Where to Start When Making a Big Purchase

If you have not experienced the dreaded moment when you realize that you are going to have to make a big purchase because of a computer, car or a home appliance breaking down then trust me – it is only a matter of time because it is just part of life. Things break and sometimes you just need a pricey item that you did not previously own. The goal of this blog is to help coach you through how to handle these situations in the most financially feasible way possible.

1) If it is broke, can it be fixed? 

Often times when an old car breaks down or the computer fails the first assumption tends to be we need to go buy a new one. While that may end up being the case it is not always and many times the best option is truly to get the broken item fixed -especially if money is tight. Take for example when your car breaks down. It can be so frustrating! Especially when the mechanic comes back with a price to fix it exceeding $1,000. Our mind immediately goes to the reasoning that people around us have used in the past when facing the same situation. You hear them in your head saying, “The car is old already, it is not worth a whole lot, why would I put $1000 into it when I could go buy something much newer?” Then they end up purchasing a car and either spend way more cash than the $1000 on repairs or take a loan out to purchase the car that ends up costing them more $1000 in the first 4 or 5 months of paying back the loan. Making a new purchase just because what we have is old and in need of repair is not always the best option as I have hopefully convincingly presented to you, the reader.

Consider if you did just pay the $1000 to fix your car and it gave you another 3 or 4 quality years of life. In my book, that would be worth it especially if that kept me from having to finance a new car before I was ready to make that purchase. If you do just fix the car it also gives you the time to plan financially and save for the purchase instead of making a big financial move on the whim when you were not planning to do so. Not to mention it would save you a ton of money of the 3 or 4 remaining years of the car’s life. This same principle could be used with home appliances, computers and etc.

I recognize that sometimes there just is no shot at saving the big item and you will have to make a big purchase. The rest of this blog post focuses on the steps to take to make financially feasible and responsible purchases of big items.

2) You’ve determined that you are going to buy. Where to start? 

When you hear someone say you should start your search for the big item by determining the monthly payment amount you can make on a loan for the big purchase item or how much cash you are willing to drop on the item you response might be “duh, that is obvious”. Well, yes and no. I would argue that while it might be common information it is not always practiced.  Even when it is someone’s first step in making a purchase a good sales person looking to earn some commission can give a pretty convincing argument for why you should spend just a little bit more and before you know it you’ve made a purchase costing you way more than you initially planned.

If you are financing the purchase it is important to take a good look at your written budget and determine how much you can afford to pay each month. Make sure that the amount you determine does not stretch you so thin that it is possible certain months you will miss payments. If you do not have a written budget do not trust your mental math to make a financing decision. Write it out to make the decision – there is a good chance that if you don’t take time to write out your budget you will be sorry later. If you decide to pay in cash be sure to not completely exhaust your savings to the point where there is not any money in your emergency fund.

If you go the financing route once you have determined how much you can afford to pay monthly you are now ready to determine the maximum dollar amount the item can be that you plan to purchase. Make sure to consider tax and loan interest in this calculation especially if that purchase happens to be a car or a home. Also consider and determine if it is going to cause any other expenses to increase such as insurance, utilities, property tax or gas to name a few. Once you have finally determined the maximum amount the item can cost you are ready to start shopping!

3) Start with Research!

Do your own research. This is the only way that you can make sure that you have all the information you need to make the right purchase for the right price. If you have done your research it will save you a ton of time once you arrive at the car lot, the appliance store, or wherever you are making a purchase. Secondly, you will not have to rely on the knowledge of a sales person. Finally knowing your facts will help you know if the deal being offered to you is worth your money, if you need to go somewhere else to make your purchase, or if there is room to negotiate the price of the item down.

4) Do not settle. 

If your research conclusively shows that you can get a better deal then do not settle and pay more for the item than what it is worth! Do not feel guilty for not buying an overpriced item because the company offered great customer service. You still have to do what is best for you financially and you have a dollar amount that you have to stick to! It is not personal, it is just business and the kind customer service folks will understand that – though you don’t even have to justify why you are not buying from them.

