Nick Carroll is a financial money coach and author of 6 Steps to Achieve Financial Freedom
Carroll says learning to manage money is the path to growing wealth
When it comes to saving and investing money, the best advice is to keep it simple
When climbing your financial situation out of debt, you need more than luck, let alone the Irish luck. With yesterday’s celebration of St. Patrick's Day, you may have pulled out that green sweater or t-shirt you haven't seen since last year to ensure pinching fingers don't come your way from friends or family. Such a day can be fun and may remind us how lucky or not our paths have been.
I am reminded of the Irish immigrants who fled from British rule in the 1800s. As the Irish population was faced with poverty, famine, and diseases, the Irish were faced with a few difficult choices.
The first choice is to stay content in their land in the hope of events improving such as ending the internal war or improved food situations. Luck as it may be. Perhaps luck will bring food to the area that wasn’t contaminated as their potato crops were sickened and destroyed. Maybe the Irish luck can deliver new profound health and rid the vast illnesses plaguing their country.
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The second choice is to flee the land and work diligently to find a new place to thrive, away from tyranny and oppressive ruling.
After numerous months of open water sailing across the cold and deep blue Atlantic, which was a dangerous journey back then, many immigrants passed away during the voyage or got deathly ill.
As the Irish faced difficult decisions to make, their determination to find opportunities to succeed and prosper was lying ahead while fear and poverty was left behind.
When it comes to managing your finances, money management isn't the only skill to develop.
You must have a new mindset when choosing to become debt free.
In this article we will discuss:
1. Mindset of Money
2. Create a Debt-Free Plan
3. Know the Cash Flow of Your Money
4. Three Buckets of Savings
1. Mindset of Money
Having read hundreds of entrepreneur books, one theme is consistent with each successful person. They all have a positive mindset. No matter how setbacks or failures, they dig deep to find the courage and push through because they are focused on the end result. Battling through a pile of debt may feel like an impossible fight, but it isn't.
In an article by the Harvard Business Review, “The Federal Reserve estimates that nearly half of U.S. households are unable to pay their credit card bills in full each month.” You’ve heard it preached by many financial coaches that you must pay more than the minimum payment to see the debt balance decline.
The Journal of Consumer Research conducted a study on consumer motivation which determined “Evidence from a field study of indebted consumers with multiple debt accounts and from three experiments shows that concentrated (vs. dispersed) repayment strategies tend to boost consumers’ motivation to become debt free, leading them to repay their debts more aggressively”
Does it surprise you that having a small debt being paid off inspires you to knock out the next debt? It seems obvious, but this strategy can only continue the inspiration and motivation if you carry that actual prior payment over to the future liability. Some money gurus call this the Debt Snowball strategy. It is, and it works!
There is a psychology behind it as well which many experts discuss. PyschologyToday.com reports “Just about everyone has a complicated relationship with money. Studies show that money is the no. 1 reason for divorce in the early years of marriage and a common area of conflict for couples.”
One of my favorite places to read about money management is The Penny Hoarder. Last summer they produced an article discussing “Scientists Figured out How Money Affects Your Brain…” and “…money “high” can lead to riskier choices”
Most debt problems result from poor money management. Management of your money can be accomplished by budgeting your finances which is one of your household responsibilities. Once you are able to correct your management issues and start scheduling with a zero-based budget, you can begin to save money better and smarter while being able to create a plan to pay off debt.
2. Create a Debt-Free Plan
When you have a smart plan in place, it acts as your road map and guide. You must have a road map to get to your destination, and in your journey, you are traveling from $125,000 in debt (or whatever figure you have) to $0 in debt.
ThePennyHoarder.com’s article “5 Strategies to Consolidate and Pay off Your Credit Card Debt Faster”, step one is to Stop Using Your Credit Cards. This is true with any and all debt.
Take a moment and imagine you are filling up a glass of water. The water from your faucet is your debt, and the contents in the glass determine how much debt you have. You turn on the faucet watching the glass filled with the thirst-quenching clear liquid. As the glass nears its capacity to water, you leave the valve on realizing you can no longer drink as much water as is being poured into the glass.
The glass can only store a certain amount of water. Once full, it can start to spill. Your financial situation can just handle so much debt because it spills over to bankruptcy or serious financial problems.
You cannot continue to use your credit cards and pay off your debt at the same time. This goes back to getting your mindset right. Once you make a decision to get out of debt, stay focused and determined.
Turn off the faucet and start drinking the water until the glass is empty. Stop spending your way into more debt and start paying more on those credit balances.
After deciding to stop using debt to get into more debt, itemize your debt balances from lowest to highest. By tackling your lowest balance amount first, you free up some additional capital to pay down other debt. This makes the surpluses shrink faster, and ties back into point number one mentioned at the beginning of this article.
Read more: How to Achieve Debt Freedom
3. Know the Cash Flow of Your Money
I recently ran across an article written by a financial planner outlining what he has learned about wealth by working with his wealthy clients. One of the lessons he shares is clients live below their means. I've written several articles highlighting the importance of living on less than you make but to hear financially wealthy people say this can help reinforce an important point.
Eric Roberge, a Business Insider contributor, writes, "First, they [wealthy people] don't spend money they don't have, period. They understand their cash flow - or money coming in and money going out - extremely well."
How well do you understand your cash flow? He also writes "Wealthy people pay themselves first by making sure they save money each month before doing anything else...".
How are you prioritizing your paycheck every time you receive that direct deposit or pay stub?
4. Three Buckets of Savings
Finally, your household must make a conscious decision and effort never to fall prey to debt again. Because of this, you will need to start focusing on saving money. I recommend three buckets. The first is beginning or strengthening an emergency fund.
Having an emergency pile of cash is the foundation to better money management and here is why.
What typically happens when a family has no savings, but they need to come up with $500 for an unanticipated expense such as medical bill, household repair, or mechanic cost? Most households will pay using a credit card if they don't have that kind of money in their bank account.
I always say that with money, you are either moving forward or backward. Debt walks you back, but if you have a financial reserve on hand, this helps keep you from running back even though you had to dip into your funds.
A recommendation is to establish a separate checking or savings account that is only to be used during emergency financial situations. I do not recommend a Certificate of Deposit to store your emergency funds because of the penalty you may be forced to pay upon withdrawal. Look for banks offering a free checking or savings account such as USAA.
The second bucket is to house your short-term goals. Short-term goals are defined as purchases you are looking to make within the next five years. Short-term purchases are more common than you may realize. When was the last time you purchased an automobile or had to repair the deck on your home?
By paying small increments from every paycheck, this sum adds up over several months.
Whether you just bought a car recently or haven't in several years, making a regular payment to another separate bank account is an excellent exercise to save money over time. It provides flexibility in your financial ability to pay cash for an automobile when ready, and when you have financially troubled months, you can skip a payment to this account.
Set a goal of your choosing. For example, pay this bank account $300 every month for 48 months will total $14,400 you can put towards a car when it is time to replace your current automobile. It may also come handy when it is time to repair the roof of your home.
If you struggle with the commitment to building other savings, then try to use apps like Acorns or Qapital where tiny increments are pulled from your bank and grow interest over time. Apps like these allow you to deposit the cash back into your bank account and allow you to establish financial goals each week.
The third bucket is your retirement savings. We won't go into much depth on this topic because there are numerous articles on this but ensure you are regularly contributing to your 401(k) or IRA, as well as, reaching your annual maximum contribution limit.
Read more: Improving Your Retirement Savings
By mirroring the money management steps above, you are replicating the strategies of wealthy people and how they manage their money. You will find these discipline strategies will put you on a path in achieving financial success and independence.
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Nick Carroll is a published author of 6 Steps to Achieve Financial Freedom and has worked as a Commercial Credit Analyst, Investment Marketing Associate, and worked at the Pentagon-Air Force Budget Office. He is a graduate of Creighton University with a Masters in Investment Management and Financial Analysis and holds a Bachelor's in Banking & Finance.