15 Jul Independent Expenses: The Hard Part
“The journey of a thousand miles begins with one step.”
And the first step is the hardest. Whether just starting an independent financial life, starting one over or taking over the controls that have been operated by another, there is fear, frustration and failure involved in any learning process, but the trial and error method is the surest way to learn.
The hardest part of riding a bike is getting it started. Balance at low speed is tricky and dangerous until momentum is established. Once the wheels are rolling, and the pedals are powering the bike forward, riding gets easier. So it is with any long-term endeavor.
The first down-stroke of a bicycle pedal is like the first month of adjustment to a new financial situation. First, the handlebars must be gripped, the pedals found and the bike mounted while already in motion. But once started, and without the aggravations of hills and bumps, the process becomes simpler and the bicyclist is freed from pedestrian constraints. Once expenses are controlled, and the power of regular income applied, choosing direction and destination are possible.
“My Bucket’s Got a Hole in It”
There is a financial gravity that pulls money from the personal income spigot into the bank account bucket. From there it seeps as payments. Fewer or smaller bucket holes mean more cash left over at the end of the month. But there are holes that cannot be filled—expenses that cannot be cut no matter what. They are the ones necessary for the survival of any human being.
Survival in a monetized society involves more than just food, shelter and clothing. Food and clothing are debit or credit purchases. Shelter is rent or mortgage payments. Medical and transportation expenses are additional survival necessities. Some outflows can be reduced, but not eliminated; they are simply the cost of modern living.
Securing shelter long-term is fundamental to survival. A lease allows for a consistent outflow, a number that can be counted on for a set period of time set by contract. A lease also allows for negotiation of future rental expense, as well as the ability to shop and compare other rentals in the market for use in negotiation.
Purchase of a home via mortgage secures shelter for a longer term, and adds assets monthly to residential consumer’s balance sheet, while at the same time reducing the homeowner’s indebtedness. But that housing expense is then fixed for the term of the loan. And as monthly mortgage payments continue, slightly more of each payment goes to paying down the principal borrowed, rather than the interest charged.
Medical insurance is a must for everyone and cannot be cut. Everyone needs coverage, but no one wants to spend money they don’t have to. All choices add up to more or less money leaking from the financial bucket each month, more or less convenience and satisfactory care when needed. Individual health, age and previous diagnoses guide the choices. But just as important as cost to some may be the ability to continue with the same physician, though making that choice may cost more.
Certain matters of financial security are critical. Honoring established contracts is one of those. Every contract has terms and penalties, from mortgage loans to cellphone subscriptions. Some can be renegotiated if the consumer is willing to give up some or all of the contracted service.
Creditors demand money, that’s why they are in business. But they will take what they can get when they can get it when the other option is bumpkis. Enter negotiations with creditors, armed with detailed personal financial information numbers and an easily manageable proposed payment. They want money, not another house, car or future.
Any payment the creditor or bill collector takes changes the color on the account from red to black; its status from delinquent to current, or at least delinquency delayed. Acceptance of payment, no matter how small, is consideration paid. A new contract has been executed.
Debt and Savings
Debt payments and savings deposits can both be prioritized by interest rate percentages. Those with the highest numbers should receive the most monetary attention. Loans always charge a higher interest rate than savings accounts pay: banks make money by lending for less than they borrow. To most efficiently protect a financial future, start by paying off debt—the highest interest rate first.
Easier said than done. But the way to not panic is to have a plan in place. The time to make an emergency plan is before it is needed. First on the list, according to Elizabeth Warren in All Your Worth is “Don’t Panic.” And the way to not panic, as is Warren’s wont, is to have a plan at the ready. Her second warning is to avoid the opposite reaction to sudden negative change: “misplaced optimism.” Many people delay reacting to a negative financial event. As Warren says, “The speed with which you react may make the difference between a fender-bender and a head-on collision.”
An emergency plan must include a list of creditors, contractors and providers with phone numbers and contact information. That list could be a scrap of paper held by a magnet to the refrigerator, or it could be a bound financial journal, but those calls must be made. A written plan can also prioritize expenses by survival, safety and security, debt and savings. Survival expenses get paid first.
Whether having fallen off the bike, riding someone else’s bike for the first time, or never having ridden a bike before, the first pedal stroke is the hardest. Once started, momentum will keep it rolling upright. The turning wheels will gyroscopically balance the bike. But the rider must first make the start.
Spire Wealth Management is a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company, Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC
This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any strategy or investment product, or as investing advice of any kind.