Photo courtesy of Michael Casey
After news began trickling out of Washington that we may be due another stimulus check, Pete from Bible Money Matters put together a great post asking why not just create your own stimulus check? With news of the government (taxpayer) supported bailout plan dominating the news recently, I thought I would use Pete’s same logic by providing a few ways to create a personal bailout plan of our own. After all, many of the problems on Wall Street could have been avoided if bankers and government regulators had applied the same common sense approach to money management that many of us out here in the real world apply every day.
- Don’t spend more than you earn. Unlike the government, regular citizens cannot print more money or borrow it from foreign countries to sustain spending beyond what we are bringing in. No, here on “Main Street” that behavior leads to debt, and not the kind that can be bailed out by taxpayers. Create a household budget and stick to it. If you don’t have the cash for something then you simply cannot afford it.
- Live frugal. If more people lived well within their means there would be no need for this proposed bailout. Just because opportunities abound to overspend, and there are people ready, willing and able to help you do it, doesn’t mean you have to take advantage of those opportunities. Apply this logic to the housing market. Just a couple decades ago people were perfectly content to live in homes with modest square footage, three bedrooms, and a small garage for knick-knacks and tools. Now days everyone needs a bonus room, home office, double garage on a one acre lot. To finance this “American Dream” many people leveraged their financial future borrowing over half of their income to support a house payment they really couldn’t afford.
- If you have debt, pay it off and fast. There are various ways to pay off debt, but at the heart of all the plans is the basic idea that if you live on less than you earn you will create excess money that can be applied to your current debts. That’s really all there is to it. Some people line up their debts by interest rates, making larger payments on the higher interest debts first. Others prefer the debt snowball method of paying balances off smallest to largest. I don’t really care how you do it, just do it! And don’t let people convince you that debt is good, or that if it is low-interest you are better off investing the money. If you aspire to be debt free, tune out the naysayers and make it happen.
- Create an emergency fund. With debts paid off, and living a frugal lifestyle, savings should be your next priority. Build a healthy emergency fund of 6-12 months of expenses–the more the better. Many financial planners suggest 3-6 months of expenses saved, but I personally would sleep a lot better knowing my family could survive comfortably for a year in the event of a major emergency such as a layoff or illness.
- Don’t suffer a spending relapse. Often times when people reach this stage of their financial recovery they backslide into bad habits of excessive spending. Think of times past when the government got control of spending, balanced a budget and shrunk the national debt, only to see spending increase as national events changed the political landscape. The government does not get the idea of an emergency fund, because in their mind a surplus is simply money unclaimed by a new spending plan. Do not repeat their mistake–keep money in your personal surplus set aside for emergencies and keep your spending in check so you don’t have to dip into these savings to finance bad habits.
In some cases the best form of education we can receive is to be provided examples of how not to do things. The poor money management lessons from our Congress are a great example of this type of negative behavior modeling. Whatever you do, don’t follow their lead with your own finances.