Living Paycheck to Credit card to Paycheck

Jul 242008

Don’t get me started on the treadmill that was my (mis)management of my monthly Paycheck. Ok I’m not as bad at it now as I was about five years ago. Five years ago I was living Paycheck to Paycheck, heavily in debt and I was not coping well at all. I had let too many small things slide and I was paying the price – both financially and emotionally.

Every month I was using nearly all of my overdraft facility – sometimes I would even go over my overdraft facility and incur heavy fees. To avoid any embarrassing situations I would transfer funds from my credit card to my bank account so that I could meet my bills. I was paying my bills and meeting my obligations but it was a serious struggle.

Day to day living expenses were met with credit cards. On the 28th of each month I would receive my salary into my bank account. The amount of my salary almost always matched my overdraft. I would go to my bank account and see a balance of almost zero in my account on the same day that I got paid. Sometimes the balance on the day I got paid would be negative. For those of you who have experienced this you know how depressing it can be.

My work began to suffer. Now most logical people would think that my work should improve as I needed to have a job to pay my bills. The better I became at my job the more I would get paid and the sooner I would get out of this financial hell – right? Nope, not for me, I began to seriously resent my job and the people I worked with. I began to resent the fact that I was trapped and that I should be paid more and if I was paid more then all my financial problems would disappear.

The ironic thing is that I was relatively well paid and that the people I worked with were for the most part very nice and pleasant. There were plenty of opportunities for promotion and travel but I didn’t want any of it. I was just so focused on obsessing about how unfair the whole thing was.

Little did I know that I was digging a deeper and deeper hole for myself with this attitude. I was getting more and more frustrated with work and my financial situation and in turn this made me angry. I was angry at the world and for a while I was not the most positive person to be around.

How I got out of this vicious circle

I slowly came to the obvious conclusion that there was one common factor to all my problems and that common factor was ME. This realization took me months of banging my head against the wall, it wasn’t just a sudden ‘a ha’ moment. These things rarely are – no matter what the self help books tell you – it took me time to realize and accept that I was the cause of my problems.

Once I realized that I was causing my problems things became easier. I could now have a direct impact on my situation through my own actions. I was the cause of the problem and I was the only one who could solve it. My anger and energy had been misplaced and I now realized that I had to act fast if I was to make up lost time.

Despite my eagerness to make changes things didn’t start to happen for a further couple of months. The process of changing my financial habits was a very gradual one. I liken the change in habits to an oil supertanker in the ocean trying to turn around. The supertanker is so big that it can take up to 24 hours for it to turnaround. Things happened gradually for me.

I started to stop going out with friends at the weekend. Usually we’d go to a bar one or two nights a week and then on to a club. I first reduced this to once every two weeks and the eventually to once a month. This was one of the major contributing factors to me getting control on my finances. I was wasting way too much money partying and all I had to show for it was a sore head and empty pockets.

I did lose a few friends as a result of my reduced social activity but I now think they weren’t real friends to begin with. If you were to analyse my fight against my overdraft I suppose these friends would come under the category of collateral damage.

Another thing I did was that I brown bagged my lunch for maybe three out of the five working days in the week. This wasn’t very glamorous and I did receive a bit of stick from my work colleagues but that just made me more determined.

At work, instead of trying to fight everything and go against the flow I simply decided to go with the flow. Whatever happened at work happened. My work was not me and didn’t define me as a person – it was something I did to pay the bills. A bit short-sighted I agree and my long term career prospects might have suffered but I don’t think they suffered as much as they would have had I stayed in the negative/angry mode of thinking.

Eventually my attitude to my work softened and it became a lot more pleasant than I thought possible. I left that job a few years later for another but it was on the best of terms.

I didn’t go for a radical financial overhaul. I was eager to change but I don’t think I would have stuck to it for very long. I did things slowly. Gradually I began to notice a difference in my bank balance on the day I got paid. My bank balance was staying positive for longer and longer each month. It was a strange but refreshing feeling to reach the middle of the month and still have money in my bank account and not to be overdrawn.

The things I learnt.

The most important thing that I learnt was that it takes time to make changes. No matter what the gurus say – change takes time – don’t beat on yourself if you haven’t solved all your financial problems in six months.

The second thing I learnt is that you have to be realistic. You can’t draw up a plan that expects you to make major sacrifices straightaway. Can you really stop something like smoking overnight? Some people can but as I mentioned above change takes time. You need to factor this into any plans you make.

Finally another major thing I learnt from my living Paycheck to Paycheck is that the unexpected happens. You can’t plan for everything but you can counter the effects of any unexpected expenses by putting a little money away each month into an emergency fund. Start the emergency fund as soon as possible – it might delay you getting out of debt for a few months but it offers a safeguard against falling further into debt.

Living Paycheck to Paycheck is a very unpleasant situation to be in. By the time you notice there is a problem it is nearly too late. The overdraft facility just crept up on me while I was sleep walking through my finances. It was an easy mistake to make but a costly one nonetheless.

Cash flow calendar – a lifebuoy in a sea of debt

Jun 022008

Cash is the life blood of any organization or so my college lecturer said many moons ago. He would also follow up the comment with something like this “many a profitable organization went under due to the lack of cash”. To be honest I never really understood what he was on about. I simply just took it to be some business philosophy that was great in theory but in the real world things didn’t work that way.

