Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
Q100’s Bert Show recently invited me to share my thoughts on financial resolutions for the new year. I talked about the importance of maxing out your 401(k), building an emergency fund and actively working to reduce your monthly spending.
But when Bert opened the phones, listeners only wanted to hear about one thing: Getting out of debt. So I shared my simple-but-demanding system I’ve used on occasion to achieve personal money goals. I call it “economic shutdown.”
During an “economic shutdown” you don’t spend one dime more than required to meet your needs. But first:
Budget: Figure out how much income you have after taxes. Then, write down everything you spend on a monthly and yearly basis. In order to get control of your money, you have to know how much is coming in, how much is going out, and where it’s going. A “sorta budget” in your head won’t get the job done.
Set goals: How much debt do you want to pay off this year? How much do you want to add to your emergency fund? How much do you need for that down payment on a house? If that goal requires more money than you can wring out of your budget by trimming existing spending, it might be time for “economic shutdown.”
Housing: Move in with your parents and pay zero or minimal rent. If that’s not possible, you get a roommate – or two.
Food: Pack lunch and eat breakfast before you leave for work. Cook dinner at home – affordable meals that make good leftovers. Wal-mart and Target are tough to beat for the best deal on groceries.
Clothing: Buy only what you truly need to look presentable in work and social situations.
Entertainment: No dinners out, no trips to the movies, no vacations, no expensive nights on the town. Cancel cable TV and Netflix. This is a great time to catch up on your reading or invite friends over to watch that classic movie on DVD borrowed from the library.
I can hear you now, “Weeees, how long do I have to do this?” Answer: Until you’ve reached your goal. But that might be sooner than you think.
For example, Jake and Lucia are 27 and have been saddled with credit card and student loans since college. Their debt totals $35,000. They have a household income of $75,000, but they’ve barely put a dent into their debt. Their checking account balance rarely tops $5,000, so the idea of putting 10 or 20 percent down on a home seems nearly impossible.
Jake and Lucia could go on like this forever. Or they can go into “economic shutdown” and be debt-free and on their way to having a down payment saved in just over a year! That’s one year of pain and sacrifice to avoid years and years of economic malaise. It’s ripping off the Band-Aid quickly instead of pulling it off slowly.
What drastic measures have you taken to cut spending and reach your goals?
– By Wes Moss, for Atlanta Bargain Hunter