Posts Tagged With: Psalms

Plug the holes

If you were in a boat in the middle of the ocean and you noticed that water was coming in through a hole, would you spend your time scooping the water out over the side of the boat, or would you plug the hole?

Getting out of debt works with the same principle. Our spending is like the water coming into the boat, and the way to fix it is to QUIT SPENDING!

Yes, it is obvious, but it needs to be repeated because for some reason our brains can realize that it is true, but not do anything about it. So our goal in this lesson is to plug the hole, stop the bleeding, whatever you want to call it: quit spending.

Spend less money than you make

Getting out of debt, creating wealth, living financially free, retiring with cash in hand can all be achieved by following one simple rule:

Spend less than you earn.

If you do everything else wrong, but get this correct you will still be okay. But, the scary truth is that if you do everything else right, but get this wrong you will be in bad shape.
It is very simple, but it is not easy. But it is the only way to stay debt free. It is the only way to have any lasting wealth. It doesn’t matter if get $10 million from lottery winnings, if you can’t follow this simple rule you will be back to where you started in no time (and often even worse.)

It doesn’t matter how much you make. Everyone (I used to do this too) thinks that when they make more money they will be able to spend less than they earn. This just is very rarely true.

We all know someone who no matter what time something starts you can count on them being 15 minutes late. It doesn’t matter if they have the entire day free, they will still be late. It isn’t a matter of the time available as much as it is a matter of discipline. So it is with our spending.

If you can’t spend less than you earn with what you have now, you will not be able to when you get more. Parkinson’s law states that “expenses rise to meet income.” So without a deliberate and intentional effort each increase in income that you get will quickly be used up by new expenses.
This is frustrating part about getting a raise. As much as I loved getting them, they never seemed to make bill paying any easier. Have you ever felt this way?

So I know I need to spend less than I earn, but how?

Make a budget

A budget is absolutely one of the best tools that you will find to help you spend less than you make. I have written extensively about how to budget, but I suggest you start with this post – how to make a budget. It will walk you through all the steps you need to get started on an effective budget. If you are really serious about getting out of debt, don’t skip this step.
Everyone who does not budget spends more money than those who do. It is as simple as that. It doesn’t have to be painful and can even be fun.

Eliminate the temptation to spend.

It is not a bad idea at all to cut up the credit cards. Romans 13:14 says to,”make no provision for the flesh in regard to its lusts.” I did this by not going to the mall and not going out to eat. These were my two problem areas where I spent way too much money. Find out what your temptations are and run from them and set yourself up to succeed. Alcoholics shouldn’t hang out in bars and over-spenders shouldn’t go to the mall!

Source: http://christianpf.com/getting-out-of-debt-part-4-quit-spending/

While I think few would argue that paying off debts is a good thing, there is a better way to accurately see the big picture of your finances. It is called your NET WORTH.

And no it is not just a number that rich people talk about at cocktail parties. It is what financially savvy people use to track their progress.

The simple definition of it is:

Assets(stuff you own) – Liabilities(debts) = Net Worth

It is simple to calculate and I will get to that shortly, but first…

Video on Calculating Your Net Worth

Why Net Worth rather than just debt?

Your Net Worth is more encouraging

The primary reason for using your Net Worth as a gauge of your financial progress rather than the amount of debt you have is because it is more encouraging. When you look at your amount of debt to track progress you are only seeing the fruit of paying down those debts. On the other hand, your Net Worth increases for every good financial decision you make.

For example, you can increase your Net Worth with the following actions:

• Paying off credit cards or car loans
• Paying more towards your mortgage
• Buying property
• Funding a Roth IRA
• Contributing to your 401(k)
• Building an emergency fund
• Buying index funds, mutual funds, or dividend paying stocks
• Or even just not spending as much money

There are many more things you can do to increase your Net Worth, but these are some of the bigger and more common ones.

It changes how you think about buying decisions

The second reason I prefer to use my Net Worth to track my progress is because I have found it helps change how I think about my buying decisions.

