When a person gets caught in quicksand, the first reaction is to struggle to get out as quickly as possible. Yet, the frantic undirected motions to get out will cause the person to get more exhausted and sink further. Fighting against quicksand will just make matters worse. The same can be said about escaping debt. The more effort we put towards minor fixes, the more tired and frustrated people become from not seeing a major result from all their effort. It is like going on a diet and working out for 3 weeks only to lose 1 pound (when the goal was to lose 100 pounds). All that work may seem like a waste of effort and a sense of hopelessness falls over the effort.

In a class that I recently taught, I discussed giving 110% towards what ever you do. Like a light bulb, our finances are driven by how much energy we give. The brighter we shine, the more we will receive. The less we shine (give), the less we will receive. A student asked then why his business was not successful when he was giving and giving all that he had (12 to 14 hour days). Sometimes we do need to work a little harder to get what we want. Yet when I discuss giving at 110% is not to about burning yourself out. For example, if we want to make a light shine brighter, sometimes giving more electricity will just burn the light bulb out (if the bulb is already working at full capacity). The problem may mean taking a step back and seeing it is not the energy but the bulb itself (may need a 150 watt bulb instead of a 50 watt bulb). For the student who asked the question, it may have not been working harder (to the point of burn out), yet taking a step back and reassessing the situation (e.g. allocating more time to marketing, finding a partner to help, realizing that the field is too competitive to succeed in, etc.). So when you are giving, you want to make sure your efforts are going to the areas of the highest payoff instead of just giving effort aimlessly.

For a financial plan, taking a step back means creating a budget and calculating your net worth to see how far you need to go to meet your goals (e.g., retirement goal, debt reduction goal, etc.). If you are only slightly off pace to reach the goal, then you may only need to cut $5 a day from spending ($1,825 a year) which may be just mean not eating out for lunch. Yet, if you are $30,000 or more in debt, then cutting a few coupons or cutting back on lunch will not work. Actually, cutting out little things (taking quick frantic actions) may make the struggle worse. By focusing your effort on little things and not seeing a positive result (still $30,000 or more in debt at year end), will result in getting trapped in financial quicksand. You will believe that no matter what I do, there is no way to get ahead.

So, what should you do?

• The first step as mentioned above is to create a budget and calculate your net worth.

• The second step is to review the budget to make sure that everything (even unexpected items) is in the budget.

One of the most common mistakes in a budget is not to allocate money for repairs, upkeep, medical emergencies, etc. Think of it this way, if I budgeted $5,000 for savings and only saved $4,000 because my furnace broke down, then I would feel discouraged about coming up short. This discouragement will mean having less energy to give to work and other cost cutting measures to meet the remainder of my goal. Yet, if I budgeted $4,000 and the unexpected expense did not happen, I am $1,000 ahead. I may want to keep that $1,000 separate because the needed repairs may be double next year. Yet, if after 2-3 years, I am still ahead, I just gave myself extra money to help finish ahead of schedule. You may ask if a repair is unexpected, how can I budget for the expense? The exact repair is unexpected, yet all cars, houses, appliances need to be repaired in the future. It is coming up with a reasonable estimate for all these items in aggregate and putting it in the budget. For example, I estimate that I will need to replace one of my appliances every other year and have one $300 to $500 repair bill each year.

• Next, figure out what is important to you, your spouse and family. What are your goals and purpose in life?

• Brainstorm 30 or more ideas of ways to cut expenses, increase income or sell assets to get out of debt.

• Calculate rough $ per hour savings if the idea is implemented. For example, shopping at 3 grocery stores to find the lowest costs groceries each week may save $10 but take one additional hour to plan and do. With an additional $2 in gas each week, the savings is $8 an hour.

• Calculate the $ per hour post-tax wage for working one additional hour for each adult (note, if there is no possible overtime, the additional wage is $0 per hour or if a second job is taken that pays $6 an hour pre-tax, this would equate to $4.50 post-tax).

• Give each idea a 1-5 on how it grades against each of your personal & family goals (1-supports goals, 3-nuteral and 5-goes against goals)

• Now rank each idea based on how it meets your family goals and values and how much it saves $ per hour savings.

• Pick which ideas you want to implement and see if it gets you to your financial goal (if not go back and re-examine your list or brainstorm other ideas).

This way you are picking the savings ideas that make most use of your time. If cutting coupons only net you $1 an hour savings compared to saving $8 an hour by going to multiple stores to shop, it makes more sense to go to different stores before cutting coupons. Yet, you may pick having a stay-at-home spouse working out of home for $10 an hour instead of working a job outside the home for $15 an hour (factoring in cost of day care) because your family goal of having a parent around is worth the $5 difference. That is why it is important to grade each idea against your personal & family goals because if you go against these goals, you will be less motivated to achieve your financial goals. Yet, not all goals are the same weight. Giving your children holiday presents that are not in the budget, may make them happy (temporarily) which may be a goal, yet going in debt will leave the parents stressed for years to come which is counter productive.

The purpose of this exercise is to examine which ideas will give you the biggest bang for your effort. If you do too many ideas that save only $1 an hour, you will get burnt out quickly (trapped in quick sand). Rather, if you focus on some of the larger ideas, the same effort can get you 10x the amount of savings in return. In addition, brainstorming ideas can give you ideas that you never thought about. Lastly, if you do it with your children, you may find a valuable ally instead of a disgruntle children when their favorite pop disappears (due to the cost cutting measures) while teaching your children a very valuable lesson about money.

This entry was posted on Wednesday, August 30th, 2006 at 6:54 pm and is filed under How to Start. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.