These past few days, I’ve been working away on my new book about financial freedom for teachers abroad and the following thought has been running through my head. Financial success all comes down to short-term vs. long-term thinking.
There are lots of people who don’t think beyond the immediate in front of them-today, this week, this month and next month. These people often struggle to pay their bills each month and live in the land of paycheck to paycheck. Things such as extra taxes getting taken out of a check, or an unexpected medical or dental expense can throw a serious wrench in their life and causes serious stress. It can be a hard cycle to get out of once you’re in it because you’re often borrowing from next month to pay for this month. I often hear people in this category say things like, “I just want to have fun now-who knows if I’ll even live until I’m 60,” or, “I can just earn more later,” or “I’ll never retire so it doesn’t matter,” or “You only live once,” or “I’ll never get out of debt so there’s no use trying.”
Then there are people who are thinking long-term- this year, next year, 10 years from now and ultimately retirement. These people don’t worry about small financial setbacks like an unexpected medical expense because they have a sizable emergency fund, as well as plenty of money in the bank or in investments. They never look forward to payday since they have a pool of money from which they draw from that far exceeds a monthly paycheck. They go on vacation, or buy a “toy” and don’t feel guilty about it.
Financial success requires longer-term thinking. Here are some tips for how to live this way:
1. You have to want to get out of the paycheck-paycheck lifestyle. No one can give you the motivation to do it. You have to have it for yourself. It will be hard. You will have to make some sacrifices. Is it worth is? Yes: nobody ever regrets getting out of debt and having a bit of money in the bank for a rainy day.
2. Make a budget and allow yourself some fun-money, which is money that you can spend each month guilt free. If you have significant debts, it should be a small amount such as $20-50, depending on your salary of course. Stick with your budget, no matter what, even if that means eating the canned food you have in your cupboard and walking to work at the end of the month.
3. Contribute money each month (depending on your salary-maybe $100-200) to an emergency fund until you have $1000-2000. You will be able to sleep better at night knowing that you are covered in case of emergency.
4.Get a second job, and a third one too. You need to get your income up for at least a few months in order to escape the cycle and begin to pay off significant amounts on your debts. As you pay off you debts, this will free up more and more money because you are not wasting all that money in interest payments.
5. Pay off your debts as quickly as possible. I recommend reading Dave Ramsey’s,The Total Money Makeover. He has an excellent plan to help you do this.
6. Once you have your debts paid off, stick to your budget and build up a fully-funded emergency fund of 3-6 months in expenses.
7. Once you’ve built up this emergency fund, set yourself a financial goal. A 30% down payment for a house within 2 years. $10 000 to invest in the stock market by the end of the year. Putting $500/month in a retirement account.