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One of the things that I often talk to clients about is having both a good offense as well as a good defense when it comes to money. A good offense means that your earnings are high, while a good defense means that you are a good saver and that your spending is under control. Of the two, having a good defense is far more important. Think of it this way – if you have all offense and no defense, it will be like an Arena League football game where the final score is 73-70.
Here are some the things that lead to having a bad defense:
- You don’t have a good spending/savings plan in place. You haven’t ever taken the time to examine what your goals are, if your spending reflects those goals, and what it will take financially to reach your goals. The key to reaching any big long-term goal, financial or not, is to take consistent incremental steps towards that goal. Figure out where you want to go and when you want to get there and start making shorter, more reachable goals. For example with retirement so many people only put in what their company will match. While this is a good start, it will not be enough to fund an early or a lavish retirement. How much will you really need to retire and how much do you need to put away to hit that number? You probably won’t be able to reach that number overnight, but start taking immediate action towards that goal on a consistent basis, no matter how small.
- You let debt sneak up on you. In a perfect world you are able to use a credit card for convenience, the ability to earn cash back, or other valid reasons, but then have the means and the discipline to pay it in full every month. What can happen if you’re not careful is that the credit card bill doesn’t get paid in full every month, and a negative feedback loop gets started. You have to come up with money to pay what was left over from last month (plus interest!) and as a result you put more on the credit card for this month until things start spiraling out of control. Next thing you know, you’re paying several hundred dollars a month or more on your credit cards and the balances aren’t going down. If you do use your credit cards and find yourself not being able to pay the balance in full, take IMMEDIATE action to pay it off the next month so you don’t light the fuse for more debt. I’m also an advocate of paying bills every month on the first of the month – it provides the discipline to look at things consistently and is a logical cycle.
- Your income went down sharply but your spending stayed the same. While the economy and job market have improved substantially in the last four years, the events of the Great Recession should remind us that nothing in this world is guaranteed, especially when it comes to our jobs. If you do suffer a job loss, change of compensation scheme, or something else that leads to your income going down, do not assume that your income will return to its previous level quickly, if at all. Again, if the income goes down, even if you feel that it’s only a temporary decline, immediately adjust your spending.