Creating Your Own (Cash-Based) Bailout Plan

Want to get your finances back on track? Go back to cash. Here are five tips to help you get started. If there’s an upside to today’s uncertain economic climate, it’s the fact that the recession has forced Americans to take a long, hard look at their spending and saving habits. We’re getting savvier about the perils of debt and overspending. We’re looking for innovative ways to save money and stretch our budgets. After years of impulsive living, we’re trying to get back to living within our means. On the surface, the idea of living within your means sounds pretty simple. And, on the surface, it is: Don’t spend more money than you make. End of story. Simple, right? Well . . . sort of. Credit cards have given us the ability to spend way more than we actually bring home. We’ve amassed piles of stuff we don’t need, and we’ve racked up hefty balances – and ruined our credit ratings – in the process. Dismal stuff, to be sure. But the good news is, you can get back to keeping the money you make, instead of feeding the coffers of Mr. MasterCard and Mrs. Visa. Here are five things you can do today to kick-start your very own bailout plan. Five Steps to a Cash-Only Lifestyle Just a few generations ago, people used cash – and not much else. They bought what they could afford, and they saved up for the things that they couldn’t afford. Somehow, they managed just fine. And so can you. Step1. Make the commitment. This sounds silly, but the first step to living on cash is to make a firm decision. It shouldn’t be an impulse. Think about it, consider what sorts of sacrifices you’ll have to make. And don’t leave the family out of the decision: Going cash-only can mean some significant lifestyle changes – especially if you’ve been living a bit beyond your means. Talk to your spouse and make sure that you’re both ready. Step 2: Hide your credit cards. I’m serious. Lock them away in your filing cabinet or safe, or put them in the back of your sock drawer or in an ice block in your freezer. Put ‘em anywhere you want – except your wallet. It’s a lot easier to say no to a purchase that involves leaving the store, driving home, fishing your plastic out of the shoebox in the back of your closet, getting back in the car, and driving back to the store. I guarantee that, 99 percent of the time, that splurge won’t seem worth the extra work. And one more thing: don’t cancel your credit cards. Part of your credit score is based (among many other things) on the amount of credit that’s available to you. In some cases, closing your account – and thereby lowering your available credit line – can hurt your credit score instead of helping it. As long as you’re not using your cards to rack up more debt, they won’t hurt you. Step 3: Set a budget. If it’s been a while since you’ve lived on a budget, here’s a quick-and-easy guide to getting started: 1. Add up your total monthly income – your pay and your spouse’s pay, plus any income from rental properties, side businesses, investments, etc. 2. Add up your monthly fixed expenses – rent or mortgage payments, car payments, bills, etc. 3. Deduct that amount from your monthly income. 4. Add up your variable expenses – things like groceries, gas, and entertainment. Remember to leave enough room for emergencies – flat tires, vet bills, and broken plumbing. 5. Deduct that amount from your monthly income. 6. Divide the leftover cash, 60/40. 7. Put the larger chunk into savings, and leave the rest of it for “fun money.” That’s it! You may have to play with the numbers a little (and find ways to cut back on some of your variable expenses). But if you stick to your budget, you won’t have any reason to use your credit cards. Step 4: Start saving. Seriously. I can’t stress this enough. Your budget (see Step 3) should include a pre-determined amount of money that you put into your savings account every month, without fail. To make saving even easier, most banks offer some sort of automatic monthly transfer – you just tell the bank the date and the amount, and the money will move on its own. Chances are, you won’ t notice it’s gone. Step 5: Go without. This may be a strange concept for folks who are used to the “buy now, pay later” mindset. But learning to go without – or simply make do with what you have – will help you keep your finances in check. Sure, it would be nice to have an ultra-mode kitchen, decked out in all the latest stainless-steel appliances and genuine granite countertops. But if your white, circa-1995 refrigerator is humming away (and keeping things cold) like new, hang onto it. Ditto for your countertops, your dishwasher, and your stove. But if you absolutely must have that combinatio DVD player/flat scree TV/refrigerator/gaming system, remember - no more credit card debt - save up for it first and pay cash. Here’s to the new (cash-only) you!