Four Simple Steps to Get Your Finances Back on Track

Lots of commentary on my How the Middle Class Can Get Back on Solid Financial Ground post where I bemoaned a Parade magazine article where spend-aholic people were whining about not making financial progress in their lives. We'll start with a commenter who echoed my thoughts:

I get SO sick of reading articles and seeing garbage on TV about how only the "wealthy" can make it these days and that the middle class is getting screwed. I think it has come to the point where nobody actually understands "The American Dream" anyway. Bottom line these days: people have become very, very lazy and take absolutely no responsibility for themselves in any aspect of life, especially financially.

Yeah, that's what I said (but in a bit of a nicer way). ;-)

In the post, I highlighted another piece from Kiplinger's that told the story of a man who had an average income but who had saved a ton of money -- socking away 1/3 of his salary each year. Some people commented to make excuses for why he could do this (and why they couldn't), but the next commenter showed us all that it could be (and is being) done:

I'm here to tell you that it can be done. Here's my story: two children in private school in Cordova, Tn., making contributions of just over $1500 per month into my 401k, all on a salary of $66,000. And not a penny of debt. Don't tell me you have to be in debt up to your eyeballs.

This was exactly my point. With some discipline, anyone with an average to a bit above average income can be in the same boat.

Next, another person who agreed -- and who also is proof that this can be done:

You are absolutely right. I think a good chuck of it comes from the fact kids today graduate from high school or college and expect to continue the lifestyle they lived in with their parents. I also blame some of the parents. They never had their kids get a job and teach their kids to pay for some of their own things. When I was growing up I was provided a car I shared with my brother. I had to pay for gas and insurance. You bet I was careful not to have a wreck or waste gas. When I went to college I was told “You get 4 years that we pay, after that – you pay”. Guess what? I finished in 4 years. It is the right thing to do to help your kids get through those years, but you cant give them everything or in the end you get nothing.

As far as not getting anywhere as middle class – I started out in the workforce with a net worth of $0 and a new wife. I have worked for almost 15 years for the same employer. I am rewarded because I do a good job. I get more vacation, more pension accrual, more sick time, and a salary increase ever year. I get great tax credits being middle class and having kids. I live in a nice house, have a nice 401K nest egg, my wife stays homes and raises the kids. What more could I ask for? How did I do it? Just use many of the suggestions FMF and others give here – I have no credit card debt, rarely take a car loan (and only for a very short time), invest wisely, save, save, save, and (duh!) spend less than I earn.

I mean guys – this ain't rocket science. It is what most of our parents and defiantly our grandparents did. If they are still around – just ask them!

If it was rocket science, I wouldn't be qualified to write about it. ;-)

But not everyone agreed with my assessment of the situation. Here's what the last commenter had to say:

I do not know why you get so worked up. You cannot judge the people until you have been in their shoes. First of all, most of these people have a family. Between paying for the high housing cost to live in the suburbs with a good education system, paying for the rising cost of college education (especially private), and the growth in wage less than or equal to inflation, it is no wonder families are going bankrupt. You have to buy and maintain your car. Gas these days is not cheap. Multiply car expenses by two if the spouse is also working. Insurance probably eats up a good chunk of income, unless security from insurance isn't part of the American dream.

By the way, just because people consider themselves middle class does not mean they are. A family making $30,000 is poor.

FYI, I HAVE been in their shoes. But I worked hard, went to school, and applied the principles I talk about here at Free Money Finance. As a result, I'm not in those shoes any longer.

Also, the article highlighted people making $30,000 to $99,000 a year. While $30,000 isn't "rich", $99,000 certainly isn't poor. On average, these people are making decent incomes -- and most are making more than the guy who was saving 1/3 of his pay!

I did offer some help in the piece -- my ideas on how people in a bad financial situation can get back on track. My thoughts:

1. Stop spending more than you earn. This also means to quit borrowing to support an over-extravagant lifestyle.

2. Pay off debt -- credit card debt first and then get out of all other debt.

3. Establish an emergency fund so when a setback occurs, you're prepared for it.

4. Start to save, invest, and prepare for life's big expenses like college for the kids and retirement.

As I said in the original piece, it seems simple to see it typed out -- just four easy steps -- but it requires discipline, something most Americans don't have much of when it comes to money.

Comments

[annab]

I think the lack of discipline can happen because so we see so many luxuries that are packaged as "necessities." Now, it's considered totally normal to pay for things like bottled water, early-generation electronics, entertainment systems, convenience foods and brand-name clothes and shoes. Off brand items or homemade things are often seen as low-class, instead of an economically valid purchase.

Also, branding starts early, so a person feels totally ok with paying more for Pepsi instead of generic cola, for Snapple instead of iced tea in a thermos or for the salon quality shampoo. I think these nickel-and-dime things can really bloat the budget because they don't feel like luxuries anymore, so people are less likely to evaluate the worth of the purchase.

[Quo]

Wow! I wished someone had spoken to me about finances at a much earlier age, (other than, "don't answer that phone, they're calling again"). I wished I knew how to manage a budget and save at an earlier age. I do beleive I might not be sitting here in the ruins of a financial disaster. Great post. And I do think one is never to old to learn. This post will be a keeper for me.

[kevin]

Great Post.

"Stop spending more than you earn" Placed post it notes everywhere the wife seems to look in the house, hopefully she gets the message

cheers

kevin

[Brandon]

To stop spending more than you earn is exactly the key to "getting ahead," because it works even when you don't earn much. I resolved to do that this year in order to get out of credit card debt by December 31st. After taxes I only make $20,000 a year, and my goal is to pay off $8,000 in credit card debt (plus interest, currently at 16.15%) in just 12 months. And I'm right on track, having cut that debt in half by living on 58% of my income and sending 42% to Citibank so far this year. Granted, I only have to support myself on that amount of money; but at that rate, I'll do it on just $11,600 this year while living in a large city. That's poverty to most people, but I live in a nice area of town and have all my essentials covered. You can do that once you come to the conclusion that when you're in debt, every dollar you spend is one less dollar you can use to buy your freedom.

I'm finding that it also takes prayer, trusting in God to take care of you, and a willingness to stop spending so much time and effort focussed on the pursuit and acquisition of material goods.

Thanks for your blog--I really enjoy it.

[Cinthya]

Just a little comment on the message that gas prices are high in the US. I live in Belgium and we pay the same price as in the US with the slight difference that we pay that price per liter and not per gallon.