A long time ago and in a land far far away… well actually it was 1980 and my wife and I, as newlyweds, just moved to Alaska—this is a true story.

I was working for a financially secure and slightly older gentleman who, one day as I was passing by his office, called me in and asked me an interesting question. “What’s the difference between a rich man and a poor man?”

Being young and just starting my career, I thought the answer was rather obvious and so I quipped, “one has a lot of money and the other one doesn’t.” It doesn’t take a rocket scientist to figure that one out.

However, his response back, was somewhat surprising:

The Lesson of the $100 Bill

He stated that the difference between a rich man and a poor man was a $100 bill. He asked me if I had one.

“No,” I answered. He then asked, “how many people out on the street walking around right now do you think have a $100 bill in their wallet, pocket or purse.” I responded, “probably not very many.” He said, “my point exactly.”

He then took his wallet out of his pocket and pulled from it a $100 bill and handed it to me and said, “put this in your wallet, keep it there and know that you have more money in your wallet than most people do, and that if a small emergency comes up, you’ll be okay.”

So I gratefully put the bill into my wallet and left. You know, I actually did feel rather rich, and knowing that a $100 bill could cover about any minor emergency that could come up, like running out of gas or an unexpected business lunch with co-workers or whatever it might be; I really was covered. Back then my wife and I didn’t have a credit card or debit card—just cash and a checking account, and for some reason my wife said I wasn’t allowed to carry the checkbook.

Two weeks had passed, and I was again passing by his office, he called me in and asked if I still had the $100 bill he’d giving me. I lowered my head and said, “the other day I was low on gas and didn’t have any money so I used it to fill the car up.

Once I had broken the bill the remainder went rather quickly.” He chuckled and pulled out his wallet again and handed me another $100 bill and said, “see if you can make this one last longer this time.”

Don’t miss another post!  Get Redeeming Riches delivered straight to your inbox!

My first thought was, this isn’t a bad deal we have going here, but he quickly said that this was the last one he was going to give me. Well, again I was back on top of the world feeling rich. This time I kept the bill for almost 6 months before I needed to use it, once again, once it was broken it went fast.

Let’s now fast forward to 2010 where a large percentage of the population of the U.S. carries either a credit card, debit card or some other form of a charge card. Who carries cash anymore?

I went into a Subway the other day and ordered their six-inch, special-of-the-day sandwich, which was only $2.99, and I had to use my debit card to pay because I didn’t even have $3 on me. Is it any wonder that so many people are having financial struggles? Not only because of the current economy but also because of what seems to be an endless supply of money that we really don’t have—credit. This idea of credit, can at some point, come back to bite us hard if we don’t manage it correctly. Here are some interesting credit card statistics.

Credit Card Issuer Statistics

Total cards in circulation in U.S.

• Visa credit: 309 million, as of June 30, 2009 (Source: Visa.com)
• Visa debit: 352 million, as of June 30, 2009 (Source: Visa.com)
• MasterCard credit: 211 million, as of September 30, 2009 (Source: MasterCard.com)
• MasterCard debit: 130 million, as of September 30, 2009 (Source: MasterCard.com)
• American Express credit: 54 million, as of December 31, 2008 (Source: AmericanExpress.com)
• Discover credit: 57.1 million, as of December 31, 2008 (Source: Discover.com)

Americans currently owe $917 billion on revolving credit lines and $69 billion of it is past due, according to the latest Federal Reserve statistics. (Source: www.consumerreports.org, September 2009)

Spending Habits and Controlling Your Money

What’s the biggest difference between now and 30 years ago regarding our spending habits? Yes, 30 years ago many people used credit cards, but many people also carried cash in their wallets. A credit card was only supposed to be used for emergencies or for purchasing large dollar items, limiting the need to carry around large amounts of cash, knowing however, that when the bill came due, it was to be paid off in full, monthly.

