Tag: financial wellness

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Behold, the Tax Man Cometh!

It’s that time of year again. Unless you’re an absolute champ and already have your taxes done, you’re probably gearing up to file them in the next couple of months. In this post we’ll ignore Washington’s inability to spend less money than it takes in, and instead focus on your taxes at a personal level.

Taxes are sort of a necessary evil. The government needs taxes in order to function, and unquestionably has the right to tax its citizens, but my view is that you shouldn’t pay any more taxes than you legally need to. I don’t have the time or space to get deep into taxes here, but I’ll try to provide some basic tips for those of you to whom taxes are a mystery. If you’re already well-versed with your own tax situation, this post probably isn’t for you.

With a few exceptions, every dollar you make is subject to tax. The obvious and most common source of income is your job, but in most cases if you’re receiving money that’s not a gift, that money’s taxable. If you have a side gig, or you have a yard sale, maybe you win the cash prize in your fantasy football league, or you win a bet with a friend, any time you’ve been given money in exchange for something, that means you’ve generated income, and that income is taxable. You’re responsible for reporting it come tax time. If you’re not reporting it on your taxes and the IRS can prove you received it, you have nobody but yourself to blame.

The U.S. has a progressive tax code. That means everybody is taxed lighter at low income levels, but income is taxed at higher and higher percentages as income levels rise. The lowest tax bracket right now is 10%, but rises to 12%, and then 22%. There are higher levels than that, but if you’re in a tax bracket above that level, you’re probably not going to learn much from this post. The system is a little deceiving if you haven’t ever paid close attention. If you’re in the 22% tax bracket, it doesn’t mean you’re paying 22% tax on every dollar you make; it means you’re paying 10% tax on all your income up to the cap of that first bracket, plus 12% tax on every dollar that’s in the next highest bracket, plus 22% tax on all the remaining dollars. That’s way better than 22% of every dollar you make. After you add up all the money you made last year from various sources, you can do a search for 2023 tax brackets to see where you fall.

Let’s say you’re married filing jointly, and between the two of you, you earn $60,000 a year. The government recognizes it needs to give people a break by not taxing every single dollar they make. Uncle Sam helps people out in the form of something called a deduction. If your tax situation is fairly simple (you rent your home instead of own it, you don’t donate much money to charity, and you don’t mess around with stocks or real estate), you should probably go with the standard deduction. It’s a value that’s updated every year, and in the 2023 tax year the standard deduction for a couple that’s married filing jointly is $27,700. That means you can subtract $27,700 from your annual salary of $60,000 (which shields almost half of your income from the tax man), and you’ll only have to pay taxes on the remaining $32,300. Deductions are good because they reduce the amount of your money that gets taxed, ultimately reducing the amount of tax you need to pay.

A second kind of deduction, called “itemized deductions,” is an option, but doesn’t make sense for everyone to take. For itemized deductions to provide you more value than the standard deduction, your itemized deductions (things like donations to charity, mortgage interest, property taxes, etc.) would need to add up to more than the standard deduction. It’s possible to do it with income of $60,000, but it probably doesn’t happen consistently unless you own a home and/or give a sizable chunk of your money to charity. If you’re making $60,000 as someone who’s married filing jointly, you’re probably going to want to take the standard deduction.

So if you continue with this $60,000 example (where you’re only taxed on $32,300), you calculate the tax according to the tax brackets. Ten percent of the first $22,000 (the upper limit in the lowest married/filing jointly bracket) is $2,200, and then you have to pay 12% on the remaining $10,300 ($32,300 minus $22,000). That comes out to $2,200 plus $1,236, for a total tax bill of $3,436. Don’t lose heart, you probably don’t have to cut a check for that much.

That’s the simplified version. If you have kids that are your dependents living with you, and you’ve provided more than half of their financial support for the year, you get to claim the Child Tax Credit. Depending on the child’s age, you get to subtract up to $2,000 per child directly from your tax bill. Tax credits pack more of a punch than deductions do, because while deductions knock a percentage of a dollar off the tax bill, a tax credit removes 100% of a dollar’s worth of tax liability for every dollar of tax credit you receive. Deductions = good, credits = better.