Making these kinds of financial decisions can be super tough. Here at the Center for Financial Success we are here to come alongside you during the decision-making process. If you would like to speak with one of our financial counselors visit our website, wku.edu/cfs and fill out our become a client form!

Understanding Present Value and How to Solve for it.

In this post we simplify present value time value of money calculations. This is a continuation of our blog posts on understanding the time value of money. If time value of money is a new term for you then check out our first post in this series on the time value of money. In that post we cover the basics of time value of money.

What is the value in today’s dollar of an amount of money that will be received in the future? This is what present value calculations find.

When solving for present value we use the term discount rate instead of annual interest rate because we are discounting a future sum of money back to its present value.

The easiest way to calculate present value is with the time value function on a financial calculator. If you are trying to determine what the present value of $1,000,000 is that you will receive in 10 years at a 10% discount rate then you would enter the following inputs into your calculator.

FV=1,000,000

I/Y=10

N or Periods = 10

PV=?

Click CPT PV and you should get = -385,543.29. (this answer is rounded to two decimal points)

*Note getting a negative on either PV or FV is normal. Typically if you are solving a Time Value of Money question that includes both PV and FV you have to make one of them negative for it calculate properly. The reason it is like this is because it is showing money leaving your hand as the negative and returning as the positive.

The greater the discount rate is will equal a smaller present value given that everything else is the same between two future value sums of money. For example if the same numbers are used from above, but the discount rate is 4% instead then the present value will be larger.

FV=1,000,000

I/Y=4

N or Periods = 10

PV=?

CPT PV = -675,564.17

If you are wondering how time value of money is affecting your life then consider this- from a practical standpoint understanding time value of money is important in making every basic savings, credit and investing decision. It is key knowing how to create and maintain wealth.

Basics of Time Value of Money

Money has a time value

The money you have today is worth more than what you have in a year. For example if you were to have $1500 now it is worth more than $1500 a year from now because of compound interest. This is dependent on if you taking advantage of compound interest. You have the opportunity to earn interest on money that you have now.

Compound interest is interest that you earn on interest you’ve already earned. For example if you invest a principal (starting amount) of $100 and you earn 7% in a year on the $100 investment then you’ve earned $7. If you choose to reinvest that $7 of interest then you now have $107 earning interest for year two. This may not seem like a whole lot, because it is a simplified example. However, consider once you have saved up money and have invested for a few years. Consider if you now have $100,000 dollars earning 7%. That means in one year you earned $7,000. Once you reach $1,000,000 if you are earning 7% that means you are earning $70,000 and that the next year you now get to earn 7% on $1,070,000! Compound interest can be your best friend if taken advantage of, the earlier you start using it in life the better!

Compound interest is much like a ball rolling down a hill. Untouched, the further it is allowed to roll the faster and more momentum the ball picks up. Compound interest is the same way! When you add more money to the principal it speeds up the process even more. It is kind of like kicking the ball to speed it up even more once it already has momentum.

Definitions for Time Value Calculations

Present Value is what money is worth now. For example if I have $150 right now that is its present value.

Annual Interest Rate – if you have an account that pays 5% a year then that is your annual interest rate. If the $150 that you have earns 5%, then at the end of year 1 you will have earned $7.50.

Future Value is what the money will be worth at the end of year 1 or at another point in the future. In the example of $150 at an annual interest rate of 5% the future value after one year will be $157.50.

When calculating Future Value or Present Value you will also need to know the term or in other words how many times does the interest compound and is it once a year, semi-annually, quarterly, monthly in the time frame that you are calculating. The easiest way to compute a time value equation is to use a time value calculator.

Non-annual compound interest

Non-annual compound interest is when interest compounds on a term that is quicker than a year. It could be semiannually, quarterly, monthly, and even daily. The quicker your money compounds the quicker you earn money on your interest.

To compute non-annual time value equations it is easiest to use a financial calculator’s time value functions.