So when your cash ran out, buying something else wasn’t an option, you just made do without. People back then understood how easy it would be to get into trouble financially using credit cards excessively. People also know this today; however the idea of doing without, if you don’t have the cash to pay for it immediately, or saving towards purchasing it at a later date ,when you can pay for it in full, has been lost or at least conveniently forgotten.

This idea is still sound financial advice today. When the money is gone, make due with what you have and go without until you have the money to purchase it outright.

How to Stay Away From Financial Trouble

An excellent way to keep yourself from getting into financial trouble is to create a budget and then track your expenses daily.

There are several ways to do this. Create a budget on paper and then jot down, in a note pad, your daily expenses. This is inexpensive but somewhat time consuming.

Another, more efficient way is personal finance software; either a desktop application or an online service. Read “Online Finance Software vs. Desktop Finance Software” to get a better understanding of the pros and cons of both of them. Online personal finance software allows you to easily create a budget and then automatically download your daily transactions.

When your purchases are in excess or getting close to exceeding your budget, you’ll receive an email or text alert warning you to rein in your spending. This will help you stay in control of your money, instead of it controlling you.

Want to feel great each day even if you do have financial stress; since fewer people carry cash these days compared to 30 years ago, tuck a $100 bill into the bottom of your wallet or purse and know that you have more money on you, than most people you’ll meet and pass each day.

Also, see if you can make your $100 bill last longer than 2 weeks or 6 months. It truly is a great feeling.

This has been a guest post from Brent Ropelato from PersonalFinanceManagementSoftware.com, which helps you eliminate debt, track expenses, manage your money, plan for retirement and more.

Tom and Sue had some great financial goals in mind.  They wanted to start saving for the girls college education, but weren’t sure what kind of account to use. 

“There’s so many choices, I’d like to do some more research before I sign up for something.  I want to make sure we’re using the right account.  After all, this is for my baby girls.” Tom told Sue affectionately. 

They also wanted to start maxing out Tom’s 401k at work, but haven’t gotten around to it.

“Did you increase your contributions to your 401k yet Tom?”   “No, I wanted to wait to see what kind of expenses we had coming up with birthdays and our anniversary right around the corner.  I wanted to take you out to that new Italian place that just opened up to celebrate” Tom responded.   “That place is expensive isn’t it?”  “Yeah, but it’s our anniversary, it’s OK to spend a little on a special day like that”. 

They set a goal to establish Roth IRAs this year too, but haven’t been able to find the money to fund it. 

“Sue, did you run the numbers on the budget yet to determine if we can get those Roths going?”  asked Tom.  “No, I haven’t had time.  I’ve been so busy with the girls and plus if we are going to take that cruise this year I just don’t think we’ll have any extra money.  I guess we could just put the cruise on the credit card as long as we pay it back right away.”

“How much do we have saved for the cruise?” asked Tom.  “Right now we have about $100 that we just put into savings” Sue responded.  “Where did all the rest of it go?” asked Tom with an agitated tone.

“Are you kidding me?  You’re looking right at what happened to it!” Sue said sharply.  Tom gazed at his brand new 50 inch Plasma TV.  “The ‘12 months same as cash deal’ was coming due and I didn’t want to pay the interest so I took the money from our savings account to pay it off.”   Tom felt a twinge of guilt, “but that HD sure is sweet”, he thought.

“We really got to start tightening our belts and get our finances in order” Tom said.  “I know, but every time we try it seems like something else comes up” Sue responded. 

There’s Always Something

Have you ever felt that way?  Every time you start getting your finances in order something else comes up?  This is true for all of us.  There is always something else to take away our time, energy and money.  The difference between those who actually reach their goals and those who don’t is discipline. 

Let’s face it, working at our finances is usually hard work and often not that fun.  Taking a realistic look at your expenses, developing a budget and researching where you should be saving your money requires effort.  For some of us it requires a lot of effort!  It’s often tempting to allow ourselves to be distracted by the things we’d rather be doing than the things we know we should be doing. 

Least Resistance

This is known as the path of least resistance.  Wikipedia describes it this way: “The physical or metaphorical pathway that provides the least resistance to forward motion by a given object or entity, among a set of alternative paths”  We could say it’s why certain objects or people choose the paths they do. 

