PARADIGM SHIFT
1 Simple Habit to Stay Out of Debt
As an investor, it’s tempting to overlook the money market account.
After all, there’s no chance it’s going to change your life overnight, right?
But maybe that’s not entirely true.
If used right, this can set you up for automatic success in maintaining a balanced budget.
When I was an advisor, I can’t tell you how many times clients underestimated their expenses because they were only considering their recurring, habitual expenses. But when it came time to buy a new car, renovate the kitchen, replace the roof, etc., they came to me with a “one-time” expense that they assured me would not be repeated.
Yet a few months later, they were back again needing money for the next “one-time” expense. This pattern disrupts the ability to take on proper risk while also increasing the likelihood of turning to debt for the answer.
Have you noticed how often we get these one-time expenses? Multiple times a year! Usually at least one a month!
Before we know it, we’re either drawing too much from savings or, worse, accumulating debt to pay for these surprises.
There’s a simple way to avoid being caught off guard. Pay yourself first.
Think of yourself as a government or a business. It’s your job to take care of all of yourself: past, present and future. But for that, you must have a reasonable estimate of potential future outcomes and their costs.
It’s may sound simple and common sense, but if you do this, you’ll rarely if ever experience a true financial emergency that requires you to fall into debt.
Start with these categories:
- Housing (repairs, maintenance, renovations, furniture, appliances)
- Clothing
- Transportation (oil change, tire change, repairs, license, tax, car replacement)
- Medical (doctor, dentist, optometrist, chiropractor, therapist, medicine)
- Recreation (vacations)
- Personal (gifts, school supplies, etc.)
Then follow these three steps:
- Review the past 12 months of spending for each overall category.
- Divide the full cost by 12.
- Set up an automatic monthly cash sweep of this number to a money market account.
It’s important to keep this money market account separate from your normal spending account! This creates a clear distinction beyond just maintaining the mental accounting in your head. And it also creates a barrier to spending the money without thought.
Here’s good news. If 12 months goes by, and you have not drawn from the account for a specific category, you can reduce your monthly sweep by that category’s amount. It’s fully funded.
If you underestimated expenses for one category, increase the sweep to meet the new expectations.
The money market account suddenly becomes far more interesting and relevant to your financial picture. It changes how you live in the here and now.
This is not an emergency fund. This is an account which you know you’re going to pull from. The question simply is when.
By placing this cash sweep on automatic, and using historical statistics to estimate future expenses, you keep yourself out of debt. And freedom from debt sets you upon a solid foundation from which you can begin accumulating wealth far beyond today’s needs.