Despite vaccinations that are underway and a $900 billion stimulus package, the coronavirus pandemic continues to exact a steep economic toll on the United States. For millions of Americans, that means mounting trouble paying their rents and mortgages.
According to U.S. Census Bureau’s Household Pulse Survey, 12.8 million people were either behind in their rent or mortgage payments as of Dec. 7, or remained unsure whether their household could pay the next month’s rent or mortgage on time.
The Household Pulse Survey, which was launched in April to examine how the COVID-19 pandemic is impacting households across the country, has found that Americans’ housing anxieties continue to grow.
The number of people considered “housing insecure” in the survey has risen by 2.8 million since July. In mid-October, that number had fallen to 9.8 million but has since increased by 30%, according to the data.
Meanwhile, the latest batch of survey results from Nov. 25 to Dec. 7 indicate a whopping 85 million had difficulty paying for usual household expenses, including food, rent, car payments, medical expenses, among others.
Before I truly understood the power of automating my finances, my bank account was a hectic and chaotic place.
Let me explain.
Every two weeks my paycheck was direct deposited into my one checking account. That account served as a one-stop shop for all my finances. I used it to pay my monthly bills, pay for food and other variable expenses, and of course, for spending money.
As for savings, I tried to move a percentage of my earnings into a separate savings account each month, although there were plenty of months that did not happen.
That was my system, if you could call it one.
The problem was, with no set budget, I didn’t have a clear understanding of how much money I was spending outside of the big ticket expenses like rent.
I spent relatively freely and when my checking account was drawn down, I replenished it by moving a couple hundred bucks over from my savings. I didn’t like doing this – in fact it felt like I was cheating or doing something wrong – but I rationalized that it was what I had to do to keep my bills paid.
Luckily, I’ve all but eliminated these bad financial habits.
As I learned more about budgeting and the power of automating my savings, I developed a system that helps me separate the money I need to pay my bills every month from the money I spend on variable expenses, like eating out and buying new clothes.
Using multiple bank accounts – and some simple math – I’m able to separate my spending money from the money I know I need every month. This doesn’t just help me stay on budget (or close to it), it gives me piece of mind. I know that I’ll have enough money each month to cover my fixed expenses, which gives me more confidence to make strategic financial decisions, like investing and saving.
Here’s how to do it:
Step 1: Add up your monthly expenses
First, you need to figure out how much money in total you devote to these fixed, monthly expenses. List and add up all your monthly bills, from your rent or mortgage to your car payments and student loans.
Don’t forget your utility bills, even though these may vary from month to month. I’ve found it beneficial to allocate a little extra for utilities in case my power bill is exceedingly high one month. My girlfriend and I combine to pay between $180 and $200 for cable, internet, and power, but I set aside $100 per month and consider them a fixed expense.
Step 2: How much do your monthly expenses add up to each year?
Now, simply multiply your fixed, monthly expenses by 12 to determine how much these bills add up to over a year.
If you spend $2,500 per month on fixed expenses, this number will be $30,000.
Step 3: Set aside money every pay period
Now, we have to figure out how much money to set aside every time we get paid to be able to cover these fixed expenses every month.
But it’s easy math. Just divide the total from step 2 by the number of times you get paid per year. If you get paid every week, divide by 52. If it’s every other week, like me, divide by 26.
Using the example from step 2, I would divide $30,000 by 26. In this scenario I’ll need to aside $1,153.84 from each paycheck to cover my monthly expenses.
Step 4: Set up a checking account and direct deposit
The final and all-important step is two-fold. You’ll need to set up a separate checking account that you will use only to pay your monthly bills. Think of this as a business account, separate from the rest of your finances.
Then, set up direct deposit with your employer and have the amount from step 3 sent directly to this new checking account every pay cycle. For even greater piece of mind, set up automatic payments for recurring bill payments.
If you’re like me and you struggle with your spending habits, this system will help you narrow your focus and address those concerns. By separating the money you need to pay monthly bills from the cash you use for everything else, you will have a clearer and more defined picture of your finances as a whole.