Water takes the easiest path downhill as it’s pulled by gravity; storms follow zones of low barometric pressure that offer less opposition; and humans often take the easy way out than rather than fight through difficult circumstances, temptations or trials to accomplish goals or tasks. 

It’s ironic from a human standpoint though isn’t it?  Think about the times you felt most proud of yourself.  Isn’t it usually when you disciplined yourself to do something difficult and came through on the other end having accomplished it?  We get the most satisfaction from doing the hard things, but often times we don’t do the hard things because, well, they’re hard.

Avoiding That Path

So how do we avoid taking the easy way out and truly change our habits so we can accomplish the tough financial goals we’d like to get done?  Here are some simple strategies to get you thinking.

Work As a Team

If you are married, it is extremely important that  both of your are on the same page when it comes to your money.  Husbands, as the servant leader, you need to step up and cast the vision and provide the direction for where you want your family to go in terms of your finances.

Start With a Small Step

Radically changing your money habits won’t happen overnight, but begins by taking some “baby steps” as Dave Ramsey often says.  Instead of going out for lunch five days a week, pack a lunch for one day and save that money. 

Do Hard Things First

This is easier said than done, but rather than saying you’ll start that budget next month, start it today.  It’s easy to procrastinate on the things you don’t want to do.  Giving and saving are things you have to be intentional about, otherwise those are the things that are easy to push back until you “have the money”

Stop Making Excuses

Let’s be honest, most of us can make some sacrifices and save a little more, pay down a little more debt, be more generous and get our finances in order, but we just don’t –  for a million different reasons.  We need to recognize the excuses and work at killing them!

Review Direction Regularly

Charting the course to financial freedom is never a straight path.  It requires regular review and adjustments.  Oftentimes you’ll find yourself cruising along with some new goals you’ve established only to find those bad habits creeping back in.

What About You?

Avoiding the path of least resistance takes hard work and a motivated effort.  With some discipline, you can get on track towards achieving your financial goals.  You’ll feel so much better about yourself and your situation when you stop taking this path, lay down the excuses and start doing the hard things. 

Have you taken any difficult steps to get off the path of least resistance?  What were some of the sarifices you’ve made to help get you started in the right direction?  What were some of the biggest excuses you made (or are making) that kept you from getting ahead financially?

Financial difficulties like recessions, job layoffs or reduced salaries have a way of revealing how important it is to build a financial safety net. 

Having funds available for emergencies helps weather the inevitable storms of life and can get you through some difficult circumstances without incurring credit card debt.  

Here are some things to consider when establishing your emergency fund.

How much is enough?

Generally speaking, most financial advisors will recommend you have at least three to six months worth of expenses in a cash reserve. 

Depending on your situation you may want more.  For example, if you have a commission-only job and your income fluctuates or you have a seasonal job where your income is low for a few months out of the year it might be wise for you to establish a larger net.

How do I begin establishing a cash reserve? 

If you find your reserves are a little anemic, consider these steps to start the process:

1. Take inventory of your monthly expenses.  Multiply this number by your desired reserve (i.e. 3 months, 6 months etc)
2. Make a budget so you can begin to “trim the fat”.  Cutting back on unnecessary expenses will free up extra cash that can be saved into your reserve.
3. Get creative on making additional money.  Sell your old “junk” on ebay, or have a garage sale.  Use these proceeds to start building your emergency fund.  My wife and I have made some extra money these last few years by selling our old cell phones, clothes and more on ebay.
4. Save aggressively into a savings account.  There are many great accounts out there.  Bob at ChristianPF has a post on the 10 reasons why he loves ING.  If you like using local banks, I suggest calling around to find out who is offering the highest interest.  Otherwise if you are comfortable with online banking then check out bankrate.com.  They allow you to search the highest yields at banks both locally and nationally.
5. Don’t dip into your reserve unless absolutely necessary.  One of the biggest mistakes people make in setting up cash reserves is a false sense of now “having money to spend”.  Stay focused on the task at hand.  After you’ve built up your cash reserve feel free to reward yourself.  Just remember this money is for a safety net.

