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Financial Stability & Success! Guest post by Daniel Clough

Joseph Clough

I'm really excited to have a guest post on my blog by Daniel, my elder brother. Daniel is the most determined person I know when it comes to forward thinking, focus, career enhancement and finacially reward.

I know you will enjoy it, so here it is.... Financial Stability & Success by Daniel Clough.

Right out of the gate I wanted to say a couple of things.

I am far from rich. However I’ve gone from being in a reasonable amount of debt to a position of debt free two years later and what most would consider to be a good financial position within seven years.

To do this there are really just a few solid principles you have to stay consistently focused on which I talk a bit about here. For the purposes of this blog post I am going to assume you’re either currently in debt or at least don’t have some assets and a significant amount of cash in the bank.

You have to want it.

One important point to make up front is that you have to WANT to be in a good position financially. And I mean like really want it – enough to make it a priority in your life and to change some of your current habits or choices. Most people will tell you of course they want to be in a great position financially yet most continue to make daily choices that move them further away from it.

Having no debt, some assets and a decent amount of cash in the bank is a life changer. It’s absolutely no different from a business that is making profit and has positive cash flow.

Firstly, you no longer worry about the unexpected costs that can sometimes come along in life. e.g. your car breaking down, a larger phone bill than you expected etc. They get handled with ease and without worry.

Secondly, you have far more freedom to make choices in your life e.g. career change, travel, starting new hobbies etc.  Quite often these opportunities come out of the blue and being able to spot them and take advantage of them quickly is essential. Having cash to hand allows you to do this.

The more connected you are with the vision of being in a good position financially, the more likely you are to stay focused and make the decisions or choices necessary to get there. It’s worth just taking a few moments now (and on a regular basis) to really think about what your life would be like if you were in this position.  Visualise how every day would be different and think about the choices you now have the freedom to make. You might even want to consider building a vision board to keep the vision in front of you.

Live below your means

There are some specific steps that need to be followed to get out of debt and be in a strong position financially and living below your means underpins the lot. It certainly doesn’t sound (and isn’t) sexy and exciting but for the majority of the population it is absolutely necessary to becoming wealthy.

Living below your means is essentially having a lifestyle that costs less than the income you bring in. Again, very much like a business, in order to be profitable you have to bring in more revenue than you incur costs. The bigger the gap between the two, the more profitable you are – the reverse puts you in debt and often out of business. Thinking about your personal finances as a business is not a bad way to go about things.

We’ll talk about income towards the end of this post; but the biggest thing you can change immediately is controlling and reducing your spend on a monthly basis. You should look to get it as low as possible and adjust your lifestyle to reduce costs as much as possible.

This may mean making some drastic changes to your current lifestyle and perhaps making some choices that make you feel uncomfortable in the short term, but I can’t stress enough how important it is to think the long game on this one.

Here are some suggestions for living below your means:

-       Live at home for as long as possible – it’s a little embarrassing and perhaps not the best status symbol but take advantage of paying no / low rent for as long as possible. It won’t be forever and it’ll be worth it. I lived at home until I was 28.

-       Cut spending on things like clothes, gadgets etc. They give you instant gratification, but as we all know this quickly wears off and most purchases simply aren’t necessary no matter what the reasons you make up as to why you must have them (I’ve come up with some pretty creative ones myself in the past!). Clothes and gadgets were by soft spot for a long time, but now I rarely buy them and have sold / given away many of them.

-       Food – eat out rarely and make smart choices when doing weekly shops. Look for the specials and generally just try and be a little more frugal with how you go about food shopping – if you do this well you can normally cut your bill in half and eat healthier in the process! This one is a bit of work in progress for me as I LOVE food, but I am slowly getting better!

-       Sell your car – this isn’t for everyone but cars are probably the biggest money drain out there. They are a significant up front cost, they depreciate quickly and cost a ton to maintain. I haven’t had a car for about 6 months now and given that cars are a passion of mine, this is a really tough one for me to do.

-       Have fewer things – consider being a little more minimalistic about life. Having fewer things simply means there is less to be maintained and go wrong.  I’ve probably at least halved what I own in the last 6 months - check out Zen Habits for some good articles on minimalism.

-       Cut your bills – do you really need the full TV package? Can you run outside instead of paying the monthly gym fee? Go through every bill you’ve paid in the last 3 months and consider how it can be cut down or eliminated. Again, you may need to make some tough choices here. I don’t have a TV package and virtually all my monthly outgoings are purely necessary house bills.

You’re probably thinking the above doesn’t sound too much fun right? Life’s too short?

As I mentioned above, you need to think the long game here. You WILL get to a position where you can treat yourself more regularly but for now you probably need to buckle down. Trust me, spending less will start to become a bit more natural anyway and it won’t feel so suppressive.

You may also want to start with one thing at a time. This can be a big shift for many people so don’t try and do everything at once. Identify a few things you want to cut back on and select one of them first and nail it. Then move to the next and nail that. It’s much better to do this than to try and do everything at the same time and give up.

At the end of the day everyone is different so you are going to have to consider what are the things you need to cut down on to get your costs as absolutely as low as possible. The key is identifying the areas you can cut back on and then attacking them aggressively. Get your costs down as absolutely LOW as you can, as this will put you in the best position to move through the next steps.

Last word on living below your means – consider setting yourself some rewards for making cuts – it’s a good way to stay motivated. For example, lets say you normally spend £250.00 a month on clothes and have decided to stop buying new clothes for the immediate future. If you have your eye on a particular piece of clothing, set a date in the future that you will reward yourself with it if you stay consistent in not spending money on clothes through to that point. This will give you something to focus on and is a great way to celebrate your success.