The last thing I’ll quickly cover is tax planning. Nobody likes to be surprised by a big tax bill when it comes time to file. Some people like to get a refund when it comes time to file, and others would rather pay at least a small amount when they file so they don’t have to give the government an interest-free loan with the money that comes out of each paycheck). I’ll let you decide what’s right for your situation, but the ideal tax planning scenario would be to owe no tax and be due no refund. If you know how much tax you’ll owe at the end of the year, it’s usually pretty easy to ballpark how much tax should be withheld from each paycheck.

Let’s use our example from above (assuming the couple has no kids and no major tax credits). They’ll owe $3,436 in taxes. If they’re paid every two weeks, we can divide 3,436 in taxes by 26 paychecks a year to find that if they withhold $132.16 from each paycheck for federal taxes, at the end of the year that amount should fully cover the tax they owe. They’ll have to readjust for raises or substantial changes in deductions or tax credits, but that’s the gist of it.

It’s too late to make adjustments to Federal withholding for the taxes you’ll be filing over the next couple of months, but since we’re only a month into 2024, you have a great opportunity to choose how much money you accrue by the end of the year to use in paying your ’24 taxes in the winter/spring of 2025. If you know roughly how much money you’ll make this year, you can also ballpark how much money should be withheld from your paychecks. Just make sure to account for the fact that some paychecks have probably already come in and the withholding from them might be different from what you want it to be for the year’s remaining paychecks. Your pay stub usually shows how much is withheld from each check, along with how much has been withheld so far in a given year. Once you determine what you want withheld from each paycheck, get in touch with your payroll department or submit an updated W-4 form to your employer’s payroll support provider.

I can’t even begin to tell you how complicated the U.S. tax code is, so please understand that this is very basic information. There are all kinds of additional considerations to look at (like filing single, married filing separately, and filing as head of household). The way you earn money also affects your taxes; if you’re married filing jointly and one spouse collects a paycheck while the other makes money babysitting, it’s likely that tax is only being withheld from one of those income streams, but both of them figure into the amount of total tax that’s owed, so you’ll need to plan accordingly.

This is only enough information to get you pointed at areas you want to learn more about. I’ve only discussed federal taxes here. State and local taxes vary by location and are in addition to federal taxes, so don’t forget about those. Of course, the best way to ensure that you’re getting it done right is to pay a tax professional to do it, but if you’ve got a fairly simple tax situation and don’t mind working with numbers, you can probably file them yourself. Tax software makes it easier to do on your own, and can often get it done cheaper than paying someone else to do it.

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Explainer: Government Shutdowns and House Turmoil

The news cycle is so short these days that this post already feels like old news. It’s been in the headlines a lot lately, but what exactly is a government shutdown? You may already know a lot of this, so if you’re pretty up to speed on the subject, feel free to skip ahead a bit.

It’s not totally realistic to compare a federal budget to a household budget, but we’ll start there. Whatever sources of income you have…that’s the money you have available to spend. If you spend more than you take in, you’re running at a deficit and you end up going into debt if you keep it up. For the average Jane or Joe, you can’t just continually spend at a deficit and go further into debt without running into some serious problems. If you die with debt, the debt still exists somewhere and gets passed along somehow. The federal government, so the argument goes, never actually has to pay off its debt because unlike a normal citizen, the government doesn’t actually die. The thinking here is that you can keep running at a deficit indefinitely.

That might be true if the debt was kept at reasonable levels or if you have years every now and then where you pay some off. Unfortunately, our government loves to SPEND money. We spend money on things that are necessary (interstate highways, a military, disaster relief, etc.), and we spend money on things whose value is more difficult to identify. We spend a lot of money on special projects that don’t benefit anyone other than constituents of specific political districts.

Our politicians, like others around the world, do what they have to do in order to remain in power. In our case, the House of Representatives is in charge of putting forth the budget every year. Representatives in Congress run for reelection every two years (meaning they’re constantly either in a campaign or are preparing for one), so they look for opportunities to throw extra money at organizations in their Congressional district in an attempt to gain favor, and to have something positive to point at in their next campaign season. We’ve got 435 Representatives, so you can imagine how, with each of them trying to throw a little extra green at their home district, this quickly adds up to numbers that extend way beyond the basic budget.

