Five Tips to Get Your Financial Ducks in a Row
If you’re like me, you’ve spent years wanting out of the rat race. You dream of a homestead where you can live without owning a necktie, free of the confines of your Dilbert-cubicle. You want to cut loose from the cutthroat bankers and credit card companies, the corporate ladder-climbing, and the MTV entertainment culture. Yet, you feel stuck. You’ve got a mortgage and credit card bills up the wazzoo. Every week you work 50-plus hours, then you spend every penny you make just paying the bills so you can start over again next week. There’s nothing left over to pay for your dream homestead.
I was in that spot, too, and not that long ago. Despite being an accountant by trade and having some clue about money and personal finance, I was on a financial merry-go-round. My wife and I made a pretty decent living. A little cottage on some land somewhere should have been within our means. That is, if we hadn’t managed to rack up a sizeable chunk of high-interest credit card debt to go along with two car payments, a mortgage, and hefty utility bills. Then there were the cable bills and cell phone bills and grocery bills, and all the other bills. Despite decent wages, there always seemed to be too much month left over at the end of our money. Buying land, creating a homestead, and leaving our corporate jobs looked about as realistic as flapping our arms and flying to Venus.
It hasn’t been quick or easy, but we’re now on the verge of making the break. Over the last five years, we’ve managed to get rid of most of our debt (the last little bit will be gone this year), and we’ve managed to buy ten acres of lovely Ozark woodsland, free and clear. Construction on the barn and the cottage is set to begin as soon as the last of the debt is paid off.
How did we do it? How can YOU do it? Well, everybody’s situation is a little different, but here are five basic things to that apply to everybody.
TIP #1: START TODAY
Lao Tzu is the ancient philosopher who said, “A journey of a thousand miles begins with a single step.” Working toward your dream can start right now, from where you are standing, with just one step. In fact, it can start no other way. No one has what they consider to be a perfect financial life. Few people come even close. But while some will idly dream of their futures, you can be doing the job of a making yours happen. Slowly work your way toward your goals, getting closer every single day. Take that first step today, and then learn to enjoy the journey. That’s what life is, after all.
TIP #2: FOCUS ON GETTING OUT OF DEBT
Note: Debt reduction strategies could make up an entire article of their own, so I’m only going to touch on some concepts here. The devil is always in the details, so you will want to obtain more detailed information before you make any bold moves in this regard.
Consumer debt—which is debt on things like credit cards, boat loans, car loans, or cash advances—is a dream crusher. It keeps you paying new money on old things that you don’t even own any more. It allows you to satisfy small wants today, but only in exchange for crushing your big dreams of tomorrow.
The $20 pizza you tacked onto the balance of your credit card? If you make minimum payments, it’s going take you fifteen to twenty years to pay off, at a cost of over $100. How can you possibly pay for your dreams if you are: a) paying $100 for a $20 pizza, and; b) still paying today, for a pizza that you ate ten years ago? The answer is that you can’t. Like a financial version of the Terminator, you must work to ruthlessly eliminate your debt.
The good news is: there is a simple formula for getting out of debt. The bad news is that it’s just like the simple formula for weight loss. That is to say, it’s not going to be what you want to hear. I need you to get this part however, because it’s important.
There is no magic pill for debt relief, and anybody who says different is selling something.
Yes, you can file for bankruptcy, but unless you have an extreme situation, all the court is going to do is give you a little breathing room. You’ll still have to pay off your debts eventually, plus you’ll have to pay your attorney for his/her time. So, scream, cry, beg, rant… do whatever you have to do to come to terms with the fact that you’re gonna have to do this the hard way. Once you do that, you can move forward and start making a real difference.
First, you want to bolster your ruthless credit self-discipline. It’s time for you to become that heartless, relentless debt Terminator. Learn to hate your credit cards. I strongly suggest that you cut them up. Let it empower you. Feel free to do it slowly… cruelly. Torture them. Make them feel your anger for all the money and dreams they have devoured. Show them that they will never again feed on so much as a scrap of your family’s dreams. Don’t be gentle.
If you keep one for emergencies, consider putting it in a bowl, covering it with water, and stashing it in the freezer to make it difficult to access. Another option is to hand over all your credit cards to a trusted family member whom you will ask to make any purchases on your behalf. In short, create roadblocks between you and your credit that will prevent you from using it for anything except a true emergency.
Next, minimize the interest you are paying by transferring balances to lower interest rate accounts or loans. Home Equity loans fall into this category as well. One caution, however: do your homework and read the fine print whenever you’re dealing with changes to your credit card or loan accounts—there are often low-visibility details that can make a seemingly good deal turn out to be a bad deal.
Finally, and I realize this is simplistic, try to earn more and spend less.
