and saving 6-12 months. If a years worth of rent is too overwhelming right now, aim for the cost of breaking the lease (lease break fee) and 1-2 months of rent. Should you be in a position where you can no longer afford rent you can at least get yourself out of the contract to avoid going back into debt.
Learn how to earn and invest. These concepts may sound completely intangible or absurd at first because in our cultural view on debt it has become “normal and acceptable” to owe. An amazing thing happens when you free yourself from financial obligation; Options, opportunity, time and abundance increase. You can now become more productive at learning new ways to increase your income and invest what you own. Instead of spending all your time and effort trying to stay ahead of the rat race. We can now put creativity to work and play with an abundance of options in life!