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A guardrail is a rail that prevents people from falling off or being hit by something. Its primary purpose is to reduce the risk of a serious accident.
When my children were younger, I used to take them bowling. Without fail they would throw gutter balls. A gutter ball is a non-scoring ball that enters the gutter before reaching the pins. When you throw a gutter ball, the ball falls off-course before striking a pin. In order to prevent them from throwing gutter balls, they’d use bumpers. The bumpers are rails placed on both sides of the bowling lanes. It prevents your ball from falling into the gutter, thus increasing your chances of hitting the pins. Using bumpers, even if the ball hits a guardrail, it will put the ball back on course, allowing them to hit one or more of the targeted pins.
As adults, the pins in the game of bowling represent financial goals. The decisions we make in regard to spending our money represents the ball being rolled. By implementing the financial guardrails, it will help us hit as many of our financial goals as possible.
Below are some financial guardrails to prevent your money, your goals, and your dreams from falling into the gutter:
Live below your means with a purpose: The cost of daily life is expensive. It feels like it costs $100 just to go outside. Living below your means requires discipline, sacrifice, denying yourself, and delayed gratification. None of this is fun. It’s also counter-culture. We live in a culture that spends everything they earn then borrow to the max to spend more. Your purpose to save for your financial goals must be more important than your desire to spend willy nilly.
Free yourself first: The margin between your income and your expenses is your most powerful wealth-building tool. You cannot have your entire paycheck tied up making payments on lifestyle, expenses and debt and expect to get ahead financially. No margin between your income and expenses means no breathing room. With no margin you’ll suffocate financially. You cannot pay yourself first if you don’t first create some wiggle room in your budget. I recommend that you have a minimum of 10 percent of your gross monthly income FREE to assist you in accomplishing your financial goals. The more margin you have, the faster you can accomplish your goals. Imagine having a 50 percent margin or one whole paycheck to yourself. Life would be grand, wouldn’t it?
Use credit when only absolutely necessary! Too often we justify borrowing without thought and sound reasoning. People are financing everything from gasoline, pets, sweaters, groceries, vacations, and of course, college, cars, and houses. Practically everything you purchase today, you’re presented with a flexible payment option which is credit, loans, debt, regardless of interest rate. They equate to monthly payments that wreak havoc on your budget, income, and the margin between your income and expenses you need to be free to get ahead financially. You have to start thinking in terms of: How do I pay 100 percent cash? How do I minimize the loan needed? How do I shorten the time required to repay the debt in full?
Expand your means: If you want to have more, spend more, save more without changing your lifestyle, you have to earn more. What’s key here is as your income increases, don’t allow your lifestyle, expenses, and debt to increase lockstep with your income. You want to expand both your means and your margin. Increasing your means comes in many forms including job promotion, overtime, side hustle, side business, new business, passive income, royalty income, and residual income. Income security, not job security, is the new financial stability. Seek ways to create multiple streams of income. Doing so not only increases your income, but expands your income sources.
College: You can send a kid to college, but you can’t make him or her think. It’s time to put your thinking on Joe College. The cost of higher education seems to get higher and higher every year. But starting salaries after you graduate from college remain stagnant. You can’t control the cost of college, but you can control how much debt you go into in your effort to obtain your degree. Debt-free degree is the optimal way to go by way of scholarships, grants, work-study programs, employer tuition reimbursement programs, etc. At all costs, you want to avoid or minimize student loan debt. I’m reminded of a meme that pictured this 100-year-old man celebrating because he’s accomplished a milestone in his life. He wasn’t celebrating his 100th birthday. He was celebrating making his last student loan payment. If you must take out student loans, do not allow the total amount of student loan debt accumulated during your college years to exceed your anticipated first year’s salary after graduation. How do you know that number? Do some research, aspiring Mr. or Ms. College Student, before you sign the loan.
Cars: Payment on all automobiles should never exceed more than 15 percent of net pay. Total value of all cars owned should never exceed 50 percent of annual salary. Never take on a car payment with payment terms longer than 3 years. Do not purchase a car by way of car leases. Car Leases = Forever Payments. If you’re not wise when it comes to purchasing cars, SUVs, trucks, boats, or any other vehicle with a motor, you’ll learn the hard way that automobiles can “drive” you broke.
Credit cards: As my mother used to tell me, “Don’t play with plastic! Plastic can smother you!” You’d think most people think that paying double-digit interest rates is hazardous to your wealth. Apparently not. Americans have a love affair with credit cards. Everyone you meet will say, I pay my balance off in full every month. Vision me side-eyeing as you read my next words. Sure, you do! Let’s assume you do pay your balance off in full every month. Here’s a rhetorical question; why carry a balance every month that needs to be paid? In an effort to encourage you not to get buried in credit card debt, here are some guardrails. Stay away from department store credit cards. The interest rate on those cards are in the mid-20 percent range. Never carry more than 2 credit cards with a $2,000 credit limit each. Never allow the credit card balance to be more than 30 percent of the limit. Therefore, you’ll never have a balance higher than $600 on either card at any given time.
Housing: Payment on rent or mortgage should never exceed more than 30 percent of net pay. In this case, particularly if you’re paying rent, less is more. Less than 30 percent of your take-home pay going to housing equals more money in your pocket to spend on other goals and responsibilities. When it comes to purchasing a home, the purchase price should not exceed 3x your annual income. You want to consider 15-year fixed rate mortgages—never take on a term greater than 20 years. Thirty-year terms are the most commonly held mortgage, hence the meaning of the origin of the word mortgage; “Death Pledge.”
(Damon Carr, Money Coach can be reached We 412-216-1013 or visit his website at www.damonmoneycoach.com)
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