Understanding time value inputs on a calculator

The pictures above display what the inputs will most likely look like on the BA II Plus Texas Instruments financial calculator and on an internet time value calculator. There is also many financial calculator apps available for smart phones. Usually they are no more than a few dollars.

PV or Present Value – is where you input the present value or where the calculation will occur for Present Value

FV or Future Value – is where you input the future value or where the calculation will occur for the future value

The N or Periods – is where you input the number of payments or compounding periods or where the calculation will occur for the periods

PMT or Payment – is where you input how much money is being contributed per period (if money is being contributed) or where the calculation will occur for how much to contribute.

I/Y or Rate/Annual Rate – is where you input what the interest is per term or compute what the interest rate is per term. It is entered as a percentage not a decimal. For example if your annual interest rate is 12%, but it is compounded monthly you would input 1.

If using the BA II Plus Texas Instrument calculator click the “CPT” button and then which ever input you are wanting to find. For example if you are wanting to find present value, once you have inputted the numbers into FV, I/Y, N, and PMT click “CPT” and then click “PV”.

Summary

This blog post is intended give the reader the baseline knowledge of time value of money and compound interest needed to then delve deeper into the topic. The topic of time value of money expands well beyond the scope of this article. We will be adding additional posts on the topic of time value of money in the near future.

Vision for Financial Success

If you are like me (I would wager most are) then you have dreams of things you would like to do or accomplish in the future that require money. I would imagine that many of those bucket list items require more than just a few dollars saved up to accomplish. I find that often we leave these bucket list items stagnant. They can end up being more like daydreams than realizable goals. I would like to suggest as long as these items are more like daydreams then realizable outcomes they probably will not happen.

Having a vision (clear direction of where you want to go) with your finances will be the first step in creating a means to turn those daydreams into something that could happen. Once you have a vision for your finances than you can begin to establish a financial structure to make it come to pass. Profitable companies always have a strong vision and mission statement. It works for an individual or family as well. Once a company establishes a vision they are able to create a mission and objectives that work towards attaining the vision. The same can be said for an individual with financial vision. While it doesn’t have to be as structured as a company, with a vision in mind the individual can begin to create objectives they want to meet that gives a structure and lens with which they can make financial decisions.

When establishing a vision for your financial success ultimately it should be what makes you happy. Comparison to other individual’s finances is a trap. It can lead you to try to keep up with the Jones’ instead pursuing objectives that fancy what will make you happy.

In terms of practicality – establishing a vision for your finances most likely will mean establishing where you would like to be financially 1 year from now, 5 years from now, 10 years from now, and so on – all the way up into retirement. This can include how much you would like to have saved/invested during this time frame, big purchases that you would like to make, how much debt you want to pay down, where you want to be living, what would you like the size of your family be, etc. The further out you go it probably will not be as precise as where you want to be one year from now and that is okay!

It is normal to change these items as you grow and move along in life. Some of the items on your list can be items that have factors that are outside of your control such as the example I used above of determining what size you would like your family to be at any point in time. Items like this should be listed so that you can determine more controllable objectives such as home purchases, and the standard of living you will want to have reached through a combination of income level, expense control and savings. This makes it possible for you to be where you want to be financially in the event that the less controllable things occur like the desired size of your family.

Now, let’s talk practically how to achieve the vision you have laid out! For each item you have listed as part of your vision, take time write out the practical objectives/goals you will need to accomplish to reach each item you have listed. There will be certain goals that apply to each statement and can just be written as key general goals to obtain financial success. For example – breaking the cycle of living paycheck to paycheck will be key reaching any item that you have written down. Having an emergency fund equaling 3 to 6 month’s salary is another key objective to meet that will be key to reaching other objectives written down. When you are working through building you goals/objectives check out this article that I wrote on goal-setting.

Giving your money vision will change how you view every transaction you make. In a way you are giving purpose to your financial decisions -spending and saving because they are now working towards your vision. It doesn’t mean you have to refrain from spending money or that you never get to have fun anymore it just means that you have become wiser when you do spend and don’t have to deal with near as much buyer’s remorse later. Rather you can give yourself the freedom to spend money within your plan knowing it will not keep you from attaining all that you are planning to accomplish. Finally, it means you are now on a track to reach your version of financial success.

