Traffic lights are everywhere--red, green, amber. Green and red are obvious--go, and stop. However, what does amber mean? Our behavior suggests: "speed up, beat the red light!" Simply, the amber light signals that we should prepare to stop.
Similarly, we have signals for our financial condition. We know when we have plenty. We are sure when we have a little. However, do we know when we are approaching empty? Like traffic lights, there are several signs that appear early, signaling us to slow down and be ready to stop spending. Sadly, when these amber lights emerge, folks speed up, take on more debt, and later collide with their financial institutions and their families, while their health suffers.
Here are four amber lights that signal your decisions are causing or will create problems with your personal finances. Reflect on each and be ready to respond appropriately when they pop up:
Giving Reduced or Stopped
Sometimes some people feel overwhelmed by their financial state, and sense they need to reduce spending. They know they have been spending more than they should, and so, they decide to cut back. The first area they chop is their giving to church, charity, Christian ministry, or elsewhere. Regrettably, they respond instinctively because this is the most visible, easiest to cut, discretionary item. They stop or reduce it markedly, without a total review of all spending. And they keep spending in other areas.
In these circumstances, when you contemplate lowering your giving, understand that the pressure that you feel is your amber light telling you to stop and review all spending immediately--the red light is here!
Look at your total budget, review your goals and plans, and recall why you were giving. You know the lifestyle choices you made, so it is easy to figure out the source of the stress you are feeling. Examine your spending decision procedures, and recent spending decisions.
This is the first and significant sign your finances are under pressure. Heed it. Before you change your giving, reflect, pray.
Credit Card Balances Unpaid Routinely
A credit card gives you a minimum "grace period" from the item charge date to the day you pay the total amount owing. Canadian regulations implemented in 2010, Mandate an effective minimum 21-day, interest-free grace period on all new credit card purchases when a customer pays the outstanding balance in full.
Accept this grace period as your total credit period. Pay the full balance monthly; if you can't, this is your amber light. Observe it; stop using the card. Put it in a freezer bag and store it in the freezer. Don't "speed up" to beat the red light; stop!
Capital Fund Or Targeted Reserve Fund Not Set Up
What causes most stress in the household budget? Emergencies. The car breaks down. The washing machine dies. The microwave, stove, or other household item stops working. You can't predict when one of these items will go, but you can expect to spend on one of them regularly.
That is why each of us needs a Capital Fund: A plan to avoid getting into debt by saving orderly for specific expenses with unpredictable timing. It is planned, targeted savings.
Usually, individuals borrow, using their credit cards or lines of credit to buy for the first time, replace, or repair major items, such as cars, refrigerators, stoves, furniture, appliances. This is a stressful, expensive, erratic item maintenance and replacement approach that the Capital Fund is designed to remedy.
The Capital Fund is an addition to your operating budget. Simply, to replace an item costing $1000 with a ten-year life, set aside $100 annually for ten years. At year ten, if you replace the item, repeat the procedure. If you don't, continue setting aside funds. Forecast major repairs over the item's life and apply the same procedure. Imagine interest charges that you would not incur if you used a Capital Fund to pay cash for everything except a home!
Are you without a Capital Fund or equivalent? That is an amber light yelling at you to stop and take note. Will you reflect on this today?
Budget Or Spending Plan Not Used
Wherever you turn, someone, a corporation, group, or ministry is trying to get you to spend. In the mall, at the super market, on TV, on the radio, there is a commercial enticing you to buy that wonder widget, get a helpful book, or an amazing service. It might cost only $5.00, or only $2.00, or only $10.00; so you buy it. You forget that these "only" amounts total a large sum.
Essentially, we allow advertising to lead our spending. That is why we need a money map to use as our road map. A money map, spending plan, or budget is a guide we prepare ahead of an event or period to plan how to spend available funds at that event or during the specific period.
When you leave home without a money map or budget, it is like leaving home on a journey to an unknown place without a road map. You will get lost.
Operating daily without a budget is another amber light. Slow down, and prepare to stop, otherwise you will sink deeper in debt. Decide today to start using a budget to help allocate your limited resources. You will be glad you did.
When any one of these amber lights starts flashing, look at your lifestyle. You might need to modify your behavior. Bankers, insurance agents, and other salespeople calling themselves financial advisers, will look at symptoms and present money-centered solutions: re-mortgage, refinance, combining debt, everything dealing with money, rather than addressing your attitude, behavior, and choices (ABCs).
Changing your ABCs is the only long-term fix for your financial affairs. Other remedies merely delay the certain, needed attitude changes. Are you ready to do the tough lifestyle adjustments required to rebuild your finances over the long haul? Always remember that money management means lifestyle management.
Copyright (c) 2011, Michel A. Bell
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