Step 7: Become Accountable

We’ve had a good journey so far. We’ve set the foundation for getting our finances in order by assessing our current financial situation. We’ve set financial goals, re-prioritized our spending, put a basic budget in place, and started building an emergency fund. We’ve even taken the difficult but necessary step of informing our creditors of our financial situation so that we can begin taking steps towards satisfying all debts in manageable terms. These are excellent steps towards healthy finances and debt freedom. However, there is one step which is the glue to this entire process, and this last step is the reason people many times fail to stay disciplined in certain areas of their lives.

This last step is becoming accountable, and it is the step that could make or break your continued success in getting your financial house in order. Now that we have certain standards for our financial habits in place, it is time to ensure real change in our lives by consistently holding ourselves to these standards and allowing others to do so.

Inward Accountability

You’ll want to first instill self, or inward, accountability, and there are several ways to do so. Start by committing to reading financial books or blogs and watching personal finance shows. Doing so will not only keep you motivated, but will keep your conscience tender during those times when you are tempted to overspend, not budget, overlook bills, and so on.

Next, use some type of budgeting program which will help you keep track of your spending and savings. I personally prefer Mint.com, which allows you to link a wide variety of accounts to their online budgeting software and easily categorize your spending. Tracking your spending through a budgeting program will help you to see where you are succeeding or failing in your finances.  Commit to reviewing your spending regularly, at least once a month if not more frequently.

Outward Accountability

Equally as important is becoming accountable to another person, or outward accountability. For you married folks out there, your primary accountability partner should be your spouse. My wife and I hold regular financial meetings so that we can see our progress, correct any financial areas that need attention, and plan how to continue on the straight and narrow financial path. The interesting thing is that these meetings do not have to be formal, hour long financial sessions. You and yours could simply discuss how the finances are going over lunch. Doing so will keep your shared financial plans in mind throughout the week until the next time you discuss finances. The important things is to deliberately discuss finances in order to establish shared values and plans to which both of you can be held accountable.

Don’t discount the value of a financial planner either. Outside parties can give you an objective view of your financial situation and how to best organize your finances. They can also assist with long term financial planning. Check out the Financial Planning Association’s site in order to get started finding a financial planner in your area.

These are just a few steps that you can take in becoming accountable for your finances. Be sure to implement accountability within your life so that you can reach your goal of getting your financial house in order.

Step 6: Inform & Negotiate

We have now reached the part of this series which calls for us to confront our debt mistakes and deal with them.  The next step in your path towards getting your finances in order is to inform your creditors of where you stand financially and negotiate terms with them in order to satisfy those debts.

Let’s deal with the first part first: Inform. I believe many of us, at some point or another, have made a mistake in life that is difficult to own up to, especially when we think about how foolish we may look for having made that mistake. Our natural inclination may be to hide from the mistake or passively ignore it, hoping that our lack of attention to the matter will mysteriously cause it to go away or lessen the consequence of the mistake. Instead, we only end up making the consequences worse through our fear and passivity.

This is what is happening in a lot of people’s financial lives. A mistake, pattern of bad financial habits or financial emergency occurs, the consequences of which seem too much to face at the moment. Instead of dealing with the situation head on, they ignore it, hoping that it will go away. Instead of going away though, interest piles up. Late fees accrue. Bills go unpaid. Debts are sent to Collection agencies. Creditors start calling more frequently. And instead of the financial problem going away, ignoring the problem has caused it to grow worse over time.

No matter where you are in this cycle, let me tell you from experience – Now is the time to confront your financial mistakes. It is time now to inform your creditors of what you can and cannot do to satisfy your debts. If you are late on any of your debts, call your creditors to let them know where you stand financially. Once you inform them of where you stand financially, you lay the groundwork for the second part of this equation – Negotiation. As Larry Burkett states in his book Debt Free Living:

“The principle to remember is, to always run toward your creditors, not away from them. A very difficult problem to overcome is attempting to negotiate with a creditor who has been ignored for a long time. Put yourself in the position of the creditor. Wouldn’t you want to know that someone was willing to pay but couldn’t, rather than to be left totally in the dark?” (189)

Credit card companies or collectors do have ways of working with those are not able to make minimum payments. Here are a few examples of what can be negotiated many times:

-A deferred payment option which allows you additional time until your next payment is due.
-Lowering your current interest rate, especially if it has been raised due to a late payment.
-A waiver of one or more late fees, thereby reducing your overall balance (some companies have an internal policy of waiving at least one late payment on a 12 month rolling basis with no hassle, for example).
-A reduction of the overall balance of the debt, especially if a large portion of the debt is due to interest and late fees.
-“Re-aging” the account by bringing the status to “current” so long as 3 consecutive monthly payments are made (more information can be found on this here).

As you can see, there is hope. Do not be ashamed. Commit to informing you creditors of your financial situation and begin negotiating today.