 

4 Benefits to Having a Financial Plan

Money can be a taboo topic, yet, we all think about the need to have a plan for our money. Few seem to make it happen. In a recent 2018 study by an investment company, Charles Schwab, it was discovered that 3 in 5 people are living paycheck and only 1 and 4 people have a written financial plan. I would suggest it is not surprising to discover that more than 50% of people are living paycheck to paycheck when only 25% have a plan. Having a financial plan is an absolute game changer. Here are 4 benefits.

1) Maximize the use of your income and accumulate wealth.

When you have a good plan you able make your income go farther, increase your wealth and over time make your money work for you. This happens through breaking the paycheck to paycheck cycle and paying yourself through savings and investing.

2) Control your expenses.

When you have a good plan it gives you a lens which through you can make prudent spending and saving decisions. Some might say it means that it removes the opportunity for fun. I would argue just the opposite. I would argue that controlling you expenses enables fun without financial disaster, buyer’s remorse later, and anxiety that comes from a low bank account.

Living below your means by controlling your expenses will produce a much greater financial reward in the years come.

3) Reach Your Version of Financial Success.

Having a plan will be the only way you reach financial success. Each and every individual’s version of Financial Success is going to be different. However, it is important to know what you envision financial success looking like for you and then make it happen! Make sure it is your vision and no one else. If it is not yours, it will not make you happy.

4) For those that desire: the empowerment to give back. 

It can be hard to give back financially to your community, preferred charitable non-profit organization, or religious entity of choice without a plan that is keeping you thriving financially. Many people want to give back, but do not have the means to do so. Planning now will enable you to give back now and give back even more later!

If you you would like help building a plan that helps you reach financial success visit our website at wku.edu/cfs and fill out our become a client form! We look forward to coming alongside you in your journey to financial success!

Understanding a Credit Card Statement

We were going to put together an article that explains everything you need to know about a credit card statement. However, in the process of researching we found their already to be an excellent article in this area!

Check out the link to this article by thebalance.com on understanding credit card statements! https://www.thebalance.com/how-to-understand-your-credit-card-billing-statement-960246

The only important item the article from thebalance.com leaves out is the concept of the “grace period”. The grace period is the time between the end of your credit card’s billing cycle and the due date for that billing cycle. This is typically about 21 days.  As long as you pay off your card’s balance by the due date then you will not experience any finance/interest charges. If you do not pay off your balance in full by the due date then you will immediately be charged finance/interest charges. These charges will continue until you have paid your balance of in full. The interest rates are steep on credit cards. Sometimes almost 30% so make sure and pay that balance off completely if at all possible!

Make sure that before you apply for a credit card it includes a grace period for purchases! Be aware that even if a credit card includes a grace period for purchases there still might not be a grace period for cash advances and balance transfers.

As always remember the rule of thumb for using credit cards! Before using a credit card make sure you have 1) a written budget, 2) you are tracking your expenses to ensure your budget is being implemented and is realistic and 3) Spend multiple months getting comfortable with steps 1 and 2 before getting a credit card.

If you would like to read more on credit cards check out these two recent articles we recently posted “Don’t Trust The Card or Yourself Without a Plan” and “The Process for Getting a Credit Card”

Understanding Credit Reports

Understanding Credit Reports

Credit Report: This is a report that combines all the information reported by businesses and organizations about an individual’s credit activities and current credit situations. The information is a combination of the different credit, loan and payment activities and is compiled into a report. There are three credit bureaus that compile these reports. Not all businesses report to every bureau which causes the reports to sometimes be different.