Like so many millennials, I graduated from college in 2009 with tens of thousands of dollars in student loan debt, completely naïve to how it would impact my financial future.
A decade later, things clearly haven’t gotten much better. In 2019, college graduates left school with an average of nearly $30,000 in student loan debt.
I don’t point this out to discourage a pursuit of higher education. College graduates with bachelor’s degrees make on average $1 million more than high school graduates over the course of their lifetimes. College is certainly a worthwhile investment.
But I do believe we need to begin to rethink debt – from student loans to credit cards to car notes.
The burdens of staying in debt are numerous. Monthly payments sap hundreds or thousands of dollars from your bank account, while interest that accrues over time costs you big bucks in the long run.
But there’s a hidden, less obvious, cost of staying in debt.
Carrying debt is like playing defense
Imagine suiting up for a basketball game and having to spend the entire game on the defensive end of the court. You never get the chance to shoot, pass, or dribble, and instead spend the entire game chasing the opposing team as they pass the ball around you.
That’s kind of what it’s like to be in debt, right?
By carrying credit card debt or borrowing money to buy a new car, we remain narrowly focused on making the required monthly payments to keep the lenders off our backs.
And therein lies the problem. If we’re too busy playing defense, we can’t go on offense with our money. The money that we could be growing in the stock market or a high-yield savings account instead goes to Sallie Mae or American Express each month.
The danger of going into debt and staying there is what’s known as opportunity cost – “the potential benefits an individual, investor, or business misses out on when choosing one alternative over another,” according to Investopedia.
This is the hidden cost of carrying debt. We forfeit the opportunity to play offense with our money and instead get stuck on defense.
Don vs. Michelle
Take this simple example to better understand these concepts:
Like the average American college graduate, Don and Michelle both owe $30,000 in student loans when they get their diplomas. They both have 5% interest rates on their loans.
Don wants to keep his monthly payment relatively low so he can afford to live in the city with friends and go on several trips a year. He makes the minimum payment every month and is on track to repay the loan in 10 years. He’ll pay a grand total of $38,183.59 by the end of those 10 years, including nearly $8,200 in interest during that time.
Don
Monthly Payment
$318.20
Total Interest
$8,183.59
Total Payment
$38,183.59
Michelle on the other hand understands the longer she takes to repay her loans, the more it will cost her in the end. She decides she wants to be out of debt in five years.
Using a loan calculator online, she figures she must pay $566 per month to reach her goal. It means she doesn’t have as much cash on hand to go on trips or to live in the city with friends, but Michelle knows it’s going to pay off in the end.
After five years Michelle has repaid her loans and is debt free. Unlike Don, who will pay almost $8,200 in interest over a 10-year period, Michelle saves over $4,000 in potential interest payments by paying off the student loan debt in just five years.
Michelle
Monthly Payment
$566.14
Total Interest
$3,968.22
Total Payment
$33,968.22
Michelle is clearly getting the better deal here, right? But there’s more.
Michelle is really sharp and understands opportunity cost. She knows that being debt-free means she’s ready to go on offense with her money.
She decides to take the $566 she was paying toward her student loans each month and invest it in mutual funds. Over the next five years, the market fluctuates a bit, but her investments average a 5% rate of return during that time.
In five years, Michelle will be sitting on more than $38,000!
End Balance
$38,382.58
Starting Amount
$0.00
Total Contributions
$33,960.00
Total Interest
$4,422.58
Not only is Michelle saving more money than Don by paying her loans down in five years, she’ll have nearly $40,000 more than Don when he finally gets out of debt.
Because she understood opportunity cost and saw debt not only as a monthly obligation – but as as drag on future earnings – she developed the right strategy to get out of debt and move on with her life.
For many people, personal finance is about as appealing as a trip to the DMV or a COVID-19 nasal swab.
I was once a member of that group. Saddled with student loan debt and no idea of when I would pay it off, I avoided thinking about my finances. Was I saving any money? How much was I spending? Was I worse off than other people my age?
