One of the many reasons for the latest economic crisis is excessive spending on the part of individuals, companies and governments. Credit has been so easy, that it was a joke. Individuals, companies, and governments spent money like the proverbial “drunken sailor.” When the bubble finally burst, they found themselves without any financial reserves to fall back on. The result has been an economic meltdown approaching the Great Depression of 1929.
Dealing with the broader economic issues is not within the scope of this article. What I would like to do is to offer some advice to individuals that if, followed, will make it easier for them to weather the economic crises of the future. Business cycles come and go. The time to prepare is now. The advice that I will offer is not rocket science, but apparently there are many people out there who are clueless about how to get their financial houses in order. The key to surviving tough economic times is to have financial reserves, to be able to live for an extended period of time without any outside income. The question is how someone creates this “reserve,” especially during hard economic times. All you need is discipline and patience, and the willingness to do without some things that you probably do not even need.
The first step is to prepare a budget and to see where you are financially. To do this, make a list of your basic economic needs. The basic needs are food, shelter, and clothing. There are other needs of course, insurance, phone service, utilities etc. Add the cost of your basic needs together and subtract them from your monthly income. If you have money left over that is your disposable income. This is the money you can spend on your “wants” or that, if you are wise, will start to save or invest for your reserve, or what I call your peace of mind.
If you have negative cash flow, in other words your income cannot meet your basic needs, or you are barely getting by, then that is where tough choices must be made to reduce the costs of your basic needs. Even if you have extra money at the end of the month, there are things you can do to save even more, so that you can build up your cash reserve even quicker. Start by thinking seriously of what your true needs are as opposed to your wants. Then come up with a plan on how to save money. Buy a piggy bank and think how much the little things you buy every day add up to.
Here are some possible ways to save money. Depending on how serious you are, and what sacrifices you are willing to make will determine how much you can save and how quickly. Again, many of these suggestions are common sense.
Do you need to go out to lunch every day, or can you make your own lunch at a fraction of the cost? A loaf of bread, a pound of lunch meat, and a bag of potato chips will cost you approximately $15.00 per week. Assuming you work 50 weeks per year, the cost of your lunch will be $750. If you go out and spend $6 per day the cost for the same period is $1500. By eating your lunch, you can save $750 per year.
Do you drink bottled water? Patronize specialty coffee shops? Visit the vending machine every day? Let’s assume you spend $3.00 for a cup of coffee, $1.00 for bottled water, and $2.00 at the vending machine every day, and that you work 250 days per year. This is $6.00 per day x 250 or $1500.00. Now just do the math in these two examples. This is a potential saving of $2250 per year.
If you do not want to give up all of your little “vices,” you can still enjoy them to a degree and save money as well. Make your own coffee. Get a filter and bring your own water to work. If you have to have vending machine goodies, go to a food warehouse and buy your own at half the cost. That’s where the vending people get their stuff.
But you see where this is going? Now think of other ways you can save money and do the math of how much you could save over the course of a year. Can you give up cigarettes? Think of the economic and health benefits. Can you do without cable? Can you do without professional nail jobs and pedicures? The ways to save money are endless.
Once you have decided on how much you are willing to give up, come up with a dollar amount and have it deducted automatically from your paycheck before you even get it. This gets rid of the temptation to “splurge”, with your new found savings, and you are on your way to building your financial reserves..
In upcoming articles I will make other suggestions on how you can really save some big dollars, but the sacrifices you will need to make will be much more painful.
By: Bobby Macris