I built up my cash reserves – now what?

Once you’ve reached your goal for your cash reserve it’s time to get strategic about earning the most interest. 

I usually recommend a Three Tier Cash Reserve System to help keep the funds liquid and yet earn a higher rate of return. 

A three tier cash reserve basically utilizes a checking account, a money market and a short term CD Ladder. 

Tier 1

Tier 1 consists of your checking account.  It acts as your revolving door, meaning  funds come in and go out on a regular basis.  

Since most checking accounts pay nothing, you want to keep no more than one months worth of expenses here. 

Tier 2

A money market fund is designed to provide a safe place to invest short term liquid assets.  They typically generate a higher interest rate than a savings account. 

If you are using a three month reserve you’ll want to keep about a months worth of expenses here and about two to three months worth if using a six month reserve.

Tier 3

A short term CD Ladder is essentially a 12-month CD bought each quarter or four total.  Divide the remaining amount of your reserve by four and buy a 12-month CD.  In three months do the same thing and so on. 

If you fast forward one year from now, you will have a CD coming due every three months in case of a major emergency and need to access the funds.

Theses ladders can be structured in various ways.  For example, you could buy a 3, 6, 9, & 12-month CD all at once if your bank offers those terms.  You could also buy 12, 24, & 36-month CDs to ladder your funds.  I am a big fan of the 12-month CDs for two reasons:

1. They typically offer higher interest than the shorter term CDs
2. You don’t have to lock up your money for a longer time period.  Since this is a saftey net, you don’t want to be in a position where you are cashing out a longer-term CD early and incurring a penalty or forgoing interest.

Set Targets and Avoid Discouragment

Don’t be discouraged if you are not able to get your cash reserve set up like this yet.  The key is to stay focused on saving your money so that you can get your emergency fund where it needs to be. 

Set a target for yourself of when you’d like to achieve this goal and also set little goals along the way (i.e. saving your first $1,000, getting Tier 2 set up etc.). 

Be sure to reward yourself along the way when your goals are met so that you can stay motivated and positive. 

Saving for Emergencies or Paying Down Debt

Inevitably a question will come up from time to time about whether it is smarter to save into an emergency fund or pay down credit card debt? 

I like Dave Ramsey’s “Baby Steps” idea when faced with a question like this.  What he usually recommends is that you save $1,000 into an emergency fund first and then start paying down your debt. 

You can worry about building up your Three-Tier Cash Reserve once you have your debt wiped out.

Resources To Help

• Bankrate.com - compare interest rates on savings, money markets and CDs from banks across the nation.
• Dave Ramsey’s Baby Steps

 

Your debt may be costing you more than you realize especially if you are making these 5 mistakes.  Paying off your debt is a battle you can win by bypassing these blunders:

1. Not paying the bill in full each month

This is where it all begins.  You buy something you can’t afford and think to yourself, “I get paid in two weeks, I’ll just put it on the credit card and as soon as I get the bill I will pay it off” and then something else comes up.  Your brakes go out, your washer quits working  or you find some other trinket you want to buy and you put that on your credit card too.  At the end of the of the month you receive a hefty bill and only pay what you can and wind up leaving a balance on the card that accrues interest at insane amounts. Creating a budget will go a long way in helping to avoid this problem.

2. Only paying the minimum payment

If you are paying only minimum payments on your debt, your credit card companies love you and you should be getting Christmas cards from them each year.  Paying the minimum payment will basically ensure that it will take a lifetime to pay off your debt.  You must pay more than the minimum if you want to get anywhere with your bills.

3. Not paying attention to due dates

This is easy to do because we are busy people, but making a late payment even if it is only by a few days can rack up ridiculous charges that only compound your debt.  Those annoying charges can also have an impact on your credit report.  Being vigilant about paying your debt and paying it on time is key.

