"Fill your life with the important things because, if you don’t, it’ll automatically be filled with the unimportant things." – Dr. John DiMartini
Dr. DiMartini’s quote applies to life generally and money specifically. Nearly 50% of Americans are living paycheck-to-paycheck even though many of them have good salaries. Why is it that so many Americans who should be doing better financially live a life of financial insecurity? Why do so many people not know where their money goes? Could it be that Americans are spending without a purpose?
We know this too well because it’s my husband’s and my story. Until our mid-thirties, we buried ourselves in $51,000 of credit card debt. Until then, we were both living and spending without a purpose. When I moved out on my own after college, I had $5,000 cash to help me start my adult life. Within just over a year, I had $30,000 in credit card debt.I was young and single and thought I needed new clothes every weekend when I went out. Because I thought adulthood had a particular look, I bought a brand new car and wall-to-wall, floor-to-ceiling Pottery Barn furniture all on credit for my new apartment. Because I was new to Colorado, I bought new snowboarding gear and clothing to look better when I went riding. David acquired his credit card debt with little purchases here and there. Like a slowly boiled frog, he acquired his debt so slowly he hardly knew it.When we started dating, we exacerbated each other’s poor financial behaviors. We went to happy hours a few times a week that all lasted much longer than one hour. We frequently dined out at expensive dinners despite spending $400 a week between the two of us on groceries. And we went on vacations we thought we deserved but never earned because we could only travel on credit.This is how we amassed our $51,000 of debt. We eventually reached a point when we said it had to end.
Our first step to becoming debt free was to stop the bleeding, so we cut up our credit cards. We didn’t cancel any credit cards yet. We just made them harder to use for the time being.Then, we stopped going out, dining out, and shopping as much. None of that spending was necessary. Therefore this only required a reconditioning of behaviors. We put the money we saved from this towards our debt and $51,000 of debt became $40,000.We became meticulous about our grocery shopping. We did what we needed to stay within our now $200 a week grocery budget. We created a weekly menu based on what was on sale and for what we had coupons. We never veered off of our weekly grocery list. We put our savings from this strategy towards our debt, and $40,000 dropped to $30,000.We declined invitations from friends and family when they asked us to do things we couldn’t pay for with cash from our social budget, and we became the resources for the cheap and free things to do. Cutting out these expenses and putting the savings towards our credit cards helped us bring our debt down from $30,000 to $15,000We figured out how to lower our credit card interest payments to 0% and put this savings towards our debt and $15,000 of debt was reduced to $0.This multi-pronged strategy to reduce all our expenses, especially our credit card interest rates, helped us pay off our $51,000 of credit card debt in two and a half years—six months earlier than we projected.Once we paid off that debt, we had money freed up to do as we wanted. We refunded our emergency savings account and started contributing again to our retirement. Unfortunately, the money we had left over from paycheck to paycheck didn’t have a purpose and, therefore, it was wasted.
My husband and I bought our condo in 2007. When we moved into the first home we owned, we painted the walls and ceiling, switched out hardware on some cabinets, and tore out the existing carpet to temporarily expose the concrete. Our long-term plan was to install hardwood floors and remodel the bathrooms that hadn’t been touched since 1962. Ten years later, these projects linger.
Our household income is good. We have no debt other than our mortgage, which is nearly paid off. We have six months worth of living expenses saved in an emergency savings account, and we’re on track to reach our retirement savings goals.
It’s disappointing to say that in these last ten years even though we could’ve installed our hardwood floors and remodeled both bathrooms, we didn’t. Our mistake is that, unlike with our long-term financial goals, we didn’t create a strategy to fund these shorter-term goals that add real value to our quality of life. Rather, we’ve spent our money on even more near-term expenses that provide only temporary gratification.
Because of not following strategies like these, we put our extra money towards frequent dinners out and not-too-infrequent bottles of wine. These and other indiscriminate expenses were only temporarily enjoyable. Therefore, our condo is one of the things in our lives that could be more awesome if we spent more of our money purposefully.
If your household income says you should be doing better than you are, there’s a chance you’re not spending with a purpose, either. If this is the case, here’s a four-step plan.
Luck is not a strategy. If you aren’t clear about what you want, you’ll never get it. The only way my husband and I could pay off our $51,000 in credit card debt before we bought our first home was because we got crystal clear on what our purpose was. Not surprisingly, the spending that wasn’t in line with our purpose was the spending that helped us acquire $51,000 of debt in the first place.
When we figured out our purpose, we had the focus and motivation to do what it took to pay off our debt to improve our quality of life with a home of our own. This same strategy applies to smaller, near-term goals as much as big, lifelong goals.
Whether you want to save 20% for the down payment on a car or save $2,000,000 for retirement, being clear on what you want and why you want is integral to your success. As motivational speaker Jim Rohn said, "When you know what you want, and you want it bad enough, you'll find a way to get it."
The first step in getting to where you want to go is to find out where you are.
Itemize all your expenses and notice your spending that’s currently not in line with your near-term goals. It’s these spending categories that you’ll reduce to fund your nearer-term goals. Repeat this exercise regularly to avoid budget creep.
Budget creep is when your spending in a category increases so slowly that you don’t notice it. An example of this is when one spouse creates a grocery list and menu to stay within budget, and the other spouse helps with the shopping and get items that aren’t on the list. If this happens occasionally, it’s not noticeable and maybe not harmful. If this happens too often, it will have a detrimental effect on your budget.
When you know what your near-term financial goals are, add them as line items to your budget. Then, reduce or eliminate the spending categories you no longer need (or need to have so large) and increase your new line items accordingly.
The regular review you do of your spending will ensure that you stay within your budget and adjust as necessary. The more you stay within your budget, the more quickly you’ll achieve your nearer-term financial goals.
If you haven’t done so already, automate your savings, set up an employer direct deposit into your primary checking or savings account. Then, set up a recurring electronic fund transfer (EFT) into a purpose driven spending account to support your financial goals. It helps if the account has no check writing or debit card features. That way you’re likely to withdraw this money only when you have enough to pay for your dedicated goals.
Purpose driven spending ensures you spend your discretionary money intentionally on your personal values, rather than unconsciously on immediate, less gratifying purchases.Purpose driven spending helped us become debt free, and purpose driven spending will get us our hardwood floors.
Get essential money news & money moves with the Easy Money newsletter.
Free in your inbox each Friday.