Welcome together, we're gonna explore our personal finances and figure out how to improve them. Whether you're just getting started in life on your finances, or you may already have a home and a car payment and you're struggling to get credit cards under control. Are you getting a later start in life on saving for retirement, reduce debt increase wealth.com is a podcast to educate those to improve personal finances, whether it's eliminating debt, or making smart investments. Hello, Mr. Chuck here. This episode I'm going to talk about two subjects. The first one being the simple rule number one, spend less than what you earn and then how you recognize when you're under financial distress. Get Started. I have two articles that I refer to in my show notes. If you want to read the articles for yourself, and you can go do that. So rule number one, we're going to do that article first. Spend less than you earn is useless, unhelpful financial advice. Okay. It's a basic sound simple strategy that you can use to help keep your finances under control. Let's see this. This gentleman here, Eric, Ravencraft has a different outlook on that particular rule and see what he has to say. If you ever had five words about personal finance, or probably spend less than urine is popular because it's simple, in fact, is too simple. It's the smallest piece of a big puzzle with lots of things. Complicated parts is time we taught those instead. What's wrong with spend less than what you earn? Before I talk about this problem with this advice, this is the article. I want to point out. I don't think this advice is wrong. You make X amount of dollars per month and you spend y. If y is greater than x, you won't be able to pay your bills, save for the future, fix your car when it breaks. I think we can all agree that's, that's a bad way to live. Okay, yes. But what he's saying is there are times when spending less than what you earn is not good. And he's going to go over that this go down through here and see when that okay life, on the other hand is less intuitive than simple subtraction. social pressures In a catch 22 news of improving your career, it's easy to slip into hole without knowing it. Sometimes being irresponsible gets you there, though, that many more times life gets in the way. And unexpected car bill ruins your savings plan for six months you lose the job right when you need your medical insurance. Not to mention the spend less than you earn. A vice rarely accounts for opportunity costs while you're staying at home with Netflix, your co workers may be out at the bar network and making the connections that will land them better jobs. So what he's saying here is sometimes use when you spend a little more in a way you earn. You can use that to your an advantage to gain a better job or to make a connection with somebody who can help you get a better job. I think he goes down through here says when you're young This advice was his own a suit that everybody should own is, every man should own a suit and he didn't have any money because he didn't have a job. But in order to get a job, he needed a suit. So if you follow this spend less than you earn here, little or none. He would never been able to buy a suit. He can't buy a suit is hard to get a job. Well, yes, that all makes sense. There are times when you have to spend more than you earn in order to better yourself to make your situation improve. But it's not an ongoing thing that you're doing a one time thing, maybe a two time thing that is not ongoing. You don't do that day in and day out. You don't keep building up that get farther in the hole. You're just doing it so you can better yourself such as buying a suit so you can go and make an impression on getting a job. Or a better job? Or getting a smartphone when you're broke? Why you need a way for people to contact you if you're looking for a job. So you definitely need a phone maybe not a smartphone. But yeah, that's all there is out there nowadays. So a cell phone is definitely you need data at a minimum. If you're not working or have very little money, then you know, that could be expensive monthly, a monthly bill that you may or may not be able to keep on paying. So what he's saying is you need to learn how to invest in yourself investing as a principal. Spending money now to enrich yourself in the future is what he's saying. So I agree with that. 100%. That is not gonna be ongoing day in and day out. It's a one time 2.5 spending less isn't helping if you're already broke. Well, if you're already broke, you're pretty much forced into spending less than my book. You don't have any money. How do you spend it? You have to have credit. If you don't have any money and never had a money, how did you get your credit? If you use credit, how are you gonna pay it back? You're just digging yourself deeper into a hole. The bigger problem is that many times money problems occur because of spending less isn't an option at all. There are numerous scenarios that could lead someone to be unable to balance the budget through spending cuts alone, unbearable housing costs. Now if you live somewhere where housing is really expensive, high student loan debt or you went to college you got all this debt now you got to pay it but you can't get a good job and then Okay, I believe unexpected medical expense. Yes, we all have that throughout our lives. You think that health insurance is gonna pay most Have it and then all of a sudden it doesn't because you have a 5000 or $10,000 deductible and you thought the deductible didn't apply because it was a screening. And it turned out it wasn't a screening. So the deductible does apply, so you got to pay it well. I'm talking about myself. Yes, unexpected medical expense do pop up and it's never ending in your life. And oh, it's also the number one cause for bankruptcies in the United States, affecting nearly 2 million people. That's why having your credit card debt under control can help because you could set up a payment plan with your provider and avoid bankruptcy. snowballing municipal violation many people get a ticket for something minor like laughs a car registration can kick start a cycle that costs a