Get out of debt

If you are in debt then you have to make getting out of it the most important thing in your life. Getting out of debt is hard; I know because I’ve been there. Most continue to make the minimum payments required and the debt continues to stay at the same level (or grow) and it can be hard to see how you will ever get out of it. This is of course what the credit companies want to happen.

The good thing is that living below your means and getting your costs down as absolutely low as possible will allow you to make larger payments against your debt. Every spare penny you can muster needs to go against paying off your debt until it has gone.

Here is what worked for me.

  • Borrow from a family member – If you have someone who is able to comfortably lend you money so that you can pay off your debt and then pay them back over an agreed period of time, do it. The interest rates that banks and card companies charge you make it that much harder to pay your debt down. If you can clear the debt from a family loan and then pay the family member back at a reduced rate of interest or even no interest then you’ll be able to pay it down quicker. Just be sure to agree a payment schedule you can consistently pay as to avoid any tension around missed payments.
  • Pay your highest interest debts first – focus your efforts on your highest interest debts first as this will ultimately mean you pay less back overall and pay off your debt quicker. So, pick your highest interest debt and be aggressive on putting as much of your cash against that as you can.
  • Go for an early win – whilst paying off your highest interest debts first is generally the best approach, if you have some smaller debts that can be cleared in the short term you may want to focus on these so that you can successfully clear a section of your debt. This can be a great feeling and will motivate you to continue to pay off your debt.

Below is an example of some debt and a suggested approach for clearing it:

  • Credit Card A - £2,450.00 (interest rate 22%)
  • Credit Card B - £1,540.00 (interest rate 18%)
  • Store Card - £350.00 (interest rate 15%)
  • Car Finance - £550.00 (interest rate 10%)
  • Overdraft - £1100.00 (interest rate 5%)

If you went for the approach of paying the highest rate off first you would probably continue to make minimum payments on all debts but put all other available cash against Credit Card A right? Generally this is the smartest way to approach things financially.

However if paying down the store card and car finance can be done in 4 months it may be worth paying those off first in order to reduce your total number of debts from five to three. It’ll feel great to knock them off the list and you’ll likely feel more motivated to clear down cards A & B and then the overdraft. This really depends on your own motivations, just be aware that the best route financially may not always be the best route for you, it’s a balance and the most important thing is that you’re putting as much cash against your debt on a consistent basis.

Whatever way you go about it, getting your costs down to an absolute minimum and putting all available cash against your debts should be the most important thing in your life until you have cleared your debt.

Start Saving – cash is king

Assuming you have no debt or have just cleared your debt, it’s essential you stick to the recipe that pulled you out of debt – living below your means. It can be easy to relax up, get back into bad habits and find yourself in debt again (I’ve been there too!).

Your next goal is to build a reserve of cash that can be relied on for unexpected costs or a rainy day.

Saving on a monthly basis is a habit everyone out of debt should be doing - regardless of how much you earn or have in your savings.

First of all, set up another bank account, which you will use specifically for saving – this is very important. Then set up a standing order to go from your main account to your saving account every month, preferably just after you have been paid. This allows you to simply forget about it and let things occur automatically in the background.

As for how much to save, I would simply suggest as much as you can. Ideally you would continue to live well below your means and simply save what you used to pay off as debt.

You can tweak how much you are saving over time; the most important thing is that you start now and make it an automatic process every month. You’ll find that way you will naturally adjust to living on what you have left after your saving amount has been subtracted.

I’ve saved over 40% of my salary for many years. Admittedly this is quite unusual but there are a few reasons I’ve been able to do this – living well below my means and being in a well-paid job are probably the biggest. When I started my own business, I dropped to saving just 10%, as my income was significantly less. In order to do that I reduced my costs even further and therefore was able to still save on a monthly basis.

I think most people should be able to save 10% at a minimum and this is a good start. You’ll be surprised how quickly you adapt to not having this every month. Even if it’s 5% or £10, be consistent in saving something each month.

Ultimately you want to be aiming to have 50% of your salary in savings. This gives you 6 months breathing space should something unexpected happen to your income and it will also give you a decent amount of freedom to make choices without concern for short-term cash flow. Obviously the sky is the limit here and building up a sizeable cash reserve in gives you lots of options.

Increasing your income

We haven’t talked about increasing your income yet and I purposely won’t go into much detail on this because for most controlling costs makes the biggest immediate impact. Increasing your income is of course the other part of the equation.

You may want to consider what you can do to either increase your current income stream or establish a new income stream:

  • Take on more responsibility at work and then ask for a pay rise
  • Work more hours for overtime pay
  • Work a second job
  • Utilise an existing skill or learn a new skill that you could put to good use and earn additional income from

There are many options here and I appreciate everyone’s situation is very different so I’ll just ask you to consider what opportunities there are to increase your current income stream or develop a new one – if you can do this, it will accelerate things nicely.

Wrap Up

Here are what I think are the most important take homes from this post:

  • Commit – You have to make a firm commitment to getting out of debt and building significant savings. It will likely need to be the most important thing in your life and you need to be incredibly focused every day on the end goal and the daily choices that will move you closer to your goals.
  • Live below your means – Unless you’re lucky and have a life changing amount of cash come your way, you need to live the appropriate lifestyle that will move you into a good financial position. Living below your means is necessary in the short to mid term and will pay off big time in the long run.
  • Be debt free – if you have debt, do whatever you can to pull yourself out of it. Plough all spare available cash to paying it off. Do whatever it takes.
  • Save – Make it a monthly, automated habit to save a percentage of your income. No matter how small, do it and make it a habit.

If you have any questions or comments, I’d love to hear them.

Daniel Clough