Welcome back to the Rambling Mind Newsletter.
This post is 2,296 words and 12 min read. Enjoy!
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In March 2017, I found myself in $20,000 worth of debt:
I owed $10,000 to the IRS (Story for another day)
I had $10,000 worth of Credit Card Debts
By August 2017, I was debt free.
Most people react with shock and awe and then follow up with one question
Answer: I made a plan and adjusted it.
Which is never the answer most people are looking for. Most people are looking for a cheat code, a shortcut but unfortunately, there are none. There is only planning and adjusting. As my dad says, "He who does not plan, plans to FAIL."
I believe the reason most people never accomplish their financial goals is a lack of planning. We get excited at the beginning of the year because New Year, New Me! But the excitement quickly fades and we lose focus on what we want to accomplish. We end the year wondering what happened and then try all over again in another year but the same thing happens. I do not want that for anyone in 2023.
Plans are not bullet-proof as Dwight Eisenhower said, "Plans are useless, but planning is indispensable." This is where the second part of my answer comes in ADJUST.
More than likely your initial plans will fail and so will your follow-up. Life never works according to how we want as Mike Tyson said, "Everyone has a plan until they get punched in the face." Life loves to throw punches and having the willingness and flexibility to adjust will be key to accomplishing your goals.
So Let's Break It Down
Step 1: Where are you?
This is one of the most important things you can do with your finances. It is coming to terms with where your financial situation currently sits. Too often we run and hide from facing reality, thinking if we ignore it long enough things will just work out. But when does that ever work?
It is like driving a car and never checking how much gas you have or determining the starting point for a trip. You end up lost or stranded. Which is where most of us are with our finances.
How to GPS Yourself
Write down all your debts and assets (focus mainly on cash and investments)
Assets - Debt = Wealth
Whatever this number is come to terms with it
You will be shocked either way
A lot of people who think they are doing well will realize things are not as great as they thought and vice versa
But just remember, this is a starting point, not the end destination. Do not go into the "I wish... I should... If I had...." This is the reality now
Review your Monthly expenses
Get your monthly statement from your credit cards and bank accounts
Separate between your wants vs needs
Wants are things you love to spend money on but can do without. For example: eating out, traveling, concerts, new clothes, new shoes, streaming, etc.
Needs are things you have no choice but to pay for. For example utilities, insurance, groceries, gas, internet, phone, etc.
This will take a while and you might need to review more than just one month of expenses to get a good picture of all your costs especially because November and December can be deceptive.
You can use Ramit Sethi's Conscious Spending Plan to help keep things straight as you go through this process.
BE HONEST WITH YOURSELF
When you finish this, be proud of yourself. You just did something that 60% of people (made up stat) never do.
Step 2: Navigation aka Planning
Most people believe GPS is the same as a navigation system but these are two very distinct things.
G.P.S. stands for Global Position System, meaning it only tells you where you are.
Navigation is the turn-by-turn direction.
It may seem trivial but it makes a world of difference. You can know where you currently are but what use is that information if you cannot use it to find a route to take?
In finances, just knowing where you are, is pointless. You have to use that information to make a plan for your money moving into the future. We’ve all heard the saying "Knowledge is power." I believe this is wrong! Information alone is pointless.
I believe the Use of Knowledge is POWER!
Subtle but very key difference.
Becoming Powerful
There are certain people you meet and they give you an aura of calm. It feels like, with them, things just seem to always work out. One of my favorite people to use for this example is Jesus. No matter what came, he was always on top of things. He always had a calm presence and consistency to him. Why?
Because he had a plan and he knew where he was going. So everything to him was just side missions on his way to the ultimate goal.
This is the beauty of having a plan, it can get rough but you can adjust to it. This creates a non-fragile life. So here is a simple money plan to pay off debt or save.
The key question to ask as you do this is "CAN YOU AFFORD YOUR LIFE?"
50-30-20
50% of your income to your NEEDS
Rent, Transportation, Utilities, Gas, Insurance, Groceries, etc.
You have the GPS, use that information to begin making life adjustments
Notice the ease in your decision making
20-30% of your income to your WANTS
Eating Out, Shopping, Traveling, Concerts, Self Care, etc.
You will notice very quickly you cannot do EVERYTHING
My advice is to cut out mercilessly on the things you do not enjoy
Spend extra on the things you love
Question to ask: Did I like doing x?
Did I just like doing x with x person?
Is there a way I can still be with x person and do something else?
Can x activity even be a part of my life at the moment?
Is x activity worth the sacrifice?
BE HONEST!! Some things will have to be on the back burner. Some things you will have to let go off
Part of this process will be learning to say NO to people around you. Get comfortable with this
20-30% of your income to Debt Payments, Savings, and Investing aka FREEDOM
Credit Card, Student Loans, Car Loans, ETC
Emergency Fund, House Fund, Car Fund, Wedding Fund, etc.
Long Saving Goal Items
401(k), Roth IRA, HSA, Brokerage, Stocks, Personal Business, Courses, Self-Investment, etc.
