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A month ago, I read an article written by J.D. Roth on Get Rich Slowly, a personal finance blog named the ‘Most Inspiring’ money blog in 2008 by Money Magazine.
In the article, J.D. offered some great advice to one of his readers who emailed him to ask for financial advice because she was in serious need of help.
The reader, Kay, said in her email that she’s never developed good financial habits and at 39 years of age, she has no savings (no emergency and retirement funds) and she’s about $28,000 in debt.
Next May, she will lose half of her child support when her son graduates from high school, and the rest the following May when her daughter graduates.
She has a list full of high-priority financial needs, but trying to do everything at once is getting her exactly nowhere. The only thing she’s done so far is cutting up her credit cards.
What would you do if you were in her shoes?
In the comment section, I left my thought about a few things that Kay could consider on top of J.D.’s advice. But first, let’s hear what advice J.D. offered Kay.
Note: This is a curtailed version. If you want to read J.D.’s actual advice, read the full article @ The First Three Steps to Financial Freedom.
J.D. said there’s no one right answer to Kay’s problem and I absolutely agree with that. In J.D.’s words:
Some choices are better than others, it’s true, but the best way to take control of your finances is to do something. Action beats inaction. Taking any step in the right direction will help Kay move closer to financial stability.
Following that, J.D. advised that there are three things Kay should focus on right now.
Reduce Expenses
As Kay did not mention her expenses in her email, J.D. made the assumption that she’s probably like most people – spending more than she needs in a variety of ways. J.D. advised to cut expenses one at a time to help create a better cash flow, allowing some breathing room.
Focus on one item. Once you’ve trimmed that, look for another. This gets easier with time.
Build Savings
Kay should save the extra money she gets from cutting her expenses for emergencies. It doesn’t really matter how much is the amount. The most important thing is to get into the habit of saving.
Tackle Debt
After reducing expenses and building an emergency fund of $500 or $1000, the third step is to make a spending plan for tackling debt. And if you’re struggling with debt, he highly recommends the debt snowball strategy.
The debt-snowball method is a debt reduction strategy, whereby one who owes on more than one account pays off the accounts with the smaller balances first, proceeding to the larger ones later. – Wikipedia
While J.D.’s advice is great, I thought there are a few more things that Kay could do. So I suggested the following in the comment section:
1. Adopt the Right Mindset
This may not seem to have any direct effect on reducing debt or increasing savings. But truth be told, wealthy people are wealthy because they think very differently, which leads them to adopt very different habits, and take very different actions, thus producing vastly different results.
We have to set our foundation – our mind – right before we can start tackling anything else.
2. Manage Your Money With Multiple Accounts
Personally, I have seven banking accounts. Each account is meant for a different purpose. This strategy helps me to ensure that:
- I’m not spending more than I should
- I’m able to pay my credit card bills on time
- I’m putting enough money aside for rainy days, and
- I have surplus to invest.
I’ve written a pretty detailed post about this.
A Practical System to Managing Your Money
3. Use Credit Cards to Your Advantage
Too many people think that credit cards are ‘evil’, but the truth is nothing further away from that.
When credit cards are used properly, they can be very powerful wealth building tool! Because each purchase made on your credit cards will earn you bonus points which you can use to redeem for free products and services, thus saving you more money.
I always use the bonus points to redeem for petrol vouchers. This has helped me save a lot on my petrol bill.
Just make sure you don’t abuse the use of credit cards and always remember to pay the bill in full every month. Set up a separate account to help you achieve this. I shared how I do this in the article linked to above.
4. Track Your Dollar
Start tracking your money so that you know where your money has gone. Tracking your money helps you to gain more control of your money instead of letting your money controls you.
I’ve shared how I track my money on a daily basis in another article.
How to Keep Track of Your Money
5. Increase Your Income
Reducing expenses is only part of the equation. The other half to make it complete is to increase your income. Besides finding ways to cut your spending, you also need to find ways to make more money.
But I don’t mean asking your boss for a raise to increase your income, although you could try that. What I’d suggest is to start a home-based business such as an Internet business (e.g. Blogging) while holding on to your day job. It’s low cost, therefore, low risk. Who knows? You might be the next J.D. Roth!
6. Grow Your Money
If you’re the kind who seek ’security’ in a job and are not willing to move out of your comfort zone to massively increase your income, then the best, and probably the only choice you have to build a million dollar net worth is to invest your money.
But really, just about anyone, whether you aspire to be a millionaire or not, should invest your money because it is the only way you can put your money to work for you to secure your own financial freedom.
So, what suggestions do you have for Kay, or anyone who’s facing a similar predicament? Share your thoughts in the comment section below.
Cheers~
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