I didn’t have the answers to these questions, and quite frankly, I was avoiding them altogether. When it came to my own finances, I was like an ostrich with his head in the sand.
That is until one day I picked up “The Automatic Millionaire” by David Bach. To be clear, I didn’t initially set out to read it. The audacious title simply caught my eye so I figured I’d give it a read, if for no other reason to poke holes in the fantasy the book’s title was selling.
“This is so ridiculous. No one becomes a millionaire automatically,” I remember telling my girlfriend.
But soon after I began reading the book, the topic that had long been overwhelming and intimidating started to feel approachable. Before even finishing the book, I felt a shift in the way I thought about my own finances. Suddenly I was energized and ready to learn more.
I’ve learned a lot in the two years since picking up “The Automatic Millionaire,” and while that education is far from complete, I’m confident in the lessons I’ve learned and want to pass them on to others who have a similar dysfunctional relationship with their finances.
Since first reading Bach’s book, I’ve paid off my student loans, established a six-month emergency fund, and hired a financial advisor to help me get the most out of my investments. For the first time, I feel confident in my financial outlook.
Here are four critical lessons that will help you reshape your relationship with money:
Find your ‘why’
It’s a simple, but important question to ask yourself and it can make all the difference in getting your finances in order: what’s your why?
In other words, what do you want?
Chances are the answer to that question is something tangible that will require money. Sure, everybody wants happiness, but what does happiness look like to you?
Having an attainable goal in mind is vital to getting serious about your finances. Identifying a financial objective – whether it’s purchasing your first home, saving for your child’s college education, or even taking a special vacation – can jumpstart your pursuit of financial literacy.
Having a “why” is what will keep you motivated and inspired.
Understand your expenses
A realistic and actionable budget is the foundation that future success with money is laid upon.
But you can’t begin to design a practical budget without having a clear understanding of two critical components of your finances: how much you make and how much you spend.
You likely know how much you earn on an annual basis, but perhaps a more important number is how much you take home each month. This number is vital.
Now, how much do you spend? This is a far trickier question, it’s likely the one keeping you from taking your finances seriously. Keeping track of your spending requires discipline and can feel burdensome, but it’s important to understand how much money is going out each month.
Next, you’ll need to figure out what are your fixed expenses and what are your variable expenses.
Fixed expenses are expenditures that are consistent and generally the same each month. Your rent or mortgage payment is a fixed expense. Your car payment is a fixed expense. These are expenditures that you plan for every month and know how much they will be.
A variable expense, on the other hand, is more fluid. They’re often tied to lifestyle and your interests, but they can also be related to emergencies or medical care.
A successful budget can be designed only when you have a clear understanding of your fixed expenses and how much is left over for everything else.
Treat your savings like your rent
A key component of the “everything else” is the big S-word: savings.
If you’re like me and have a set annual salary, set a realistic savings goal every month and treat it like it’s a fixed expense.
For instance, if your rent is $1,200 a month, you know you need to set aside that much money at the beginning of every month. Well, now just do the same with your monthly savings.
Treat your monthly contributions to savings accounts with the same urgency and importance as you do with your rent or car payment. Think of your savings like a fixed expense; build it into your budget and then let your variable expenses fall where they may.
Automate your savings
I mentioned earlier that “The Automatic Millionaire” was the first personal finance book I read and it’s what got me motivated to take control of my money.
The author, David Bach, teaches you the importance of automating your contributions to retirement and savings accounts by setting up direct deposits. By having predetermined places for your money to immediately go when you get paid – other than your checking account – you reduce the chance that you’ll spend that money.
Each time I get paid, a percentage of my pay is routed into two savings accounts and a pair of checking accounts. I use one of the checking accounts to pay bills and the other for variable expenses and spending money.
If I had to manually move money into my savings accounts every month, I’d surely forget to do it sometimes – or worse, rationalize why I didn’t need to do it at all.
Automating your savings removes the unreliable middleman: you.
Patrick Villanova 