Are you among the 80% of Americans that can’t come up with $400 in the event of an emergency without borrowing the money or do you want to become a financial superstar?
The sad fact is that we have become a nation of debtors Americans between the age of 18 and 65 now owe an average of $4717 in credit card debt. The website CreditCards.com recently reported that the interest rate on a credit card now averages 15%. If you assume a minimum monthly payment of $189 it would take 10 years and a month to pay off that $4717.
Plus, the average household owes more than $15,000 in credit card debt. People that are debt-free – that pay off their bills at the end of every month – have become a very small minority. The credit card companies call these people “transactors” and they don’t like them because they never pay interest, which is where the credit card issuers make their money.
What does a financial superstar look like?
Here’s a good, working definition of a financial superstar:
- A person who is debt-free (with the exception of a mortgage)
- A person that has a six months’ emergency fund
- A person that has saved at least 12 1/2 times her or his annual expenses.
- At least 10 years
Given these three criteria it’s not possible to become a financial superstar overnight. Achieving these goals will probably take at least 10 years. The good news is that there are basically just two steps to becoming a financial superstar. They are: Get out of debt and save your income for 10 years. That may not seem very profound but that’s it. For example, if you were to save half of your income you would have 12.5 times your annual living expenses in about 8 1/2 years. Assuming you continue to save that 50% for another 1 ½ years, you would then have an emergency fund of 18 months. Of course, this means assuming you shun debt like the Ebola virus.
Tips for reducing household expenses
Are you committed to the idea of becoming a financial superstar? All it really takes is a little self-discipline and in some cases a change in your lifestyle. You say you’re not interested in changing your lifestyle? In that case, it’s unlikely that you’ll ever become a financial superstar. People who become superstars – whether it’s in film, music or especially athletics don’t get there without making sacrifices, which often means big changes in their lifestyles.
Things you can do without dramatic lifestyle changes
So here, first, are tips for cutting expenses without making big lifestyle changes.
1. Take public transportation or walk or bike to work. Of course if you live in a place where there’s winter you probably won’t be able to bike to work to work year around. However, you should be able to take public transportation, which will still be cheaper than driving a car.
2. If none of these alternatives is feasible then buy the best car you can with cash. Forget about an automobile loan or a lease. Driving a car with 100,000 or so miles on it may not do your ego much good but it does offer some real benefits, not the least of which is all the money you’ll save because you won’t be making monthly payments.
3. Don’t have cats or dogs. They come with a number of visible costs such as food and vet care but also invisible costs such as what do you do with that pet when you want to go out of town for a week or more? Unless you have a friend who will pet sit for you, a week away will cost you $240 or even more.
Note: If you can’t stand the idea of living without a pet get a turtle or pet goldfish. They can be entertaining and will cost you much less than either a cat or dog.
4. Here’s a very difficult one. Don’t have children. If you’re married this may be mission impossible because your husband or wife will have a vote in the decision. But if you must have children wait until you’re at least 25. By then you should be emotionally and financially more ready. If you’re a guy, you might not want to date anyone you would consider for marriage. Staying single eliminates a lot of the temptation to have children.
Things that require lifestyle changes
Remember what we said earlier in this article about making lifestyle changes. Here some you would have to make if you truly want to become a financial superstar.
1. Move to a trailer or tiny home. The inescapable truth of homeownership is that the fewer square feet you have the less it will cost you not just in utilities but also in maintenance and insurance.
2. If neither of these is feasible live in an apartment. That will eliminate nearly 100% of the maintenance costs and renter’s insurance is considerably cheaper than homeowner’s insurance.
3. Finally, if there are reasons why you must have a house choose a modestly sized one. Trust us in that your kids won’t hate you if you put them in small bedrooms or even two of them in one bedroom.
If you’re really serious about saving 50% of your income you will need to find ways to economize on the two biggest expenses – housing and transportation – until you are saving 50%. If this means driving a beat-up looking car or living in a cramped space, so be it. Just keep reminding yourself how great your life will be once you’re a financial superstar and are still in your 30s.