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- Break the Harmful Cycle
Keep it secret!
Picture you received an envelope with a stamp ‘classified’ as in the above image. Wouldn't this intrigue you? Wouldn't this make you excited? For sure, I would be curious. Today I will share a valuable piece of information with you. Promise me not to share it with anyone, okay? This will be our secret.
But before unveiling this confidential information, let me ask you something:
If time, money and resources would not be an issue, what would you do with your life?
Would you continue your current career path, follow your passion or indulge yourself like there is no tomorrow? Take a moment to reflect.
I often see family members, friends and acquaintances having financial problems, living paycheck to paycheck, even though they don't have a low income. No one is immune. I got astonished when I saw people from financial industry having trouble with money.
From an early age, I understood that money gives you freedom and peace of mind. However, it took me over a decade of learning and drawbacks to crack this code. Not a surprise, I emphasize this concept in my previous money letters. Check them out here to capture my view.
Going back to our conversation. How many times I heard at home "there was no money for anything extra" or, even worse, "the salary may not be enough to cover all obligations." I confess, I've lost count of the times I've seen my parents playing Tetris with the utility bills. I believe I'm not alone here, and it still is a common reality in many families around the world. Living paycheck to paycheck statistics are alarming. Do you wanna break free from this vicious cycle?
Earnings are immediately allocated to expenses, leaving little to nothing for savings or investments. Does it ring a bell? This stressful and precarious cycle leaves individuals vulnerable to financial emergencies.
Breaking free from this cycle is crucial for achieving financial stability. The reality shift takes time and requires a solid plan, lots of patience, discipline and focus. Are you ready for this ride? Let's get started.
"All money is a matter of belief."
Your Financial X-ray
Think of Your Money Habits
The first step towards breaking the paycheck-to-paycheck cycle is to assess your current financial situation. As uncomfortable as it may sound, this step is crucial to know where you stand. Don't be afraid or ashamed. Get comfortable with the uncomfortable. Get real and take back the control of your finances.
This assessment involves more than just knowing what's in your bank account; it requires a deep dive into all aspects of your financial life. Start by listing all your assets (what you own) and liabilities (what you owe).
This includes everything from savings accounts, retirement accounts, and property, to credit card debt, student loans, bank loans and other obligations. Like an x-ray detects potential problems in your body, this process gives you an overview of your financial health.
Next, track your income and expenses over the last few months to understand where your money is going and flowing. Categorize your expenses into necessities (rent, utilities, groceries, etc) and non-essentials (entertainment, dining out, etc).
This exercise not only sheds light on your spending habits, but also highlights areas where you can cut back. Recognizing the difference between wants and needs is critical in this process.
“Life is a game. Money is how we keep score.”
Creating a Budget
Budget and Create Wealth
With a clear understanding of your financial standing, the next step is to create a realistic budget. This powerful tool gives you control over your finances, allowing you to make intentional choices about how you spend your money. At this stage, the power is literally in your hands and head. The goal is to ensure that your expenses do not exceed your income, and to ideally, leave room for savings.
Start by allocating funds to your non-negotiable expenses, such as housing, utilities, and groceries. Don't forget to include obligations such as taxes and baking fees. Then, set realistic limits for discretionary spending (dining out, shopping, entertainment and subscriptions). Yes, I know you can't live without your daily dose of Netflix. Don’t worry, I’ve got your back.
In return, I just ask you one thing: be honest with yourself about what you can realistically cut without feeling too restricted, as this can lead to budget burnout and frustration. None of us wants that, right? Dissatisfaction is the silent killer of wealth, relationships, and happiness.
Incorporate savings into your budget as a non-negotiable expense. Even a small amount saved consistently can make a significant difference in the long run. Use budgeting apps, or any tools to track your spending and stay within your limits. Make it simple and choose a budget rule that suits your actual circumstances. Keep in mind to adjust and review your budget regularly to reflect changes in your financial situation.
If neither the 50/30/20 rule nor the 70/20/10 rule fits your income, expenses and savings goals, you can create your own budget rule (60/20/20) or (65/20/15). Flexibility is key here. I currently use the zero-based budget, but I already tried the envelope and the 50/20/30 budget versions.
The important thing about any budget method is that it’s sustainable for you in the long-term, helps you work on your savings and leaves you with enough money to still have fun. Remember, the pay yourself first principle.
"Money is a great servant, but a bad master."
Building a Cash Reserve
Build your Financial Safety Net
An emergency fund is a game-changer in anyone’s life. A critical component in any financial plan. It acts as a financial buffer that can help you cover unexpected expenses without turning to high-interest debt - aka bad debt. Here are the top five emergencies people face:
Job loss
Medical or dental emergency
Unexpected home or car repairs
Unforeseen tax or utility bills
Unplanned travel expenses
Saving three to six months' worth of living expenses is the rule of thumb. But even starting with a smaller goal, such as $500 or $1,000, can provide you with a head start and a sense of security.
Through my journey, I found that a personalized approach works best. If you have a predictable income, a 6-months reserve may be enough. However, if you venture into self-employment or your income is dependable on performance (sales job), at least 12-months safety net offers you the peace of mind and necessary stability.
Begin by setting a monthly savings goal and treat it as a fixed expense in your budget. Automating your savings by setting up a direct deposit into a separate savings account can make the process easier and ensures that you're consistently building your fund. As your financial situation improves, aim to increase your contributions until you reach your desired emergency fund size. Voilà! it works like magic.
“The goal isn't more money. The goal is living life on your terms.”
Conclusion
Breaking the harmful cycle of living in debt and fear is a journey that requires patience, discipline, and commitment. It comprises three important steps:
An X-ray: evaluation of your current financial situation.
Creating a budget: be honest, get real and prioritize savings.
Building an emergency fund: this is your safety net.
These steps lay the foundation for a more secure financial future, free from the stress and limitations of living paycheck-to-paycheck. Small and consistent actions can lead to significant changes.
Remember, Rome was not built in a day. Be courageous to set the stage for long-term financial stability which will impact generations to come.
Financial education is our right. While information is more accessible than ever, only a few achieve financial freedom through years of discipline and hard work. The secret lies in the details, in our daily habits and actions.
My friend, here is my last question to you: “What holds you back to have control over your money?” I hope it is not knowledge. Together, let’s spread these seeds and build an abundant future to everyone.
“Knowledge is freedom, and ignorance is slavery.”
PS: I was kidding in the beginning. Share this life-changing knowledge with as many people as you can. They will thank you later.
Talk to you next week.
Light and peace,
—FMV
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