It was only when I got into the ‘real world’ that I finally understood what my lecturer was on about. The thing was that I didn’t need to have my own company to learn the full lesson. When I first started to receive income from a job I came to fully understand what the statement “cash flow is the blood of any organization” really meant. You see if you think about it you are in effect an “organization” or at least you operate along very similar lines. You receive income (from a job/property etc.) you have expenses (food, mortgage, phone etc.) that allow you to go about your daily business and at the end of the month you either have money left over or not (profit or loss). Just like any organization if you are constantly making a loss (i.e. your expenses are greater than your income) then you will eventually go bankrupt.

The simple accounting principles at play here apply equally well to your financial situation as they do to the financial situation of any large corporation. Money in and Money out.

When you think of cash you tend to think of the hard physical green stuff – right? Well in this situation I want you to expand your definition. From now on when you see the word ‘Cash’ mentioned in this article I want you to think of it as not only the physical notes but also as any access that you have to credit. So if you had $500 in notes, $3000 in the bank and $4500 available credit on your credit card then to me your total cash available is $8000 ($500+$3000+$4500) Confusing eh? But it is important. By thinking of your cash available in terms of both physical cash, cash in the bank and credit remaining you open up the flow of that “life blood” into your financial life. This is what will make all the difference.

For many people in debt and who struggle financially the problem isn’t so much lack of income. A lot of the time the problems seem to stem from the inability to manage the timings of their incomes and expenses. Here is a simple example. Let’s say that I get paid $3000 at the end of the month and let’s say that my average monthly expenses are $3200. Now imagine that the day after I get paid all my expenses for the month are taken from my account. So now I have negative cash of $200 ($3000-$3200). Now imagine that my car breaks down and I need to pay $500 to get it repaired. This $500 has to come from somewhere and if I don’t have credit available I will be walking to work for the rest of the month.

The point that I am trying to make is that in order to keep our heads above water we need to smooth out our outgoings and have a little in reserve to meet the unexpected expenses. Many organizations can manage to stay afloat for a long time while they continue to make losses. The same can apply to you. If you are struggling financially and find that at the end of the month you do not have enough to pay your bills then your need to look at your cash flow calendar.

Cash flow calendar

In simple terms a cash flow calendar is a calendar that highlights when your income and expenses fall due. In any given month you may have things like birthdays and weddings that you may need to budget for. On top of that a cash flow calendar allows you to identify any potential times of the year or month when you are likely to have a shortfall and this will allow you to make contingency plans.

A cash flow calendar can and should be used as the foundation of any budget. In order for any budget to be effective you need to know when your expenses fall due. The thing is most people’s budgets simply go on a month by month basis, their budgets never actual take into consideration the very important issue of timing.

The big thing about being in debt is the constant worry about having the funds to pay bills when they fall due. Some bills will get priority as they are taken via standing order from your bank account. Other bills are more discretionary in that it is up to you to go and pay them. It is these discretionary bills that can cause the most mental stress. The reason is that mentally we have prepared ourselves for the standing orders coming out of our account. We know each month like clockwork that the bills will be paid. However with the discretionary bills we have to build ourselves up to pay them and more often than not we end up putting them on the long finger.

From a cash flow point of view it is these discretionary bills that throw a spanner in the works of our finances. The great thing is that if you have a cash flow calendar you can look at it and see what else is due to go out that month. If there is enough slack in your current funds then you can pay the discretionary bill. For example any bills that tend to be bi-monthly i.e. they come every too months, can catch us unawares. How often have you scratched your head thinking ‘didn’t I just pay this bill last month?’ If you have a cash flow calendar and were expecting this bill then you can build it into the budget for that month.

Building a cash flow calendar

Building a cash flow calendar is really simple. Depending on type of person you are you can use a spreadsheet or an actual calendar that you would hang up on your wall. I tend to use both! I use a calendar that I hang up on my wall so that I am constantly reminded of upcoming bills and expenses and I also use a spreadsheet because it is easy to calculate totals and edit amounts. I recommend that you do both as I have found from experience that using both is very effective.

All your income and expenses need to go on to the calendar. It needs to be a reflection of the flow of cash into and out of your financial life. The calendar will help you create a mental picture of your financial situation at any one time and will help eliminate the stress of unexpected bills. When you receive and unexpected bill you can go to your calendar and see how much room to manoeuvre for the rest of the month and how much you can afford to spend. This will empower you and will give you key insights to your spending habit.

It will take a bit of trial and error to get the calendar accurately reflecting your cash flows. When you look over old cash flow calendars you will be surprised at how off you can be. Don’t worry this is natural and comes from the tendency to over estimate income and underestimate expenses.

Cash flow calendars should be used in conjunction with your budgets and not instead of them. Think of cash flow calendars as a tool that gives you a quick up to date idea of your financial situation. As the months and year go by you will see that this will lead to better financial decisions.

As with the rest of the tools in your financial armoury this needs to be used regularly to be effective. Cash flow calendars are highly effective for such a small and simple idea. The benefits to you can be enormous and the cost miniscule. Remember with cash flow calendars you only get out what you put in so makes sure that what you put in is quality.

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