Question to ask: What is the priority for me RIGHT NOW?
This will take time and effort to get right but put that time and effort into the process. It is very unlikely that your numbers will fit perfectly into these categories. That is okay, it might just mean some decisions have to be made. You will feel a variety of emotions and that is okay as well but work through them and then make the best decision for yourself.
But remember this one quote, "DO the HARD things, so life will be EASY." No cop-outs. Make the hard decisions A ONE-TIME DECISION! One of those hard decisions might be accepting that you need to make more money which is something we ignore far too often.
Throughout the process remember, "Spend extravagantly on the things you love, and cut costs mercilessly on the things you don't."
Only you can determine what those things are
Pre-Step 3: Safety First
At the company I work for, we do something called a Safety Circle Walk. Before you drive any company vehicle, you have to walk around the vehicle and check if there are any abnormalities since the last time you used the vehicle. By walking around the car, you make sure the vehicle is still suitable for use.
I remember one time, I did the Circle Walk and found a flat tire that I would have otherwise never noticed. If I did not notice it before leaving the safety of the parking lot, things would have been a lot worse if I had gotten on the highway.
In our finances, the Safety Circle Walk is having an Emergency Fund. One of the main reasons people never get out of Credit Card debt is that they have to keep relying on credit cards whenever an emergency comes up. Having an emergency fund is like being in the safety of your home or the office environment and finding a problem with your car. It is much less stressful to deal with.
How Much Safety
To keep it simple I suggest the following amounts:
$1000 for Single Folks
$3000 for Families
This is just your beginner emergency fund to use while paying off high-interest debts like Credit Cards. As you progress on to different goals, you will move to have at least 3-6 months of expenses as an emergency fund.
Step 3: Drive
Everything we have talked about so far will be useless if you never put your hands on the wheel and move. Just like with driving a car, the only way to learn is to actually do it. Everything will sound nice in theory but it is not until you are in the middle of a highway, do you learn how to navigate roads and other cars properly.
With your finances, you must implement the plans you put in place. As I said earlier, more than likely your initial plan will not work out. But much like driving with Google Maps or Waze or Apple Maps, you can re-route yourself into better paths to continue moving towards your destination. Sometimes there will be no alternative and it will be for you to sit in traffic but a plan makes the wait a bit more tolerable because you can still forecast reaching the destination.
How you take action matters. I love driving on the open road of the interstate when there are no cars in front of me because I can use Cruise Control. It is so freeing to remove my legs from the pedal. Plus because I tend to have a lead foot, it ensures I never get any more speeding tickets. But even better than that is the Adaptive Cruise Controls some newer cars have. Where the car will break and start back up on your behalf while following other cars in traffic. Whenever I get the chance to drive a newer model, I always want this feature because it allows me just to relax and not be stressed whenever in bumper-to-bumper traffic.
This system can be implemented in your finances as well through Automation. By automating, financial decisions on the front end when you are rational and chill. It removes the money stressors later and makes decisions much easier when your emotions are high.
Activating Cruise Control
Rather than me trying to talk you through this. Ramit Sethi has a great video discussing exactly how to do this.
He also goes step by step with a blog post if you prefer that.
But the most important thing is for you to TAKE ACTION! Do not wait for a perfect season or perfect time, there never will be one. The moment you have a plan in place, TAKE ACTION!
Step 4: Use Your Rear & Sideview Mirrors
Just like driving, it is important to check what is happening around you. So periodically, it is good to look at your mirrors to make sure you know where other cars are and to avoid things creeping into your blind spots.
It is the same way with our finances. It is so easy for things to catch us off guard or fall through the cracks because life happens. This is why it is so important we take time regularly to do a check-up and review how things are going.
I suggest starting with a weekly process to make sure all your automations are working currently. As you get used to the process, move to biweekly, then finally monthly. Initially, it might take an hour to check everything but eventually, you will be to be able to complete the check-up in less than 15 minutes.
Just like with driving, we do not spend our time looking at the rearview mirrors. There is a reason the windshield is much larger than the rearview mirror. The goal is to know what has happened so you can adjust in necessary. However, your focus should always be on your goals.
Step 5: Enjoy The Ride
The best part of driving for me is being able to jam out to music or listen to podcasts. I love either learning in my car or just vibing out. Sure there may be traffic but that just means more time to enjoy myself.
Same with our finance journey, whether you are trying to pay off debt or have a savings goal. Find small ways to ENJOY THE JOURNEY!!
It can be as simple as celebrating the milestones you hit along the way.
As my sister once told me, "Life is to be lived not just survived!"
Which lead to my new slogan,
HAVE FUN JUST DON’T EFF IT UP!
Remember GENEROSITY > greed
✌🏾
Recommended Reads
Humble Dollar Writer Howard Rohleder explains how we never go back once we increase our lifestyle
Katie Gatti Tassin writes about the broken compensation system in the US which leads to the top 10% are the only ones really able to win in the US Economy