Now, here’s a curveball. Most of the drama leading up to a shutdown is intentional. Everybody (especially those in Congress) knows that there’s wasteful spending in the federal budget. You could argue that the fairest thing to do is to cut all the extra pork out of the budget, but that will also affect representatives differently. Because it’s a complicated issue, most Reps opt not to change what’s already been decided. Our Representatives in the House know that if they avoid taking meaningful action until very late in the process, it builds pressure on the entire body to approve temporary extensions (called “continuing resolutions”) that continue funding the government at the rate it’s been using. It does nothing to modify spending levels or remove any wasteful spending, it just keeps doing what it’s been doing for a little longer.

Here’s where the brouhaha from last week comes in. In the last election cycle, Republicans won back control of the House, so they obtained the right to decide how to lay out the budget (though the Democrat-controlled Senate and White House both have to sign off on any budget proposals). Republicans ran on the idea of reigning in DC’s out-of-control spending. The way they planned to do it was by passing individual bills for the obviously necessary parts of the budget (the Farm bill, funding for the Department of State, the Department of Defense, etc.), meaning that funding for a large amount of the current wasteful spending would simply disappear. If this had happened, this would have saved us a huge chunk of money as a nation.

The problem is that they couldn’t get it done in time. There was some brinksmanship, some games, some intentional pressure-building, and in the end they said “hey look, we want to continue with this ‘fund the essentials’ approach, but we ran out of time. Let’s pass a 45-day continuing resolution to give us the time we need to pass about a dozen of these bills that will fund the stuff we really need.”

Toward that end, the Republicans passed an extension of a Democrat-designed budget (including very high spending levels for the priorities laid out by Democrats) in order to try to enact an approach that requires the agreement of a bunch of people that don’t truly want it to succeed. A few of the Republican reps in the House said “we have to draw the line somewhere,” opposed the proposed bill, and then lashed out against now former Speaker of the House Kevin McCarthy when he framed the budget to gain support from some Democrats. This week McCarthy was voted out of his Speakership role and has announced he does not want the job again.

Now all real work in Congress (including work on those multiple bills that will fund the crucial parts of the government) stops until the House can vote in a new Speaker. Last time they had to pick a speaker, it took four days and 15 rounds of voting before McCarthy got enough votes. The clock is still ticking on those 45 days, and many of the House’s representatives are just fine with bumping up against that new November 17 deadline without a permanent budget in place, because it increases the chances they’ll pass another continuing resolution to keep funding the pet projects that are meant to make people in their home districts happy.

The sad truth is that our government consistently spends more money than it takes in, and the national debt has reached mind-boggling levels with few politicians willing to do anything about it. While all the focus has been on the debt ceiling, the national debt has ballooned to unsustainable debt-to-GDP ratios. We have so much debt at this point that, due to debt and high interest rates, we now have to use almost a fifth of our budget to service our debt. A fifth! If you had to use 20% of your income to pay off credit card bills, imagine the financial freedom and new possibilities that would open up to you if you didn’t have that expense. The government is using our tax dollars very inefficiently, and as our credit rating keeps dropping, it will affect all of us at the personal level by having a higher floor for interest rates. All the folks in DC get to shrug their shoulders and point at someone else.

So that’s what we’re dealing with. Hopefully the House will be successful in passing some clean bills this month or next so we can start paying back some of that debt.

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Anyone Else Notice You’re Getting Less for the Same Money?

You’ve likely noticed that inflation has taken a big bite out of your income over the past couple of years. Unless your income is keeping pace, you’re probably getting a little squeezed. Hopefully this post can offer some practical tips.

There are two ways to gain disposable income: cutting expenses and increasing income. You can only cut expenses so much. If you’re getting squeezed and there’s nothing left to cut, the only other option is to bring in more income. While getting a higher-paying job or a raise at your current one would be great, sometimes that’s not possible. In those cases, adding a revenue stream or two may be the way to go. Do you have a hobby or talent, or simply extra time, that you can use to bring in some extra cash (babysitting, freelance yard work, having your kids pet-sit and contribute to the household out-to-eat or go-to-the-movies plan)?

I feel obligated to say that avoiding a credit card balance is one of the best things you can do to keep your debt under control, but I also acknowledge that it’s tougher and tougher for people to sock money away for a rainy day when it’s been raining so much for so long, and they’ve come to rely on credit cards instead of savings for a backup/emergency fund. By all means, pay off your monthly balance in full, but when you can’t do that, here are some other hacks for saving some money.

