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Life Rule # 2: Don’t Spend Tomorrow’s Earnings Today!

Last month I shared one of the four essential life rules you should implement now to build a strong foundation for your adult life. Take time to read that blog post if you have not done so. This month, we will discuss the 2nd essential life rule.

                Life Rule # 2: Don’t Spend Tomorrow’s Earnings Today!

Have you ever taken the time to think about how you view money?  Most people do not. Subconsciously, you know that money is a valuable resource that allows you to meet your needs and wants.  You also probably believe that you need to work to make money and even save some for a rainy day. For most people that is as far as it goes regarding their view on money.

Let me offer another viewpoint on money. Think of the money that you earn as fuel. In a car, you have a limited amount of fuel, and when you run out, you have to purchase more. With that in mind, you must choose where you’ll be driving to, and make sure that you have enough fuel to reach those destinations. Work, school, shopping – all of these are destinations that you need to work into your driving/fuel budget, and money is the same way.

When you’re spending your money, you need to fulfill three goals: (1) pay current expenses/debts, (2) create emergency fund and (3) prepare for the future. We will cover the first two points in this post.

Paying current (living) expenses 

Your current expenses include the things you pay for just to live. Typically, you cannot avoid paying living expenses because you need to them survive as an adult.

Living expenses consist of paying for:

  • Rent/mortgage
  • Renter’s insurance
  • Utilities (electricity, gas, water, sewer/trash, etc.)
  • Groceries
  • Transportation (gas for car, bus/metro pass, etc.)

Additional living expenses can be parking and child/day care fees. Note, I did not include expenses like cable, cell phone, gym fees because they are not needed to survive. You may think you need them but they are not necessary.

I recently reminded a young adult who wanted to know how to decrease her monthly expenses that she can live without paying monthly gym fees by using alternate ways to lose weight. I advised her to consider walking/jogging outdoors, purchasing an exercise equipment and/or utilizing exercise videos, etc.

Paying debts

Debts are anything you accumulate on credit or you do not pay for at the time of purchase but must be paid back later. Debts are commonly repaid in the future in one lump sum or on a monthly basis. You have debts if you have one or more of these obligations:

  • Car/motorcycle loan
  • Car/motorcycle insurance
  • Credit card charges
  • Student loan
  • Personal bank loan

 

Creating an emergency fund

Many Americans do not have money aside to cover unexpected expenses or emergencies. What would you do if you need to replace a tire or worse, if you lost your job? Most people will charge the expense of purchasing a new tire on their credit card. That is fine, if you are able to repay the charge within the period to avoid paying for interest charges.

Now what happens if you lose your job and it takes one or more months before you find another job? As those months fly by, your bills will continue to accrue and must be repaid.  Imagine not being able to pay last month’s expenses and a new month is upon you and you still have not found a job. How are you going to cope? This is the primary reason you need to create an emergency fund.

The financial experts say you should have a minimum of 3 months’ worth of living expenses and debts. This means, if your total expenses and debts for a month is $1,500, then three months of savings would be $4,500.

I recommend having at least 6 months because it can take a lot longer to than 3 months to find a job. Also, when you do start a new job, it can take about a month before you get your first pay check. The money you set aside as a safety net ensures that you can

  •  continue to pay your living expenses and debts with no disruption
  •  avoid paying late fees
  •  avoid getting bad credit…if you are late past 30 days on your debts,
    your creditors will report it and it will be reflected on your credit report
  • maintain a simple life. Remember the first life rule? Keep life simple. And one way of doing this is to minimize your stress by preparing for emergencies.

Young adults fail to consider that anything negative can occur. I am here to tell you that life happens and it happens when you least expect it.

So, if you just started a new job and received your first few paychecks which for many young adults is exciting or you have been work for many years, it is easy for you to get overwhelmed and start spending money on things you don’t need.

Key lesson to remember:  Life happens and when it does, there usually are unexpected expenses that comes with it.  Part of being an adult is making wise money decisions for day to day expenses and for the future.

Let me know your thoughts.

Dr. Linda