crippling amount of money if you're not making a comfortable salary at traffic tickets that cost a couple hundred dollars can spiral upwards with late fees, higher insurance costs and lost work hours. Okay, try to avoid getting yourself a ticket. So don't do anything that's gonna cause a ticket. That's his take savings important but it's not enough. More often than not. When someone says spend less than urine outside other con, what they really mean is just spend less however, spending is just one of the number two numbers he can use to determine your financial gap. It can only reduce your spending so far increase your income on the other hand has virtually no limit. making more money is a lot harder, of course, especially for IRA and financial crippling situation. It's quite often the only solution that works long term if you're making $20,000 per year or less. No amount of spending less will truly prepare you For the future goes over how you can make more money. Try to get a better job, get a job in your field that you got the college met, the college degree for the college loans are costing you have a second job. There's a lot of ways to do that. So that's from life. hacker.com spend less than urine is useless, unhelpful financial advice. I agree with that to a point and I disagree with it to a point. My assumption is if you are making a decent amount of income, and you have a home you have a car you have one or two credit cards, that you have enough income to qualify for that credit. If you have enough income to qualify for that particular credit issue. Be able to pay it with no problem. So you need to look at what other items you're spending money on, and cut that spending first. So that you don't get behind on your loans. That's number one. Also, you need to be building up an emergency fund. So if an unexpected cost comes up, you'll be able to handle most of it, some of it part of it, maybe set up some make a lump sum payment on it, and then set the rest of it up so that you can make monthly payments and keep the creditor happy or the provider happy if it's a medical issue. So as a general rule, spend less than you earn, what does that really mean? And how do you do that? You definitely didn't spend less than what you earn. When you out, went out and bought a home and got a mortgage for 30 years, you really spent a whole lot more. That is not what we're talking about we're talking about is on a month to month basis. For instance, how much is your mortgage? How much is your housing costs? How much is your transportation costs? How much is your food, how much is your entertainment, how much is your clothes, keep all those items down under what you're making. If you follow my early episodes where I talk about your housing shouldn't be any more than 30% of your net income. Your transportation shouldn't be more than 12 and a half percent of your net income. You're in entertainment should be more than eight to 10% of your income, your clothes. You know 8% he should have, you know the 50 3020 50% of your income for needs 30% for once and 20% for savings, that's savings and credit card debt. If you can keep yourself within all these guidelines, and you have an understanding what's going on and you're building up an emergency fund, if you get laid off temporarily, such as your company goes out of business or you get laid off because you did something bad or maybe you had a job, you're what really qualify for and they recognized it and they got rid of you. I mean, who knows, I don't know. But you'll be able to get by for a short period of time, whatever your emergency fund is set up for the pay those bills to pay find another job, hopefully a better job. Or you're more qualified, more skilled, where they appreciate your talents more. So you can continue in your daily life and what's going on. That's what I mean by rule number one spend less than what you earn. Not necessarily. I earn I made $500 this week, I can only spend $490 and $10 is gonna go in savings. Well, that's good. That's a start. That does not always true from paycheck to paycheck or paper to paper it but that's a start. I'm going to be talking about two items and this episode. So let's get started financial distress and how do you recognize it and what is it the definition is hard to find because a lot of the definitions I found on the internet were related to businesses. But for an individual, the financial distress is when you're unable to pay all your debt. And when does why would that happen? The top five causes of financial distress are reduced income, you have the same expenses. Some families are seeing two incomes turned into one or you're forced into taking a lower paying job after a layoff you have reduced income. Number two divorce. Half of married couples do it some more than once. Number three medical expense and unexpected medical expense that's happened to me more than one time. Number four poor money management. You're you're living paycheck to paycheck. You don't have a budget, you don't have a clue. You just pay the bills as they come up and you spend the rest and little no savings. If you have a properly funded emergency fund, three of the five of these items that cause financial distress are taken care of unexpected medical expenses, poor money management and little no savings because you're going to have savings if you have an emergency fund. You're going to have a money management program in a place not going to be poor, it's going to be better and unexpected medical expense. You have the ability to make a payment or set up payment plan so that you'd be able to pay it and get out from being financially just spread distress. The article I have is from inside Understanding financial distress. It's from the UK It's www FC a.org.uk. And of course, then a government research article they had to do research. Our research find the factors that predict people suffering difficulties repaying their debt, or becoming financially distressed. The use of debt especially consumer credit debt is frequently described in negative terms but from an economic perspective, such debt plays a critical role and allowing people to manage temporary cash flow