According to Annualcreditreport.com a credit report may include:

  • A list of businesses that have given you credit or loans
  • The total amount for each loan or credit limit for each credit card
  • How often you paid your credit or loans on time, and the amount you paid
  • Any missed or late payments as well as bad debts
  • A list of businesses that have obtained your credit report within a certain time period
  • Your current and former names, address(es), birthdate, social security number, phone number and/or employers
  • Any bankruptcies or other public record information

The Fair Credit Reporting Act requires that each credit bureau give consumers one free credit report a year. The three credit bureaus are Experian, Equifax, and TransUnion. The credit bureaus provide information to credit score companies such as FICO so that credit scores can be determined.

 The Consumer Financial Protection Bureau and the Federal Trade Commission both provide excellent additional resources on credit reports. The Federal Trade Commission has resources available to aid in reporting items that are on an individual’s credit report in error.

Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-report-en-309/

Federal Trade Commission: https://www.consumer.ftc.gov/topics/credit-and-loans?sort=subject

 

Understanding Your Credit Score

Credit Score defined:  A number that helps lenders determine creditworthiness of a borrower.

Background on Credit Scores: There have been multiple algorithms developed that determine an individual’s credit score. The most common score used by lenders to determine creditworthiness and interest rates is the FICO Score or more appropriately a version of the FICO score (there are multiple FICO scores). The FICO Score was developed by the Fair Isaac Corporation in 1989.  MyFico.com makes the claim that a FICO score is used in 90% of lending decisions.

The second most commonly used score is the Vantage Score. Credit Karma, a reputable credit resource website that uses the Vantage Score, states that over 2000 lenders use the Vantage Score to determine credit worthiness. Most of the online free credit scores come from the Vantage Score formula. While for the most part this score is educational (in that most lenders use the FICO Score) it is still accurate and close to the FICO Score. The information gained from the Vantage Score most of the time will provide the information needed to improve an individual’s score.

How the FICO Score is Determined

The primary FICO score is on a scale of 300 to 850. It is has been determined that a score of 580 or lower is “poor score”, 580-669 is a “fair score”, 670-739 is a “good score”, 740-799 is a “very good score” and 800+ is an “exceptional score”.

 

The Fico Score is determined by 5 factors. The factors and percentage weight of each factor is as follows: 30% Amounts Owed, 35% Payment History, 10% New Credit, 15% Length of Credit History, 10% Credit Mix. The three credit bureaus Experian, Equifax, and Transunion provide the information that FICO uses in each factor to compute the score.

30% Amounts Owed:

This refers to the amount of credit an individual has used compared to how much available credit that they could use. Using credit each month for purchases will not necessarily a make a credit score go down in fact utilizing credit each month can potentially improve the score whereas not using any credit will not cause the score to be improved.

The closer that the amount of credit used gets to the amount of credit available the more likely that a score can go down. This is because it indicates that individual could have a high risk of over extending themselves and unable to pay back the borrowed amounts when they are due.

Fico scores pay attention to the amounts owed on different forms of credit and treat them differently.

Keys to Success: Pay off credit cards fully each month (if you have only a small amount of available credit it may benefit you to pay off your card balance more frequently than to just once during a billing period). Pay installment loan payments on time with the appropriate amount each month.

35% Payment History:

This is the heaviest weighted factor in computing an individual’s credit score. In general this factor is looking to see if an individual has made their credit payments on time. According to myfico.com if someone misses one or two payments but has a good history it most likely won’t hurt their credit score much at all. However, missing many payments can have a strong negative impact on one’s score.

All forms of credit accounts are considered in this factor. Fico also considers public records and collection items. Myfico.com states that negative factors include bankruptcies, lawsuits and wage attachments. Myfico continues with the details of late payments and collection items are considered such as how late they were, how much was owed, how recently they occurred, how many there are.

Keys to Success: Create a budget plan that ensures you are able to pay credit cards in full each month, afford monthly installment plans, and includes an emergency fund so that unexpected bills such as an Emergency room visit or replacing a washer doesn’t cause you to a bill sent to collections.

10% New Credit:

This factor focuses primarily on two items. The first is the age of an individuals and how much credit accounts have been opened in recent history. Adding a new credit card account has the effect of lowering the age of an individual’s credit which can potentially slightly lower their credit score. Likewise if an individual opens multiple accounts in a short span of time it can have a negative impact on a credit score because of the possibility of that individual being a higher risk – especially in instances when that individual does not have a long credit history.