Kids grow fast. Like, real fast. Shoes and clothes don’t fit them for nearly the same length of time as they fit adults. When I’m doing yard work I wear jeans I wore 20 years ago. It’s not because I’m super fit, it’s because I don’t want to buy a new wardrobe. With such high turnover rates for kids’ clothes, thrift shops can save you a ton of money. Some things are better bought new, sure, but if they’re only going to be wearing a given pair of pants less than a year, they don’t need to be designer or top notch. Larger thrift shops have more options, so if you live out in the country, you may have better results heading to thrift shops in more populated areas. Just because other people pay for rapidly growing kids to have nice stuff doesn’t mean you have to pay the same prices; many shops will randomly have name-brand items. If the kids whine about not buying brand new, let them pitch in or pay the difference between what they want and what you can get it for at the thrift store. It’s easy to whine when you’re using other people’s money, but the tune often changes when you’re the one footing the bills.

Food is a big expense. The economy and supply chain have made for some anomalies where in some cases, it’s cheaper to buy a meal prepared at a restaurant than it is to buy the ingredients and prepare them yourself. This is not the norm and it probably won’t stick around for long. At any rate, if you’re pinching pennies, you should probably avoid dining in at a restaurant and opt for takeout instead. Dining in means you’re paying for drinks and paying more for a tip than if you call a restaurant to place an order, travel there, pick up the food, and then travel wherever you’re going to eat it (remind me again why people tip when they do all the work?).

If you regularly stop for hot drinks that have some kind of flavoring, foam, or shots of something in them, you forfeit the right to complain about not having enough money. Coffee, cream, and sugar. Want a treat? Try flavored creamer.

A lot of times we start subscribing to things and after awhile we stop thinking about whether they’re worth the price. For example, unless you’re some kind of super-user, you probably don’t need a phone plan with unlimited data. If all you need is talk and text with a moderate amount of data, you can probably ditch the major carriers and go with small companies that have the same coverage but plans that better fit your needs. For entertainment, do you really need all those streaming services? Do you still pay for cable TV? If all you really want are major networks, consider buying a digital antenna and getting TV for free. Admittedly, you get what you pay for, but if you’re in an area with decent signal strength and you buy a respectable antenna, you can pick up a lot of channels. Check out https://www.fcc.gov/media/engineering/dtvmaps to see what networks you can pick up in your area. And an individual channel often has multiple sub-channels within it, so if a particular channel comes in well, there are probably a few different shows playing on the channels that are affiliated with it. I personally get channels with more westerns, Spanish telenovelas, episodes of Walker Texas Ranger, Columbo, and old game shows than I know what to do with, but I’m also a fan of older, less stressful shows. If a digital antenna’s not really your thing, but you have good internet speed, pick up a Roku device. Different shows rotate through the available channels, you can usually get some live news, and the commercial breaks come with countdown timers. Still not seeing something you like? Check out your local library for shows and movies on DVD. We don’t normally even start watching a new show unless it’s finished its run on TV. There’s a lot of cheap or free entertainment out there, so take a look at your subscriptions and make sure you’re only paying for stuff that’s worth it for you.

Walmart is both a blessing and a curse. On one hand, it’s cheap and has lots of options. On the other hand, it’s very hard to walk out of the store with only the things you intended to pick up when you walked in. What you saved by going to the store got more than chewed up by picking up all the add-ons you tossed in the cart while walking around the store. Here are a couple of ideas to help manage costs. Don’t use credit/debit cards to pay for purchases; only use cash. When we use credit or debit cards, it makes it harder to appreciate the value of the money you’re parting company with. When you use cash, it makes you much more aware that money is leaving your possession, and it makes you think harder about whether a particular purchase is worth the price. Alternatively, place a Walmart order online. Shipping is free once your purchases total a certain amount, and as long as you’re not adding things to the cart just for the sake of hitting that mark, you can be more choosy about what items you’re willing to purchase to reach that shipping minimum. If you aren’t willing to wait for the shipment to arrive through the mail, use the “store pickup” option. Employees will gather the items you pay for and put them in a locker for you to retrieve. You might have to go into the building, but you don’t have to go beyond the registers. If you don’t go beyond the registers, your chances of escaping without making impulse buys go way up. Now you just have to dodge the Scouts selling cookies or popcorn outside the door.