shortfalls and spread the costs of making large purchases. Yes, that is true. But if you're going to manage temporary cashflow shortfalls, you need the one recognized What's causing this shortfall First of all, and for making large purchases? Yeah, well, that's called a mortgage when you buy a home, it's called a car loan, when you buy a car is called a personal loan, you buy an expensive appliance for your home or something. But they use of debt to, to manage your cash shortfall. A lot of people are not doing that as a temporary measure. They're doing it as a permanent manager. So their credit card debt keeps increasing and they're unable to pay. They're paying a minimum maybe balance due. So their debt is increase and increase and increase and they're not keeping up with it. At that's happening to you, you're becoming financially distressed. So what persons are most likely to have this problem well, it's going to be the younger people who are have No or job that pays less money. They don't have a savings plan in place. They don't have any savings. They're getting started in a life they need to buy stuff such as a suit as we talked about earlier. So they can promote themselves or have cell phones so they can apply for a job and have a way for people to get in touch with them. And also, when you're financially stressed, you may find it stressful, mentally stressful and all social stigma. I don't know why it would be a social stigma if nobody knows about it, but you but that's what the article says. The bad thing is that means that you might have to file for bankruptcy, increase working hours take on additional jobs, reduce spending in order to meet repayments. How do we measure financial distress Or more credit payments. If you have missed two or more credit payments, you're becoming financial distress. Okay? I say that if you make the minimum payments on your credit card, say three or four credit cards that you carry a monthly balance, don't pay any extra pay the minimum balance you're not necessarily financially distressed but you're you have a major pan for your cash and you're working on solving the problem is what my plan does. So if you mess in credit card payments, what's going to happen you miss a payment, it's going to be a bad mark on your credit. Bad marks on your credit, it's gonna mean that you are riskier personal money to so somebody's willing to loan your money, they're going to charge you more interest. The more interest you have to pay the less longer is going to take you to pay down the principal The more that you're going to hang out for a longer period of time, the more risky you're gonna be. And it's a vicious cycle. And you got to break that cycle by reducing your credit. I'm going to read article it goes into a lot of other information that I'm not gonna talk about. In a nutshell. If you're missing any payments on your, whether it's a credit card, personal loan, car loan, your financial distress, so you need to take steps to get that under control. And one of the best ways to get that under control is to follow simple rule number one spend less than what you earn. You might only have to do it for six months, but it's a good starting point to get yourself out of financial distress. To get them credit cards paid off. You need Just start somewhere, somehow do something. And that's the point of this episode. One, what is financial distress when you're unable to make a payment on something that you owe? To? What did what cause you for that to happen? Is your income reduced? Do you are you unemployed? Did you maybe you're married and your spouse is laid off, or maybe your spouse quit working because now you have children and the spouse stays home because it's cheaper to stay home than paying for daycare. I understand all that. Maybe you're going through a divorce. Maybe you had unexpected medical expense, something caused it. So you need to recognize that and that's if you recognize that at that particular moment. Now you can take steps to get it under control. If it's a loss of job, loss of income, What can you do to increase your income? Well, that one article is telling you that well, spending less is not a good thing to do. But it is a good habit. It's not going to solve all your problems. But making more is going to be a longer term benefit. Yes, I agree with that. If you can increase your income every year, throughout your life, whether you're getting pay raises through work or get promoted, or you're changing jobs, changing careers, whatever you're doing, as long as you keep making more money, you're gonna be one keeping up with inflation, to be able to meet your financial obligations that you know what you owe, such as your home your cars. You'll be able to build up a bigger emergency fund so that when an unexpected expense pops up, it's not as bad stressful on you, and you get it under control sooner. And that's what my plan does. So you know, from day one, what's my plan, you need a financial plan. Within a financial plan, you need a debt reduction plan. And if you have all that together, once your debt is reduced, and under control, then you can start saving for your short term, mid term, long term goals. You have an emergency fund, life is a whole lot less stressful. And it's gonna be easier to follow simple rule number one, spend less than what you earn. Because you're going to be doing it it's going to make one gotta be a habit. And you got to be able to enjoy things in life. And later on when your debt is under control. Then you maybe you can go out and finance buy that item that you really want it That you waited to 30 days that you still want it. You have enough money to make a large enough downpayment to make them loan affordable. Go ahead and do it. Live life enjoy life. That's why you're working. That's the end of another episode. I hope you found it useful. And if you'd like to share this episode with your friends, please do so. I'm open for any suggestions for improvement or for information that you would like to talk about in future episodes. He can go to my Facebook page and leave me a message more than glad to comply. 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