One of the most valuable financial lessons I have learned can be summed up in two words: buy assets. What I mean by that is you should spend more of your money on things that will keep cash in your pocket. So they should at the very least:

• maintain their value
• but better yet increase in value
• and the best would be increase in value and provide you income as well.

On the other hand you should avoid buying things that are going to take cash from your pocket. Coincidentally, these are most of the things most of us spend our money on. When you buy clothes, food, electronics, decorations, cars, entertainment, you are (generally) using cash to for something that is going down in value and therefore decreasing your Net Worth. Examples of this would be:

• Spending $200 on new clothes
• A $50 steak dinner
• Getting the new iPhone
• Going to the Yankees game
• A brand new BMW

Think about how much you could sell each of these for 2 years from now. Each one of them is adepreciating asset, so 2 years later they would not be worth what you paid for it, if anything at all. But if you had spent it on…

• Buying property
• Funding a Roth IRA
• Contributing to your 401(k)
• Building an emergency fund
• Buying index funds, mutual funds, or dividend paying stocks

You would have a much better chance that it would be worth at least what you paid, and it would more than likely be worth more than you paid for it.

Obviously there is more to life than Net Worth, and you can never avoid spending money on depreciating assets, but you can avoid spending ALL of your money on depreciating assets. This is the key to why many people never get ahead financially. They spend all of their money on stuff that goes down in value. Once you start buying things that increase in value, you begin building a snowball that just grows larger and larger, faster and faster.

I don’t want to get the cart ahead of the horse, so lets get back to our Net Worth. The reason I mentioned this is because I want you to be thinking about the end result of each buying decision. None of the things listed above are necessarily wrong, but they should be thought about and decided upon rather than just reacting to what you “feel like doing”. Your Net Worth will reflect each buying decision that you make – good or bad.

How to calculate your Net Worth

This shouldn’t take more than a hour if you have never done it before. When you update it in the future it will take even less time than that. I have created a template from my own balance sheet that you can use if you would like. You can download it here.

1. Get a spreadsheet

First off, you can do this on paper if you really want to, but I suggest Excel, Google docs, Open Office, or really any kind of spreadsheet will do.

2. Total your assets

List every asset you can think of. Anything that you could realistically sell. For the purposes of sanity and simplicity I don’t bother with items under about $500. Yea, I am sure I could find someone on Ebay to buy my socks, but I am just looking for a general picture. So I just lump together all these smaller items as one line called “Misc items” and take a conservative guess of what they could be sold for.

So your house, cars, retirement accounts, stocks, savings accounts, checking accounts, emergency fund, jewelry, and anything else similar would fall in this category.

To get real estate values you can use Zillow to get a decent estimate of what your home may be worth. For automobiles you can check out Kelley Blue Book to see what they could be sold for. For all your checking, savings, investment accounts you can either check the balances online, or just use your last statement.

Once you have them all listed with the estimated selling/liquidation value you can total them up.

3. Total your liabilities

A few lines below the Assets total, we are going to now list every debt you have. Mortgages, credit cards, student loans, they all apply. Do the same as above checking balances on each one and then total your debts to get your liability total.

4. Subtract them

Now you can subtract your liability total from your asset total and viola! You have your Net Worth. Date it and save it.

Now what?

When I first calculated my Net Worth, it was -$13,843.84. This was eye-opening to me. I knew I had a bunch of debt, but didn’t realize how below par I was. Regardless of what you number is, just look at it as the starting point. It is from this point that it will become larger.

After we had been working at it for one year it was up nearly $15K to +$746! We were so excited to have a positive Net Worth! Even if it was only $746. As we kept on working on it, it has just continued to grow.

I normally update mine about two times a year. But if you are working really hard at it and need to see the encouragement of it increasing, do it more! As in just about anything, you are either moving forward, or you are going backwards. If you are increasing your assets by making good buying decisions or minimizing debts your net worth will be growing.

Your homework tonight is to calculate your Net Worth.

Source: http://christianpf.com/getting-out-of-debt-part-3-create-a-balance-sheet/