The second item is inquiries. The FICO score only considers inquiries in the last 12 months even though most inquiries will stay on an individual’s credit report for 2 years.  With the fico score inquiries have a small if any impact. The score allows for individual’s to interest rate shop without being penalized by the inquiries.

Keys to success: Avoid opening numerous accounts rapidly. Only open a new credit account when needed.

15% Length of Credit History:

This factor improves as length of time an individual has credit. It is possible to a high FICO score without having a great score in this factor.

Myfico.com describes three items that are taken into account in this factor: “1) How long your credit accounts have been open, including the age of your oldest account, the age of your newest account, and average age of all your accounts. 2) How long specific credit accounts have been open. 3)How long it has been since the account has been used.”

Key to success: If you don’t have a credit score open a secured credit card, or find someone to cosign with you. Be slow to cancel a card that has been open for a long time even if it has been a source of debt. It is okay to not use it anymore, but it may not be wise to close it you are looking to building your score.

10% Credit Mix:

This factor considers the different forms of credit accounts that an individual has opened. This factor does not play a significant role in determine the FICO credit score. It is important to not go out and open a credit account unless it is actually needed. This factor considers whether an individual has experience in paying back different forms of credit accounts on time such as credit cards or installment loans.

Key to Success: Manage the accounts that you do have responsibly. If you have no credit accounts as mentioned above start with a secure credit card to begin to build credit.

Limits of the FICO Credit Score:

It is important to note that the information above is to be used as general guidelines. Every individual’s FICO Score calculation will be slightly different based of the individual’s experience with credit utilization and the fact that every individual has a unique credit history. Secondly, FICO has made multiple credit scores. Different lenders use different scores for different forms of credit. For example FICO has created a formula for a fico score specifically for mortgage lending that mortgage lenders tend to use. The same could be said of credit card lenders and car loan lenders.

How to Access my FICO Score?

It is extremely difficult to access a FICO score for free without taking a credit card with a company that offers a free score as benefit. Discover happens to be the only company we have discovered at this point that seems to offer one FICO score for free based off the Experian Credit Report. You can also access the Vantage Scores based of Equifax and Transunion credit reports by creating a free account with creditkarma.com. The Vantage Scores provide by Credit Karma and the FICO Score from Discover will provide valuable insight, and will help you improve your score without paying for access to other FICO scores.

To learn more about your credit score through reliable online resources we suggest visiting www.myfico.com, creditkarma.com, and yourvantagescore.com.

 

The Process for Getting a Credit Card

Step 1: Consider a few questions before applying for a credit card. If your answer is “no” to any of the following questions it might be in your best interest reconsider applying for a credit card until the answers are yes.

  • Do you have a written budget and a method (spreadsheet, budgeting app, pen & paper) to track your expenses monthly see if they line up with your budget?
  • Have you been using a written budget and tracking your expenses for at least 3 months?
  • Are you aware of the impact credit card interest rates can have on your financial reality if you do not pay the card balance off fully each month?

Step 2:  Determine what kind of card you would like to apply for. Cards have different benefits some of which are: sign up bonuses, cash back cards, hotel rewards, airline miles, rewards cards, balance transfer, student, zero APR, no annual fee, a retail card, etc. Typically cards offer more than one of the benefits listed. You can go to places like bankrate.com, creditcard.com, and creditkarma.com (the websites do make money off marketing the cards if someone applies for the card through their website). Make sure that you look to see what annual fees may be associated with the card you decide on.

Note: Make sure that before you apply for a credit card it includes a grace period for purchases! Be aware that even if a credit card includes a grace period for purchases there still might not be a grace period for cash advances and balance transfers.

