Simple Debt-Free Finance

A Simple Approach to Getting Out of Debt & Into Wealth

Why You Should Have a Financial Plan.

Posted on | January 10, 2008 |

“Thy desires must be strong and definite. General desires are but weak longings. For a man to wish to be rich is of little purpose. For a man to desire 5 pieces of gold is a tangible desire which he can press to fulfillment.”

-Arkad, the Richest Man in Babylon.

Translation: Set tangible goals and define the steps required to reach them.

This is the 7th of the 7 cures for a lean purse as detailed in George S. Clason’s The Richest Man in Babylon.

Far too many people fail to create a financial plan of any kind. I’m talking about retirement planning, but also planning for emergencies and rainy days as well. Many people live paycheck to paycheck and count on credit cards to cover any unexpected (or emergency) expenses that come up. This is not a plan.

If you do not take the time to think about how much cash you may need to cover unexpected expenses and create a plan towards that goal amount, then you will quickly find yourself racking up credit card debt when your car suddenly needs more than routine maintenance, or an appliance needs replacing.

Personal Experience.

I mention that last example because just such a thing has happened to me in the past week. Our washing machine has worked itself into an early (and most unexpected) grave. So we’re going to have to go out and purchase a new washing machine. That sucks, but it really sucks so soon after Christmas. It sucks that I’m going to have to dip into savings to pay for a new washer. What hurts the most is that we’re not quite at our target amount for emergency savings, so this episode of unexpected expense will delay our reaching that goal. But the good news is that we do have that savings to fall back on. Just 4 years ago, we would have been racking up a couple hundred dollars on the credit card and hoping to pay it off in 6 months to a year.

So, while my intent for the emergency savings was to use it in the event of a loss of employment and not really unexpected appliance replacement, the fact remains that the money is there and we can tap into it without accruing interest.

So, how did we get to this point?

As I mentioned, a few years ago we had no savings and routinely used credit cards to fill in the gaps between paychecks. It started out simply enough, but a string of back luck (read: consistent failure to create a plan) left us with several months of credit purchases and a balance we couldn’t pay off at a leisurely pace.

The Breaking Point.

The breaking point came when our cat came down with some freakish illness the day we were leaving for a long weekend. We awoke to find her lying in the middle of the kitchen floor, shaking. She didn’t even meow. She could only look up at us with the saddest pair of eyes I’d ever seen. When she tried to walk, she would take two steps, and then keel over.

Our plans were made and it would have cost too much to break them, but it was obvious that we couldn’t leave our beloved pet to suffer (and maybe die) while we were gone. Since this was a weekend, our regular vet was closed and our only course of action was an emergency animal hospital. You think health care is expensive for people; it’s absolutely ridiculous for animals!

So, after a very long weekend of constant phone updates on her status and a $495 vet bill for who knows what (they never found a cause for her symptoms, and basically gave her “bed rest” and I.V. fluids) we had reached the breaking point: $7,320 in credit card debt.

It didn’t take long for me to realize that, since we were a single income family of 3, if I lost my job we’d be in a serious pinch. This was at a time when the U.S. economy was still not yet out of a recession, so while I felt pretty secure in my job it wasn’t hard to imagine being laid off.

So what could I do?

After lying awake in bed at night for the next week straight, I finally decided things needed to change. We needed to take action. Step 1 was to look back and see how and why we ended up with over $7k in credit card debt in the first place. Only then could we correct our behavior to avoid the same traps again.

We did this, and realized that it wasn’t any single big expense, but many little ones that created a snowball effect: $50 for dinner out; a couple hundred at the end of the year for generous Christmas gifts; some car repair, a new battery; and so on… it was clear that our behavior needed to change, and we needed to anticipate car repairs and the like better.

Step 2 was to deal with the past - the debt we had already accumulated. I thought briefly about paying off the credit card with a personal loan, or credit counseling or other such method. I even contemplated borrowing money from my 401k at one point, but soon realized I would just be playing a shell game with my debt and not doing anything to eliminate it. We became resolved to get out from under this debt without credit consolidation or other 3rd party assistance. My wife and I got into this ourselves, and we would get out of it the same way.

