I get to work early in the morning and it is cold and the coffee shop is next to my building. With that fresh smell of coffee or tea, I really have to start my day well. And really the debts will wait because I need to live. Also what difference will a cup of coffee or tea make to my already bad finances?
The banks have been calling and the credit cards are all at maximum. Some of my debt are at collection agents and others are threatening to garnish my assets. Does that mean that I have to deny myself from little pleasure of life?
This is a usual scenario that is common in debt situations.
Analysis:
Most of the time we fail to realize that there is a connection between savings and just a few of the "little" necessities of life such as a cup of fresh coffee or tea. In this situation, this worker has credit cards at maximum and also other debts which may include line of credit, credit cards and overdraft protection of his bank. The debts need to be paid and obviously the salary is not enough to cover the expenses. This indicates a negative cash flow situation and poor cash management. There is likely no responsible budget and spending habit. For an individual, it is a clear sign of financial distress.
What are the options available ?
Options:
There are many options that a person should take when in this situation. The key question is how long do I want to remain in this situation and what can I effectively do to minimize my hardship.
For a person to be financially disciplined and responsible with a desire to overcome these difficulties, the first step is to "Start counting" .
Start counting means that it matters when we spend that money on little necessities such as a cup of coffee. I am not trying to be stingy and I also like coffee, tea, drinks and all entertainment. However, I realize that if I cannot afford it then I don't buy it. That is called financial discipline.
Why does it matter?
Let us look at the numbers closely.
- Let us assume that a cup of coffee that I will buy is $2.50 and with some snacks of $2.50, which totals $5 per day. In a month, of 25 working days, I would have spent $125. In a year of 12months, I would have spent $1500.
- Effectively, I could have reduced my debt by $1500 if i had avoided drinking coffee or tea for 1 year. This amount would have reduced the phone calls from the bank and also increased my credit card payments.
- Since, this is a debt issue, the credit card would be accumulating interest as well as the overdraft. So the actual cost of buying the $5, coffee is not just what you pay but also what the interest accumulates.
- Assuming the cost of buying this coffee at the grocery was $15. For an average person, they would be saving a minimum of $110 per month and still enjoy the pleasure of drinking coffee. In a year, we would have saved $1320. So we are not denying ourselves completely but we are smart savers.
- Savings of $1320 per year may seem small but over 5years, it amounts to $6600.
- To wipe out our debts quickly, we need to extend this exercise to other areas such as drinks, lunch outings and dinner also.
Strategy:
- Make a budget for the year. Include all known expenses that you will spend during the year including entertainment and travels.
- Be realistic in your estimates and know that the numbers may change eventually.
- Include an amount known as "miscellaneous expenses" so that it will capture the changes and other items that you do not remember. The number should be minimal.
- Set out a plan to pay back your loans and be stringent with your timing. Pay it off as quickly as possible.
- Resolve to save at least 10% -20% of your income monthly. This should be in addition to paying off the loan and some moral commitments. After paying off the loan, increase your targeted savings to 30% minimum.
- Revise your initial budget. You would find that the numbers do not work and that is when you have to review items like entertainment, travels, shopping, lunch and other items that are not necessary.
- Decide on the items that you must have and other that you can do without (even if it is on temporary basis).
- You may also find alternative sources of income if those needs must be met.
- Use cash and save on bank charges, credit card interest charges, line of credit charges and overdraft fees. Put those credit cards away and refuse all forms of financing or re-financing. The interest payments over the period of the loan are more than double the amount you actually borrow.
- Reduce social outings, shopping and eat more home made food.
Goal:
Within a shorter period or within the stated time frame, you will be lighter in debt burden and also can start enjoying some of those lifestyle. you may also find out that you could do without them and continue with your part to more savings.
I guarantee you that the feeling is worth more than a few missed little necessities of life!
Tested and true!
MLO
