Perhaps the first question to ask is: Why should you take my advice?
I achieved freedom from debt by age 30. In less than 8 years I paid off a combined total of $72,000 in Student Loans, Auto Loans, Loans from Family, and Credit Card Debt. I do still have a mortgage, which even at a conservative estimate represents less than 60% of the value of my property. I also currently have about a third of my annual family income socked away for a rainy day (or maybe a Tesla).
For the first time in my life, I feel wealthy, not my because my family income is higher, in fact, it’s significantly less than a few years ago.
I feel wealthy because I now have positive cash flow due to paying off debts. If you are making a decent income but you still live paycheque to paycheque, it is because you have negative cash flow, and this traps you in a negative circle of continuing to work and make debt payments, while never really getting off of the hamster wheel.
Cash Flow is an accounting concept, but it can be illustrated simply, as follows:
Incoming Cash (Paycheques) – Outgoing Cash (Bills & Spending) = +/- Cash Flow
Positive cash flow means you have money leftover in the bank when your next paycheque comes in. You can then use this leftover money to increase your savings, splurge on a special item, or take a guilt-free vacation because it wasn’t paid for on a credit card! It takes some sacrifices and self-control, but the payoff is well worth it!
So, if you feel like taking my advice, here are my tips for getting your personal finances to the point of positive cash flow!
Know your spending habits.
I’ve heard people say things like “Oh, I never look at my bank/credit card statement, it’s too depressing.” If you really want to change your financial situation, your very first step is to figure out where your money is going. I like the free app Mint by Intuit for personal finance and budgeting. You connect your bank feed to the program and set expense categories for vendors. This really helps to determine your problem areas.
Create a budget and stick to it.
Once you’ve reviewed your current spending habits, you can determine limits that you are comfortable with. Be reasonable with yourself. If you’re currently spending $1200/month on Restaurants, Bars, and Coffee Shops, it’s not likely that you’re going to stick to a $300/month budget. Aim to cut your spending by at least 15% on non-essentials.
- Some people like using a “cash budget” which is a method where you:
- Determine how much money from your paycheque you need left in the bank to cover your bills (preferably on auto-pay so you don’t forget to make any bill payments). Leave this in your chequing account and don’t touch it.
- Calculate what will be left over after bill payments. From this amount, transfer some right away to an emergency savings account. You can set up an automatic transfer through your online banking to come out on the same day as your payday, so you won’t even miss the money.
- The remaining money is your “cash budget” for 2 weeks and you withdraw this amount in cash. You use this cash for all your variable spending: groceries, clothing, coffee, alcohol, etc. You do not touch your debit or credit cards. The nice thing about this method is that you can see if you are running out of cash too quickly and need to reign in your spending to make it to the end of the pay period.
- A modern version of the cash budget method is the Mogo app. It’s a prepaid Visa that you would load with your cash budget amount for the period. You get a notification after every purchase with your updated balance. So cool!
- Some people like using a “cash budget” which is a method where you:
Resist the urge to trade up a vehicle.
Everyone loves having a new vehicle! After a few years, your old one just doesn’t seem to be that exciting anymore and you walk in a dealership “just to take a look around” and end up walking out having made a spontaneous purchase on a new car. It seems like a good deal because of “low interest rates” or “the payments aren’t that much more than I’m already paying”, and that may be true, but you are certainly locking yourself in to payments for an even longer term. Let me crunch some numbers for you! For this example, I’m going to ignore the interest expense and just look at the cash flow effect of an increased auto loan payment.
- Let’s say your current auto loan payment is $300/month and you want to buy a vehicle that will be $450/month. To afford an additional $150/month in after tax cash you would need to make $230/month more money or get a $1.44/hr raise!¹ Think about it this way… Would you be happy to keep your current vehicle if it meant you got a $1.44/hr raise?
- Now the second component besides the increased payment amount is the increased term of the loan. Maybe you traded in a vehicle for $300/month and got a new one for $300/month BUT the new vehicle has added 5 more years onto the life of the loan. For those 5 years, you need to make $450/month² gross income to cover the payments. This represents $5,400 per year and $27,000 over 5 years! Think about it this way… Would you be happy to keep your current vehicle if it meant you got a $5,400 annual bonus for the next 5 years after paying off the auto loan?
- I realize this is a pretty crazy concept to wrap your head around, so let me use my personal finances as an example. I used to pay $300/month for my car loan (2008 VW City Golf) and $400/month for my truck loan (2009 Chevy Silverado). I worked at paying off those debts and now both vehicles are paid. That $700/month savings represents $12,800 in annual salary that I don’t have to make. I can cut down to part-time hours if I wanted because I now need to work less to cover my expenses. If I continue to work the same amount, it means I have an extra $700 every month to spend or save. CASH FLOW, my friends! Sure, I’m not driving a fancy car, but maybe I’ll go to Europe next year, or work 4 days a week instead of 5.
Don’t buy stuff you can’t afford.
This clip from an old SNL sketch says it all. If you want to buy something non-essential and you have to use a credit card to pay for it – don’t buy it. Of course, I’m guilty of this as much as anyone. That’s how I racked the credit card up in the first place! It takes a serious change in your mindset to stop being okay with putting purchases on a credit card. If it helps, take the card out of your wallet and leave it at home.
Thanks for reading PART 1 of this post – Jump to Simple Tips for Financial Freedom – PART 2!
Until next time,
-Alicia Loewen, Coastal Tax
¹Calculation is based on $48,000 annual salary vs. $50,760 annual salary working full time.
²Calculation is based on $48,000 annual salary vs. $53,400 annual salary working full time.
Disclaimer: I want to take a minute to recognize that not everyone has access to the same advantages in life that I’ve had. My status as a Caucasian, straight, cis-gendered female from a middle class family with access to good education puts me at a starting point of significant privilege. If you are using a credit card to put food on your table, I feel for you, and I really do hope your situation improves. This post is not written for you. This post is geared towards people making a middle-class income who are wanting to get a handle on their personal finances.