On earning more, maybe a part time job, a home-based business, or asking for a raise. I’ll leave that part up to you. You know better than anybody what your skills are, what you can reasonably produce, and/or what the job market in your area is like. (If you don’t know these things, then a trip to a career counselor might be a worthwhile thing.) When you go looking for extra money however, beware and avoid the scams. (I’ll come back to that below in Tip #3.)
When it comes to spending less, learn to embrace the three concepts of simplicity, frugality, and efficiency.
SIMPLICITY: Every bit of “stuff” we consume costs us much more than the initial price tag. Each item we buy not only costs us the initial purchase price, it also costs us time and money to store it, clean it, accessorize it, maintain it and eventually dispose of it. The more stuff we buy, the more up front cost we incur, and the more ongoing expense we pay over time.
If you want to simplify your life, as you’re considering a purchase, just ask yourself, “Do I need this item, or do I just want it?” If your answer is “need it”, then ask the same question again. Do it at least three times. Then ask yourself if you actually believe the answer you’re giving yourself.
That’s tougher for many folks than you might think. We’re bombarded daily by dozens of marketing messages that tell us we’re unhappy, and that the only cure is to buy “Product X”. In fact, consumerism is linked to some of the founding principles of our nation. We’ve all heard the line from the Declaration of Independence that says we are endowed with certain inalienable rights, and among them are “Life, Liberty, and the Pursuit of Happiness”. Well, that happiness that we’ve been told to pursue is often called the “American Dream”. And what’s the most common version of the “American Dream”? It’s having the correct “stuff”, like a nice car, a color TV, and a three-bedroom house with a white picket fence.
So it’s not as easy to change as it may seem. To quit will require willpower and discipline, and you may falter a few times—much like quitting smoking. But I can guarantee that you don’t need that $9 DVD on sale at the video store. That nine bucks is a tiny piece of your dream. Don’t let the video store or the shopping mall steal your dream and replace it with a DVD, or a cappuccino machine, or whatever other unnecessary “stuff” they want to sell you.
FRUGALITY: Frugal is often confused with cheap, but frugal is not always about the lowest price. It’s about the greatest value. A person can be frugal and still spend a hefty sum in order to obtain function and quality. In real world terms, frugality means that if you’re going to spend your hard earned money, you should do so on stuff that works, and stuff that lasts.
Around my 10 acres of Ozark woods, there are not many farmers, but there are a few. The soil in the Ozark hills is rocky stuff, and is definitely not a farmer’s best friend. As a result, small farmers here have a pretty tough go of it, and if they have two nickels to rub together they are doing pretty well. To say that they are “frugal” would be a vast understatement. These farmers would sooner stab themselves in the eye with a rusty screwdriver than spend $4.25 to buy a cup of Starbucks coffee. They’ll stick to brewing their own Folgers, thank you very much. Yet each of these very same farmers will invariably be wearing Carhart coveralls. Carhart coveralls are definitely not the cheapest you can find, but they have a reputation of being nearly indestructible. There are plenty of other brands that are lower in price, but these hard-scrabble farmers consider the more expensive Carharts to be the better value.
EFFICIENCY: Don’t buy anything unless it will do its job better and more economically than whatever it is replacing.
Let’s say for instance that you love ice cream, and you and the kids have been making it at home with an old-fashioned hand cranked churn for years. On a trip to town, you spot a gleaming, shiny new electric ice-cream maker. It promises to make gallons of ice cream at the push of a button. Seems more efficient, right? Wrong. That button makes ice cream, just the same as your old-fashioned churn. To do so however, it’s requires electricity, which costs money. It’s also more liable to break than your simple old-fashioned churn. So unless your arms fall off, that new machine is not adding any efficiency to your current situation.
Another efficiency concept calls for you to try to spend as much of your money as possible on things that appreciate (increase in value), and to avoid as much as possible, buying things that depreciate (lose value). Now, we all have to buy things that lose value quickly, like food and clothes. I’m not saying you can’t buy them. I’m just saying don’t go overboard and buy more of these things than you actually need. When you want to splurge, do so on something that will maintain or increase its value over time, like a quality tool, an improvement to your home, or fun new educational materials for your kids.
TIP #3: AVOID THE SCAMS
The genetic makeup that makes many of us want to homestead, also makes us more susceptible than average to the countless “work from home” or “make zillions in your spare time” scams out there. I’m embarrassed to admit that in my younger days, I fell for more than one.
That’s not to say that you can’t make money from a home-based business, nor am I suggesting that you can’t earn a living without wearing a necktie. If that were the case, our cause would be lost. No, what I am saying is that you need to be cautious in separating the wheat from the chaff. A friend of mine likes to say, “If you’re invited to play poker with a group of strangers, and you don’t know who the pigeon is, then it’s you.” If you’re looking for extra income, here are some things to watch out for:
• If you heard about this great new opportunity via email, an internet ad, or a sign tacked up on a phone pole at an intersection, don’t walk away—run.