The grace period is the time between the end of your credit card’s billing cycle and the due date for that billing cycle. This is typically about 21 days.  As long as you pay off your card’s balance by the due date then you will not experience any finance/interest charges. If you do not pay off your balance in full by the due date then you will immediately be charged finance/interest charges. These charges will continue until you have paid your balance of in full. The interest rates are steep on credit cards. Sometimes almost 30% so make sure and pay that balance off completely if at all possible!

Step 3:  Determine your credit score. An easy way to get your credit score is to create a free account with creditkarma.com. Credit Karma offers scores for two of the three credit bureaus and it is free. When perusing through different cards, usually in the details section for the card it will show a credit score range applicants typically have when they are approved for the card.

Step 4: Apply for a card. Nowadays this is possible through an online application- this is the easy way. Applying at a bank or a retail location or sending off an application is still an option. Make sure you answer the questions on the application asked accurately.

Step 5: This step happens behind the scenes. The lender will complete an investigation into your credit history to determine your creditworthiness. If applying online, often this takes just a matter of seconds. The lender will obtain your credit report from one of the credit bureaus. The lender may get your report from one of the bureaus or all three of the bureaus. The lender will also get your credit score to help make an informed decision on whether or not to grant you a card.

Step 6: The lender will decide to accept or reject your application. If your application is accepted then the lender will determine the exact terms of your credit agreement. The higher your credit score the lower the interest rates will be on the card and the lower your credit score the higher the interest rates. Under the Fair Credit Report Act if your credit application is rejected you are allowed to request a free credit report. You must request it within 60 days of being notified of the application rejection.

Step 7: Make sure to include your credit card in your budget! It is easy to forget how much is spent on the card when not carefully including it in your budget and making sure that money is accounted for to pay off the balance each month. Read more here on budgeting with a credit card.

Is A Larger Paycheck The Solution?

 


Do you ever feel like your financial stress and ability to manage debt depends all on the size of your paycheck? When it feels like there is more money going out than coming in, it is easy to become frustrated and feel that the issue can solely be blamed on not making enough money. I am not going to deny that having a larger salary can make a huge difference at times. However, I will argue that an extrinsic issue like this may not be the first step in a solution to your money woes.

At the Center for Financial Success, we have found that the difficulty in managing money lies not in the size of the paycheck, but in one’s resolve to learn how to effectively manage their money and stick with it. People are quick to assume that a larger paycheck will solve all of their financial problems – keep in mind that even millionaires declare bankruptcy.

In our experience at the Center working with students and community members to create long-term practical money management solutions it starts with helping the client learn how to live within their means. What does this look like? It looks like avoiding the use of credit on consumer items that you need every month if can’t pay it off at the end of the month. It looks like breaking the habit of living from paycheck to paycheck and learning how to not spend every dollar you make. It involves incrementally cutting back to the point where there is actually a small amount being saved every month. This eventually leads to addressing debt, getting a month ahead, and the beginning of making progress on your financial goals.

The point of this article is not to dissuade you from pursuing a higher paying job. However, there are certain financial habits that must be formed regardless of income level. Regardless if you are making $32,000 or $1.5 million a year, you will fall into the same problems of being trapped in overspending and unnecessary financial stress without healthy spending habits.

Once you are able to develop basic financial management skills instead of focusing only on the need for more money, it can be a little easier to avoid the financial stress caused from overspending. After you establish financial goals and develop a maintainable spending plan, you will find these principles to be effective regardless of how much you earn. You will be getting “more bang for your buck” – a habit that will pay huge dividends especially as your paycheck increases!

Unfortunately, a one stop solution that magically enables someone to pick up the basics of personal financial management does not exist. Sound financial management skills can be compared to a muscle –  it must be exercised before it can be strengthened. Just as a weight room is a great resource to strengthen your muscles, there are great resources out there to assist you in growing your personal financial management skills. We offer resources for these skills through our blog, peer financial coaching services, and presentations. When you visit our website, you can find links to external sources we find helpful.

If you enjoyed this content and would like to enhance your personal financial management skills, take a few seconds to fill out our new client form so you can be on your way to a life with less stress with Peer Financial Coaching Services.