Do you remember when the Great Recession hit in 2008 and 2009? This prompted many people to stop buying on credit and actually put some money away into their savings account, just to protect themselves from the “what ifs” in the economy. After that first year into the recession, Americans were saving about 6% of their income, which, believe it or not, was a very high percentage compared to the prior decade (where savings percentages were actually negative).
So here we are in 2014. Have we learned anything? Absolutely not. Americans are still stupid.
Americans must be getting pretty comfortable today, because 76% of them are living paycheck to paycheck and have little to no emergency savings. I could not believe this stat when I first saw it, but as I open my ears to how people are living and how people are spending their money, it suddenly all makes sense.
Spending Everything You Earn
Are you living paycheck to paycheck? In other words, by the end of this month, will you have extra money left to put into your savings account? If you don’t, then you are one of these 76% and will likely not improve your net worth for many years to come.
At work, my desk is upstairs and sits near the railing that overlooks the lunch area. Nearly all of the accounting and finance employees spend some time here throughout the day and have personal conversations about their homes, cars, and sometimes even breastfeeding (this is the point where I usually put in earbuds and listen to music). Lately, the talk in the lunchroom has gravitated toward summer fun – getting the fun cars out of storage, putting the boat in the water, or heading up to the summer cottage for a weekend getaway – and I suddenly realize how many people are overspending and stretching themselves thin, just so that they can drive around in a boat 6 or 7 times a year.
Focus on the Total Debt, Not Just The Payments
Buying a boat doesn’t seem like such a big deal. the payments are only $250 a month, which is easily doable. But, it is purchases like these that are getting you closer and closer to living a paycheck to paycheck lifestyle. In order to protect yourself from getting to this place (if you are not yet one of the 76% that is), keep in mind the total cost of each one of these items that you would make payments on. How much do you owe on your home? On your cars? On your vacation home? How about on that boat? How much debt do you have if you total all of those up? Let’s say it is $250,000.
How much money do you earn per year? If you are above average, you are hauling in $60,000 a year, or roughly $40,000 a year after you pay Uncle Sam his cut. If you were able to live on only $30,000 a year (which requires pretty simply living) and put the rest toward your debts, how long would it take you to pay off all of these items? In this scenario, it would take 25 years! Are you really comfortable with that much debt? It suddenly sounds a lot different when you aren’t talking only about monthly payments doesn’t it?
Build an Emergency Fund and Free Up Some Cash
If I were you, I would not want to be lumped into this 76% that are living paycheck to paycheck. If you want to escape from this group, the first thing you need to do is pile up everything that you don’t really need into the corner of your living room. Next, you either have a garage sale or post all of your items online to sell. With your cash, you put it (all of it) immediately into your savings account and keep it there for a rainy day (you know….for when you have a financial problem – it’s coming, it happens to all of us).
Next, you need to sell off your debts, ie. that boat in your driveway. Yes, I realize that you might have to sell the boat for less than what you owe, but at least you can get rid of the remaining payments pretty quickly and free up some additional cash at the end of each month (and can then breathe again!).
Finally, it might be a good idea to increase your income and further pad your emergency fund. Either get a second job or start a side gig. If you can earn just $500 extra a month, this will improve your financial status tremendously! Do whatever you can to join the sane and low-stressed 24%. Believe me, the feeling is an excellent one.
Are you part of the 76%? Or the 24%?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.