• If the opportunity involves sending any money to the person or company that is pushing the idea, then it’s not about getting YOU rich quick. It’s about getting THEM rich quick. Tell them you’ll think it over. Then don’t.
• If it suggests, infers, or outright promises you income that is equal to, or greater than, that made by a skilled individual (carpenter, bricklayer, etc), and yet it doesn’t require you to have skills or experience, it’s a one-way ticket to Scamsville.
• If the money you will supposedly make is not payment for physical labor, skilled services, or the sale of a physical product, then you are about to receive a lesson in modern skullduggery.
The old adage still holds true: If it sounds too good to be true, it probably is.
TIP #4: GO TO WHERE THE RULES AND TAXES AREN’T
It’s no secret that different places have vastly different costs of living. If your job situation will allow it, consider moving to a place where the cost of living is low, the taxes are low, and the regulation level is low. Most often, at least in the US, that’s going to be a rural county away from the major population centers.
Taxes, of one sort or another, make up a very sizable chunk of the average family’s expenses each year. That makes them a prime target for savings. Bigger cities need bigger taxes to pay for their fire department, police department, water and sewer departments, sanitation department, and another dozen or so other departments. Those taxes will come from you in the form of higher rates on your state income tax, county real estate tax, personal property tax, local sales taxes and more. Compare the rates for these various taxes when you are looking for a potential place to live, and try to choose an area with a relatively low total tax burden. The savings can be significant.
In addition to having big taxes, big cities (and the counties that contain big cities) also have a love affair with conformity. Much of your life in those areas is regulated by their Building and Zoning codes to force you into doing things much like everybody else does. If you want to build, maintain or repair any major project on your property—even just a fence for your dog – in many areas you’re going to need to talk with a few gub’ment officials first and ask them for their official okie dokie. Getting that okie dokie can cost you. Building Inspectors and Zoning Boards can add thousands and thousands of dollars to any project you may be considering for your property, if they let you do it at all. Since any self-respecting homesteader is going to want to do things with their property, you’ll want to find an area that does not require building permits or zoning approvals. It’ll save you money and it’ll save you frustration.
TIP #5: FIND OR BUILD A COST-AND-ENERGY EFFICIENT HOUSE
Housing is the largest single expense most of us will have in our entire lives. That makes it the easiest place to save a lot of money. You want a home that is energy efficient, functional, attractive, and most of all, cost efficient.
To be energy and cost efficient, the first rule is that it should be just big enough to allow you to live comfortably. I look at some of the 3,000 to 4,000 square foot homes going up today, with one young couple living in them. What I see is a pair of folks who are vigorously shoveling dollar bills out of their windows.
Smaller houses require fewer materials, fewer labor hours to build, fewer utility dollars to heat/cool, fewer dollars to insure, fewer dollars to maintain, a smaller mortgage and less interest to pay, and fewer hours of your time to clean and maintain. So apply the KISS principle to your house. (If you are unfamiliar with the KISS principle, it stands for “Keep it Simple, Stupid.”)
As far as size, you can live quite nicely in 1500 square feet for a couple, with maybe an additional 100 square feet per child. Some folks could be very happy in even less space. But to be sure, anything larger is a luxury. I’m not opposed to a little luxury, but we’re trying to give you the tools to escape the rat race, remember? Escape first. Luxury later.
If you will be buying a house, buy small, and buy in an area of low taxes and limited regulation. With low taxes and no building or zoning barriers, it’s easy to add on if your family grows or you come into some more cash and want a touch of luxury. If, on the other hand, you buy a house that is bigger than you need, you’re pretty much stuck with it until you sell it.
Next, consider a house that is energy efficient. If you are buying, you can add insulation yourself at fairly low cost. Upgrading to more efficient appliances is fairly simple, too—just make sure the increased efficiency will offset the purchase and installation cost within a few years.
If you are going to build, only the obscenely wealthy would do so without taking advantage of free energy enhancements like passive solar heating, protective landscaping, or earth sheltering.
You’ll also want to educate yourself about things like thermal mass and the insulation values of different building materials as you decide what kind of house you want.
If you can find locally-sourced, low-cost building materials that have good insulation and thermal mass properties, and if you can utilize your own labor to build with them, that’s a recipe for a truly cost-and-energy efficient house.
So there you have it. Five tips that I hope will help you with getting your financial ducks in a row, and making your break from the rat race. Much of what I’ve said is just plain common sense advice. Too often we either get caught in up complex details, or we forget about our future financial health as we try to keep up with the Joneses.
If you can get out of debt, and you can live simply, frugally and efficiently, even those of modest income can afford to escape the rat race and build themselves a homestead. On a modest budget, you may not be able to buy 500 acres with a roaring mountain stream within a convenient drive from the nearest opera house. Chances are pretty good, however, that you can afford a lovely 10 acres of Midwest woodland, and can build yourself a happy life outside of the cubicle.