4. Not paying attention to the interest paid

If more people understood how much interest they are paying to their card companies each month in interest alone, perhaps they would make a greater effort in getting these debts paid off.  Matt Jabs at DebtFreeAdventure.com takes a revealing look at his own interest payments for the month and shows how interest destroys your ability to build wealth.

5. Not negotiating with the card companies

It puzzles me that more people don’t call their card companies to negotiate with them.  You can negotiate things like interest rates, late payment fees or even payment plans.  If nothing else, it doesn’t hurt to give them a call and find out what they can do for you.  Bob Lotich at ChristianPF.com tells about his experience in  negotiating with credit card companies. 

Getting out of debt isn’t easy, but don’t make it harder on yourself by making simple mistakes that can easily be avoided. 

Few things can make people’s skin crawl like the idea of creating a budget. If you are unsure where your money goes each month or wonder why you never seem to get ahead, a budget might be a good tool for you. The word itself conjurs up feelings of kissing your freedom and your fun goodbye, and some people even try to mask the feelings by calling it a spending plan.

Ironically, many people find budgeting a highly liberating experience. A budget, sorry – spending plan, can be a great tool to help control your money instead of your money controlling you. What many find after creating and sticking to it is that they have more money to spend on discretionary items and can have fun without the guilty feelings. I’d like to provide some simple and practical ideas on how to create a budget and tips on sticking to it.

Where Are You Now?

The best place to start in creating a spending plan is to find out where you are. When you Mapquest directions you always need a starting address. It’s the same idea with financial planning. Getting an idea of where you are is an eye-opening experience for many people. To me, the best way to figure out where you are is to do a 30-day diary of expenses. It takes a little more time up front, but I feel it reaps big rewards.

Write down every single dollar you spend in a month whether it’s coffee at the gas station or lunch at a local restaurant. After 30 days of doing this you will get a pretty good idea of what unnecessary expenses you might be able to cut out.

Next, list out the categories of each expense (i.e. gas, food, clothing etc.), jot down the amount in each category and determine if those numbers are realistic. For example, you may find that you spent $75 that month on lunches, but by making your own lunch once or twice a week you feel you can get that down to $50. Use that number for your plan and do this for each category.

Where Are You Going?

The next step is to figure out where you want to go financially. What I mean is consider what goals you want to plan for. You may have a goal to give more of your money to charity or to save for your child’s education or your own retirement. List out each goal so that you know what you’d like your money to do for you. This doesn’t mean you will be able to save for each goal, but listing them on paper is a powerful and motivating tool.

It’s important to remember that these items must come out first, otherwise you and I both know that if you wait to see how much is left over and then try to give or save it probably won’t happen.

How Do You Get There

Once you’ve determined where you are and where you want to go the next step is to put some numbers down. Write down all of your expenses and the alloted amounts or targeted numbers for discretionary items like going out to eat. One of the reasons budgeting becomes such drudgery for many people is that they don’t plan for fun things. Bob at ChristianPF.com has a good post about how budgeting should be like making cookies.

Michelle Jones, editor of BetterBudgeting.com, has personally reviewed and recommends several budgeting tools to help get you started. She says these budget tools “can be extremely useful and will help you stay on track year after year, but the most important thing is that you find something that works well for you and your family.”

Once you’ve outlined your alloted expenditures, factoring in your savings and giving the hard part is sticking to the plan. Review it often and make adjustments as necessary. Remember, the budget is meant as a tool for you to control your money so don’t let the budget control you. Be flexible when needed, factor in the fun things and persevere.