The Plan.

“In working to secure 5 gold pieces he can then attain 10, 20 etc… in learning to secure his 1 definite, small desire he hath trained himself to secure a larger one.”

Start small and build. All too often, people set unattainable goals and doom them selves to failure. The key to accomplishing your goal is to plan the steps necessary to reach the goal, and then set smaller attainable goals for each step.

We started small. We started to pay ourselves first every month by opening up an ING Direct Orange Savings account and set up an automatic savings plan to putting aside $50/ month. Then we resolved ourselves to eating out less, consolidating our phone and cable bills, shopping around for less expensive car insurance and took the money we saved from cutting our expenses and paid at least twice the monthly minimum on our credit car bills.

Once we had paid off the credit card, we took a moment to see where we should go next. It was very satisfying to have no more credit card debt and we had even managed to save a little over $1,000 in the process. It was nice, but clearly not enough. So we set out to build our emergency savings. Standard advice is 3-6 months of living expenses, but since we were a single income family of 4 now I though 6 months of income would be better.

With that idea in mind, we set out to determine what that is in a dollar amount, and what it would take to get there in a year. We soon realized a year was too aggressive and we didn’t want to doom ourselves to failure with an unattainable goal. So, we again started small and built big. We increased our savings to $100/month, then 200, 300 and so on until we found we could not make it through a month without tapping some of our savings. Then we dialed it back again ever so slowly. This became our maximum comfortable savings amount. We’ve stuck with it ever since and were 1 month away from reaching that goal… now we’re about 2 months and a new washer away. Not a bad place to be after all.

Epilogue.

“The more of wisdom we know, the more we may command.”

Learn all you can about finances and building wealth. Invest in yourself and your knowledge of the way things work. Your financial future is in your hands. The best way to anticipate the future is to create it, so out and make of your future what you truly desire!

Bookmark and Share
Related Posts Related Websites
Category: Building Wealth, Debt, Saving

Comments

2 Responses to “Why You Should Have a Financial Plan.”

  1. Mortgage Meltdown Mess: What to do? | Simple Debt-Free Finance
    September 29th, 2008 @ 9:04 am

    [...] Do We Go From Here? How About Back To The Basics. Essentially, live within your means, fund your emergency savings, and jettison the debt. Oh, and while we’re at it - how about changing our life style so we [...]

  2. How Decrease Your Auto Insurance Premium by 40% or More. | Simple Debt-Free Finance
    November 5th, 2008 @ 11:25 am

    [...] Besides shopping around, you may want to consider raising your deductible. Simply raising your deductible from $200 to $1,000 could save you up to 40% on your premium. Don’t worry about being able to afford the repairs should you get into an accident - that’s what the emergency fund is for! [...]

Leave a Reply





  • Search

  • Get Updates

    Subscribe in NewsGator Online
    Subscribe in Bloglines
    Add to Technorati Favorites

  • Recent Comments

  • Contact

    If comments aren't enough, feel free to contact me at:

    Join me on FaceBook

    Technorati Profile
    Blogs That Follow

  • Recent Tweets

    What I've been up to:
      follow me on Twitter
    • Frugal Hackers badgeMoney Hackers Network
      RSSMountain RSS Directory On our way to 1,000,000 rss feeds - millionrss.com
      Investing Blog Directory RSS Search Blogged.com hihera.com Blog directory

    • Tags

    • Disclaimer

      The information and opinions provided on this site do not constitute professional advice. This blog is intended to provide general information only about the author's own personal financial journey. While all information shared here is believed to be accurate, the owner/operator of this website specifically disclaims all warranties expressed, implied or statutory, regarding the accuracy, timeliness, and/or completeness of the information contained herein. You are advised to discuss your specific requirements with an independent financial adviser. All posts are © 2008-2011, Simple Debt Free Finance.

    • Unique visits since 2008:

    • ss_blog_claim=f34d742cbb91cfd8bb6b4f0e010113be ss_blog_claim=f34d742cbb91cfd8bb6b4f0e010113be

    • Useful Links: