In a recent publication, Report on Economic Well-Being of U.S. Households in 2013, released in July of this year, the Federal Reserve notes that 52% of respondents to the survey upon which the report is based could not come up with $400 in an emergency without adding debt to a credit card, borrowing the money from family or friends, or selling something to raise the money. That means over half of Americans are broke. What else would you call it when someone cannot get their hands on $400 without borrowing it or selling something to get it?
We’re not talking about that much money. Four hundred dollars is less that one percent of the median annual income (approximately $50,000) in the United States. Yet, over half the country has less than $400 in liquid savings, and are one paycheck from a personal financial crisis.
How to avoid being broke
It doesn’t have to be this way. People don’t have to be broke if they don’t want to be. They can take control of their spending, reduce it, and accumulate savings. Here’s how to do it:
- Seek meaning in the non-material aspects of life. A meaningful life full of love, joy, and happiness cannot be purchased with money and is not found in the material aspects of life, but is free for those who seek it. A meaningful life is found in giving rather than getting.
- Establish spending priorities. Review spending by going through the checkbook and credit card statements or keep a spending journal for two or more months. Determine what is most important and what is not. If accumulating savings is a goal, then saving should be important.
- Use a budget to plan spending. Plan spending around high priority items and fund them first. That includes saving. Set money aside for saving first. Reduce or cut out spending on low priority expenses until spending and saving balance with income.
- Establish an emergency fund. Direct all saving into an emergency fund to replace lost or reduced income in the event of a layoff, medical emergency, or reduction in hours. Once two months of living expenses have been accumulated in the emergency fund, begin to direct some savings to pay for unpredictable expenses such as automobile maintenance and repairs, home maintenance and repairs, appliance repair and replacement, and medical deductibles and co-pays. Continue to direct the bulk of savings into the emergency fund until at least six months of living expenses have been accumulated.
- Save in advance to pay for unpredictable expenses. Expenses such as automobile maintenance and repairs, home maintenance and repairs, appliance repair and replacement, and medical deductibles and co-pays are not emergencies and should not be paid for out of the emergency fund. They are unpredictable expenses: we know they will occur; we just don’t know when. Save in advance for these expenses, a little each month, so the money will be there when it is needed. Review past expenses in these areas to get an idea of how much should be accumulated for this purpose.
- Get the maximum value out of the money you spend. Employ unit cost comparison when determining the best price for an item. Become conscious of the going price for frequently purchased items in order to recognize a sale price when it is offered. Buy enough of a sale item to last until the item goes on sale again. When a frequently purchased item goes on sale, consider buying it even if there isn’t an immediate need for it and add it to the inventory for that item. Research prices for items purchased only once in a while to determine the best price. Always be shopping, not buying but shopping, to become familiar with the marketplace. Always make a plan before going to the store; have a list or know what is to be purchased and the approximate dollar amount that is to be spent. Stick to the plan.
- Avoid paying for convenience. Convenience is costly. Avoid convenience and save money. Eat at home and bag lunch for work. Avoid prepared, packaged food and meals. Take coffee brewed at home in a thermos. Avoid hiring work done around the house when possible: yard work, house work, laundry, ironing, simple maintenance, washing and waxing vehicles, and so forth.
- Buy used when practical and possible. Used items can be a great value and save a lot of money. Consider used clothing, vehicles, bicycles, toys, household furniture, office furniture, tools, appliances, cookware, VHS cassettes, CD’s and DVD’s, sports equipment, computers and peripherals, dishes and glasses, and so on.
- Don’t compare. No two households have exactly the same financial makeup, and no one has perfect knowledge of someone else’s financial situation, so it is a waste of time to compare finances. Don’t do it. Personal finance is not a competition.
- Adjust standard of living based on accumulated savings not increased income. Maintain the current standard of living when there is an increase in income and save the difference. Increase the standard of living when accumulated savings can justify it, in other words, when there is enough savings to sustain an increase in living standards.
If you are broke, do not despair. I was broke until I was nearly thirty. Do as I did: implement some of these ideas today, and start setting aside some savings. Every dollar counts. The more you try to save, the easier it will get to accumulate savings. Eventually, you will develop the habit of saving. Once that happens, you never have to be broke again.
K. C. Knouse is the author of True Prosperity: Your Guide to a Cash-Based Lifestyle, Double-Dome Publications, 224 pages