Every financial expert will tell you that in order to achieve financial freedom you must create and live by a budget that sets aside money for emergencies as well as long-term savings. The late Dr. Thomas Stanley based his best-selling book, "The Millionaire Next Door," around the idea that true wealth should be defined as having the ability to walk away from a job you don't like and leave the workforce for an extended period—or perhaps for good. That means having at least one year's worth of living expenses saved and set aside. Yet, a substantial number of people do not or cannot do that. Depending on the study, as many as 78 percent of all U.S. workers and nearly 10 percent of those with salaries of $100,000 or more live paycheck to paycheck. While those families may "get by" most of the time, as soon as an emergency happens, they are in trouble as evidenced by the COVID-19 crisis.
There are many systemic issues that bear on this problem leaving portions of the population with little opportunity to make more money or cut expenses. However, for others, at least part of the problem is a lack of financial literacy. People need to live within their means and the first step is to understand your income and expenses. In other words, create a budget.
I have had prospective clients walk in the door and have no idea how much they spend monthly and for what because they do not track their expenses in detail. You have no hope of saving for emergencies or otherwise if you cannot review where your money goes and make decisions about which expenses are for "needs" and which are for "wants." Not surprisingly, what one person considers a need, another would say is a want, so it is important to be honest with yourself. Having a budget does not mean depriving yourself of every splurge, it means prioritizing what is most important. Ultimately, if you have no significant savings, you are taking a huge risk that nothing ever goes wrong with your health, job, house, or family.
For those with substantial debt, it will much harder to save, but the first step is still to start with a budget. In a future post, I will talk about different tactics to get out of debt. In the meantime, talk to a financial professional or credit counselor for advice.
There are many resources that are available to improve your financial literacy. Books, magazines, websites, online courses cover all the basics from budgeting to investing. The knowledge you gain can go a long way towards making you feel more in control of your finances.
COVID-19 has had a devastating impact on some families. If your job and health are still secure, that is great, but a potential crisis lurks in all our lives. What are you doing to make sure you can get through it financially?