It’s not how much you earn - It’s how you spend it.

Each month you face the same problem. You get paid and your salary only just about covers your overdraft. Within a few short days you will be back using your overdraft facility and supplementing your spending with your credit card. It feels like you are just threading water. Each month the same little routine plays out. Each month you kid yourself that next month will be better.

It’s a depressingly similar situation for your average salaried employee. We somehow managed to get ourselves into this ‘running to standstill’ situation whereby all our energy and focus is on being a good employee and trying not to rock the boat. We may not like our jobs, in fact we may even hate our jobs, but we need our jobs. By painting ourselves into a corner from a cash flow point of view we have no choice but to stay in our current job. No dreaming of a better future for you.

I know you don’t want to hear this and be reminded of what has happened or is currently still happening but I’m afraid its time for a few home truths. The reality of the situation is that if you are currently struggling financially then you need to look long and hard at how you spend your money. Somewhere I read that you spend in proportion to your salary. Now what this means is that if you get a salary increase then your spending should logically increase. But what seems to have happened is that the easy credit has allowed people to bypass this rule of thumb and now even someone on a modest salary can live like they are earning maybe three or four times what they really earn.

It’s not simply a case of living beyond your means. It’s a case of not even know what your means are. To me my means is simply my net take-home pay each month. To others ‘means’ is mistaken for ‘available credit’. Now in previous articles I have mentioned how it is this access to credit can help you ride out the tough times. However to help you avoid those tough times you need to look at your means as your net take-home pay.

Net take-home pay provides the parameters within which we must limit ourselves if we are ever to stop this cycle of living from paycheck to paycheck. The idea is simple. If you have a take-home pay of $3000 per month, then your target is to fit all your monthly expenses within that $3000. This way you can be sure that you are not incurring any excess debt.

Now most people will be starting from a point where their monthly expenses are way above their monthly net pay. This is where the problem lies. The treadmill just starts to speed up and go faster and faster and you can’t get off. At this point it’s where the necessities come into play.

Necessities?

There are some basic things in life that you just can’t do without. Ironically two people’s necessities are not the same and this is where the trouble starts. Between men and women there will be differences. So you need to be honest and determine what the necessities are. When I look around my life I could probably list the necessities on one hand – accommodation, transport, food, debt repayments and phone. I said these were the necessities not my current reality. I know that if I need to reduce my spending habits and free up some cash that I would simply reduce my life back to zero i.e. I would simply cut out the excess spending in my life. I call this living on life support.

Living on life support – financial life support

Not a particularly pleasant thought because it makes you think about death but I think it nicely defines how someone in debt should view their financial life. To recover from a bad case of debt you need to put your financial life on life support. By life support I mean reducing your spending down to the basics that you need to function. That way you can slowly but sure gain your financial strength again.

If your net pay is $3000 per month and your necessities only cost $2400 per month then straightaway that is $600 that you can use towards eliminating your debt. The maths is simple. After six months on life support you have freed up cash of $3600.

This $3600 can make the difference between you coming off financial life support or someone else making the decision to turn off your life support machine.

It will take a serious amount of discipline and focus to cut your life back to the bare minimum. It won’t be easy. There will be sacrifices that will need to be made, maybe for six months – maybe even longer. As always the choice is yours. If you do decide to take this route and cut your life down to the bare necessities then you can be assured that you will make a huge difference in your financial situation. It’s as simple as that. The hard part is knowing the difference between a ‘need to have’ item and a ‘nice to have’ item. Only you can decide that.

I have to admit that this post was a little darker than the usual. I don’t know why but sometimes I guess you have to be cruel to be kind. I’m all for tough love if the person it is directed at can understand that there is well meaning behind it. So don’t take offence and realize that the actions you required to change your situation aren’t that hard to take. I just hope that I can provide the spark to get you going.