Step 5: Build an Emergency Fund

So far we’ve been on the offensive with getting our finances in order.  With building an emergency fund, we’re implementing a little defense.  I’m sure you’ve heard this term tossed around before, but if you haven’t, an emergency fund is quite simply money that is set aside to take care of unusual financial circumstances which may come up - true emergencies, if you will – and/or money set aside to handle life’s necessities in the event of a job loss – which is a true emergency indeed. Put another way, an emergency fund helps you to take care of life when life happens.  All too often, an “Emergency Fund” for many actually turns out to be a credit card or two.  It’s time to break that habit.

Your next step in getting your financial house in order is to begin setting aside funds for such times of emergency. Many financial professionals say that you should set aside 3-6 months’ worth of living expenses as your emergency fund. One of my favorite personal finance motivator’s, Dave Ramsey, says to save up $1,000 as your initial emergency fund. Dave further advises that once your debts are paid off, you should finish off your Emergency Fund by increasing it to the standard 3-6 months’ worth of living expenses. In Dave’s own words from his book The Total Money Makeover:

“…You start the emergency fund with $1,000, but a fully funded emergency fund will usually range from $5,000 to $25,000. The typical family that can make it on $3,000 per month might have a $10,000 emergency fund as a minimum...... Don’t forget, Money magazine says that 78 percent of us will have a major unexpected event within the next ten years. When the big stuff happens, like the job layoff or the blown car engine, you can’t depend on credit cards. If you use debt to cover emergencies, you have backtracked again….”  (133-134)

In a perfect world, no emergencies would happen. However, since we do not live in perfect world, we need to set up a guard against life’s unexpected events. A $1,000 emergency fund may be enough for you to build up a comfortable initial defense. Or, you may require a little more, say $2,000, in order to feel comfortable that you can handle life’s surprises while paying off your debts.

How should you start your emergency fund? Set aside a portion from each paycheck to go into a separate savings account. Make this portion of saving a priority over all other types of savings, until you reach your initial emergency fund amount. Be sure to store your funds in a separate savings account, not grouped along with your general savings or savings earmarked for some other purpose. This way, when you do need to use the money for an emergency, you will not feel that something is being taken away from your future. Instead, you will feel relieved that you had something set aside to help guard your future. Here’s to effectively taking care of life’s emergencies.

Step 4: Create Structure in Your Finances

Now that you know where you are (financial situation), where you are going (financial goals), and what is hindering you from getting there (financial waste), it’s time to create a financial structure which will help you to reach your goal.

The first step in structuring your finances is to create a plan for your spending (ahem…yes, a budget).  This doesn’t have to be a complicated, drawn out process in the beginning (see below for why it should not be). Instead, you simply need to allocate your income among all of your necessities, make sure there is surplus, and then decide how that surplus is going to be handled. Let’s take a look at a quick example:

Let’s say your monthly net income = $3,000 (after taxes)

In the vast majority of cases, necessary spending can be grouped into one of the following 4 categories – 1) Housing, 2) Food, 3) Gas, and 4) Bills.

So to continue, let’s say you assign the following amounts to these 4 categories:

Rent - $1,100
Groceries - $450
Gas - $250
Bills - $500

Your monthly income ($3,000) minus the above expenses would equal your surplus:

Income - $3,000
Rent - $1,100
Food - $450
Gas - $250
Bills - $500
Surplus = $700

Your surplus is for savings, unexpected events like a car repair (otherwise known as life happening), entertainment, etc.  In other words, your surplus is what you use to reach your goals, take care of the unexpected, and have fun when all else is taken care of. But how will you know how much you can spend, or when to stop spending, if you don’t know how much needs to first be allocated to the 4 necessity categories? Hence, a budget enables you to see where your money needs to go, and how much will be available to do whatever else you need to do.

Too simple right? Although you can divide these categories into further sub-categories (for example, splitting food into “Groceries” and “Eating Out” for better tracking of your spending), the basic goal of putting structure to your spending can be accomplished in a budget as simple as this.

Step 3: Decide what is essential, optional, and just plain waste

Now that you know in detail how your financial situation looks, it’s time to do a little fat trimming. Your next step is to decide what is essential to you, what are optional expenses, and what is in your monthly spending that is just plain waste. Once you have separated these categories of your spending, it will be easier to see what you can live without.  

Examples of essential items within your spending include the following:

• Basic Groceries
• Gas
• Electric Bill
• Water Bill
• Rent or Mortgage
• Phone Bill

You need to be able to get places, eat, have a roof over your head, be able to wash and iron your clothes, and wash yourself. These are essentials. Check out how we often turn essentials into luxuries:

• Whole Foods Groceries
• Premium Gas
• Luxury Apartment or home larger than your current needs
• iPhone

All of the above fill a need, but the way in which they are filled are optional. To add to this, many of us include items which are just plain waste to our spending:

• Starbucks every day, restaurants every weekend
• Netflix subscription which rarely gets used
• U-Verse 400!
• Vacations on credit card instead of cash

Your goal is to make room for what is essential, make compromises in the spending areas that are optional, and eliminate wasteful spending. Some of you may need to simply cut out a few financial carbs to get fit, while others may need to go on a financial fast in some areas of your spending. Be honest with yourself and determine what sacrifices you will make to get back on the right track.