Staying On Track

Here are some general tips to staying on track:

• Make it a family affair.  When everyone is working together toward the same goal you are more likely to stay on track. 
• Check your progress regularly.  Ideally once a month you should sit down and review how you did and make any adjustments as necessary.  You may have budgeted $100 monthly for gas, but you find after a few months it isn’t realistic.  It’s OK.  Make your adjustments and determine where you might be able to cut back. 
• Make it a lifestyle.  You’ve heard people talk about this with food: “it’s not a diet it’s a lifestyle”.  The same can be said for budgeting.  Make it part of your life and with some discipline you will reap rewards. 
• Start at the right time.  Don’t start when you know it will be difficult (e.g, right before the holidays or before a major vacation that was already planned)
• Find a budgeting system that fits your needs (e.g., budgeting software)
• Build rewards into your budget (e.g., eat out every other week)
• Try to avoid using credit cards to pay for everyday expenses.  Using credit cards makes it more difficult to track your expenses.  After you get the hang of your budget and have been sticking to it, you may feel comfortable enough to start using them again, but remember to pay off your balances in full each month.  

According to creditcards.com, the average American household credit card debt is surveyed to be at $8,329. Even if you are not one of the average ones you probably know the devastating affects debt can have on you and your family.

If you are burdened by credit card debt and are serious about breaking free from the bondage that credit cards can put you under, then let me offer some practical steps to begin your journey.

1. Pray

Prayer is an essential component for any aspect of our lives. If you are in over your head in credit card debt, might I suggest humbling yourself and spending some quiet time alone with God to be honest with him about where you are at financially. He’s not going to be shocked by the news and He offers wisdom to those who ask for it (James 1:5).

2. Take Inventory

Gather each credit card statement and write down the name of the card, the balance, interest rate, minimum payment due and the amount you are currently paying toward that debt. I would also suggest you write down the toll free number of the card company as this will come in handy later.

Taking inventory also means you look carefully at each card companies offers (i.e. balance transfer rates, 0% offers etc.) This will be important in step four.

If you are married this should be done with your spouse. You would be amazed at how many couples I come across that do not know that the other one has credit card debt or are unaware at how bad the problem is. Typically one spouse is more of a spender than the other and so it can be quite a shock at first, but paying off debt is a team sport and must be fought together.

3. Stop Over-Spending

This sounds pretty basic, but if you are in credit card debt you have been spending more than you earn. You must be tenacious in reducing expenses and stopping your use of credit cards in order to fight this battle. Christian Personal Finance has a great post on where and how to cut expenses.

4. Negotiate With the Card Company

I am amazed at how often this is overlooked. Many companies are willing to work with you if you approach them and let them know that you are wanting to pay off your debt, especially in this economy, where many people are not paying their bills or even filing for bankruptcy.

I suggest calling your card company and be honest with them. I would ask for a manager right away or an account closing specialist so that you get straight to the decision maker that can help you. Let them know you want to pay down the debt and you’d like to know if they can reduce the interest rate for you. Find out if they have any special balance transfer rates and that you may be willing to consolidate some of the debt to them if they can give you a decent offer. Also let them know that you are willing to transfer their balance to another company if they cannot work with you. Here is a helpful post about negotiating with credit card companies.

5. Consolidate

If possible, take advantage of special balance transfers offers. This only works if you stop your over-spending. You don’t want to consolidate your debt and then rack up another couple thousand dollars on the card you just transferred. You don’t want to get into the habit of doing this either because it can have some negative impacts on your credit score, however, if you consolidate some of the debt to a much lower interest rate then more of your payment will go towards paying off the principal.

6. Snowball the Debt

Some people believe you should pay off your highest interst card first. I tend to disagree. I think snowballing your debt is more of a confidence builder and can start the momentum towards getting you out of debt. According to Dave Ramsey the best way to knock out debt is to get some quick wins under your belt.

” The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20% head knowledge and 80% behavior. You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction.”

The first step in snowballing your debt is to pay minimum payments on all your credit cards except the one with the lowest balance. You pay as much as you can on that amount until that debt is gone and then you take whatever that payment was and apply that towards the next smallest balance. Each time you pay off a debt, apply that payment to the next smallest card and before you know it you will have created some great momentum and will see the progression at a more rapid pace.

Final Thoughts

Getting out of credit card debt is not easy and it won’t happen over night. It will take discipline, sacrifice and patience, but the results will be worthwhile. Find some friends to keep you accountable and do your best to keep plugging away. You’ll be glad you did.