Tuesday, February 10, 2015

Eliminate Debt and Build Savings

A closer look at point #5 of my Modern Victory Movement concept. Check out my Introduction to the Modern Victory Movement for an explanation of the concept.

MVM #5 Eliminate Debt and Build Savings

We are facing difficult economic times. It will be especially difficult for the folks who are living paycheck to paycheck, in debt up to their eyeballs and with little or no savings. Debt – whether personal, business or government – is bad. It creates stress and makes one much more vulnerable to economic downturns.

In your personal life, work towards eliminating consumer debt – credit cards, car loans, payday loans, personal loans and installment plans. This will mean you have to put yourself on a budget and stick with it. It will probably mean putting off major purchases, avoiding impulse purchases and denying yourself luxury items. It may mean taking bag lunches to work. It may mean selling your car to get out of the loan. It may mean having a major yard sale to raise some money. It may even mean taking on a second job. It will take some sacrifice to eliminate debt in your life, but the benefits will be more than worth it.

Building some emergency savings will have to be done at the same time. Yard sales are a great way to bring in extra cash to do this. So is a second job in the evenings or on the weekends. Put the money somewhere safe, such as an insured CD or money market account in a stable bank or credit union (do your own homework or check with several companies that offer ratings on the soundness and safety of various financial institutions). Don’t worry about getting top interest. Safety and liquidity is your goal for your emergency savings, not growth.

Once your debt is paid off and you have accumulated some emergency savings, you can then turn your attention to saving for long-range goals such as the purchase of a car, a new home, children’s education, or retirement. Use common sense, avoid overly-risky investments and seek professional advice of someone you can trust.

No investment is perfectly safe. Cash savings are subject to losing value to inflation. Stocks and mutual funds are subject to the ups and downs of the market. Land is subject to property taxes and eminent domain. Converting all your money to gold & silver and burying it in the backyard is subject to thieves. There are no guarantees in life. The best you can do is use reason & common sense, to remain vigilant and to take responsibility for ensuring your own future.

The single most important thing you can do now to survive any future chaos is to start taking responsibility for your own life.

Get back to the financial basics. Make sure you are spending less than you earn. Avoid taking on any new debt - don't use credit cards, payday loans or installment payment plans of any type. Pay cash or make do without. Build some emergency savings. Get on a budget or spending plan and stick to it. Avoid impulse purchases. Scale back your lifestyle sharply. Find the best bargains by doing comparison shopping, use shopping lists, clip coupons.

Why pay off debt if we are headed towards high inflation? It may be true that by waiting to pay off debt, you will be paying it off with cheaper dollars. However, there are other considerations. For one, debt puts you, your family and your assets at risk. Pay off your debts now while you are employed and you run less risk of losing your home or other assets if you become unemployed later.

Debt can be very stressful, especially in difficult times, which can be a real detriment to your health and your ability to make calm decisions at a time when you most need both.

Another reason is that debt can shackle you to your current job and circumstances, when what is really needed at a time like this is freedom and flexibility.

Finally, people tend not to realize how fast interest, late fees and other penalties can add up. You may be paying off your debt later with cheaper dollars, but still be paying more in real terms because of all the added interest and penalties.

Rethink your telecommunications expenses. When I was a child (the 1970s) the only telecommunications expense my family, most families, had was the telephone and that was a land line, of course. TV was over-the-air and free. There were no cell phones. And no one had a computer, much less an Internet connection.

Today, many (most?) families pay for a land line, multiple cell phones, special ring tones, texting privileges, unlimited data plans, cable or satellite TV, extra movie channels, Internet connections, and even satellite radio subscriptions. For most families, huge savings can be found in this bloated budget category.

Mostly, these things are used as distractions, and often are a major contributing factor to obesity and a lack of physical fitness. Replace these distractions with learning, reading, exercise (gardening, hiking, tennis, golf, swimming, etc.) and shared activities such as a family game night.

When I mention cutting back this category, I occasionally hear people whine that they really need a cell phone or Internet connection. Fine. You must decide for yourself what you really need and don't need. But even if you do need a cell phone for emergencies and such, you don't need the latest model of smart phone, special ring tones, texting privileges, unlimited data, or the largest minutes package available. I have a cell phone myself, but it is the basic model that I got for free when I signed up. I don't have texting and I've never paid for a special ring tone. A cell phone may be a necessity for many today, but all the expensive bells and whistles are luxuries you can do without.

The same thing goes for cable or satellite TV. Do you really need to have all the movie channels? Do you really need the HD channels? Do you really need the expanded package with all the sports channels and all the music channels? Or can you get by just fine with the much less expensive basic package? 

Reduce your entertainment expenses. We may hate denying ourselves, but entertainment is a purely optional budget expense. Eliminate it. Learn (or re-learn) how to have a good time for free or nearly free. Start a family game night. Play with your kids in the backyard. Invite friends over for a weekend cook-out or a movie night (with the DVD checked out from your local library for free). Next week they can invite you over.

Read a book (checked out from the library for free, of course) instead of going to a movie. Libraries are a wonderful source of free entertainment. In addition to books and magazines, many libraries today also offer audio books, movies on DVD, music CDs and even board games that you can check out. Many have story times for young children and lecture series for adults you can attend for free.

Give up the vacation away from home. Instead of heading for the beach or Disneyland or wherever, stay home. Spend a week visiting local museums, zoos, botanical gardens, historical sites, parks or wildlife refuges. Go on a picnic or nature hike. Go fishing at a local lake. Play frisbee with your kids in the backyard. Or just relax at home, thinking of all the money you are saving.

Reduce you home energy use. Turn off lights, TVs and electronics whenever you leave a room. Set your thermostat to conserve energy. Replace old appliances with new, energy-efficient models. Super-insulate your house. Consider installing energy efficient windows. Many power companies offer free or low-cost home energy audits for their customers, which can identify weak points in your home's insulation and other energy wasters, along with advice to reduce your energy use. 

Reduce the amount of fuel you use. Make sure your vehicle’s tires are properly inflated and the engine is well-maintained in order to maximize mileage. Drive less by walking, car pooling and using public transportation, as well as planning & combining trips. Consider replacing your old vehicle with a newer one that gets much better mileage. Check out the essay Three Changes to Save Big on Gas.

See Also

Twelve ways to save money - easy and practical money saving ideas

Top Ten Ways To Save Big Money - These ideas may save you hundreds or even thousands of dollars a year.