Finally, let’s address the issue of tithing. Tithing, or giving 10% of your income to the church body you attend, is expected even when money is tight. God knows when it’s simply impossible for you to give that much, but He also knows when you’re milking the situation a little bit. Do your best to build tithing into your budget. You’re welcome to donate money to other charities, of course, but that’s supposed to be after you’ve given your 10% to the church you attend. Ten percent sounds like a lot, and it sure can be, especially if you don’t currently give anything. I’d offer that you live your life of following Christ in expectation that He’ll do bigger things through you than He’s doing right now. If that’s the case, this current stage of your life is a prelude to things that are yet to come. Be faithful with the smaller things, and He’ll entrust bigger things to you in the future. Tough stuff, I know. If you’re way under that 10% goal, start out by consistently doing better than you are right now, and keep working toward that goal.

There are lots of other tips, but I’ve already taken up a lot of space. Who else has suggestions? Please leave a recommendation in a comment.

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In the Interest of Interest

Money is probably one of the biggest obstacles for a person’s taking a leap of faith in terms of stepping out of their comfort zones to do something they feel God’s calling them to do. I bring this up now because interest rates are in the process of rising, and they’ll likely rise several more times over the coming year to help start getting a handle on inflation. To help try to make that obstacle a little easier to overcome, I’d like to spend some time today talking about how to pay less for stuff by getting better interest rates, which in turn, means you’re using the resources God’s provided you with wisely and can do more with those resources in your charge.

Ideally if you want to buy something, you’d pay it in full right then and there at the site of the transaction. Cash used to be the dominant way to do this, but it’s not nearly as common anymore. There are times, however, when you don’t have enough cash available (either in your wallet or in your bank account) to make a large purchase. You’ll likely need to borrow money from a bank or credit institution to cover the cost of a house or vehicle, for example. Those institutions, in turn, will charge you money for the service of borrowing their money. (You’ll make payments to them, but the total amount you hand over will be way more than the original amount you borrowed.)

Credit cards are a similar thing, but at the same time they’re a different animal. Debit cards are nice in the sense that they’re sort of the electronic version of cash. You purchase something with a debit card, and it takes the money right out of your account. Just like cash…if you don’t have enough for the purchase, you don’t get to walk away with the thing you’re trying to buy. A credit card, on the other hand, doesn’t require you to have enough money available to pay for whatever you’re buying. In fact, credit card companies would prefer that you not pay off your credit card bill in full, because it gives them the opportunity to charge you large amounts of money for the privilege of using the credit they’ve extended to you. Don’t get lured in by earning reward points. I’d recommend that if you’d like, you can use credit cards to purchase things you were going to buy anyway, but try not to use them for impulse buys. When making a purchase, if you don’t have the money to pay for it right then and there, consider whether or not it’s worth going into debt for.

Okay, so…let’s pretend you’re a lending company…either a credit card company, somewhere that gives out car loans, or a mortgage company. Someone you’ve never met applies to your company for some credit. Each time you lend money to someone, you’re making an investment in them that involves some amount of risk. What do you use in making your decision about whether or not to extend credit to them?

It turns out these organizations use something called a credit score. Every person’s track record of the way they’ve handled credit or debt in the past plays some role in their credit score. If the lending institution sees an applicant who has a very good credit score, they’ll view that applicant as a safer investment than someone with a low credit score. Those with a high score are more likely to be able to secure larger amounts of credit at cheaper rates.

If an applicant has a low (or worse, no) credit score, they’re seen as a risky bet. They may be approved for credit, but it will likely be in smaller amounts, and will almost surely pay higher interest rates. A higher risk means there’s a greater chance that they won’t reliably pay back the full amount of money owed. To offset this risk, institutions will grant the credit at higher interest rates. (Even if the applicant defaults, the money gained from the high interest rate helps recover some of the money they’ve initially laid out.) A bank’s favorite scenario? When a person with a high interest rate pays off the full balance, but does it as slowly as possible. The bank not only recovers its initial outlay, but also gets to pocket all that high interest as profit.

Now let’s look at it from the other side. If you’re applying for credit, you want to get money for the lowest possible interest rate. Your best bet is to build up your credit score before you even apply for credit. Credit scores run from a low of 300 to a highest possible 850. In general, a “good” score is 700 and up. An “excellent” score is anything above 800. Most people have a score that falls somewhere between 600 and 750.

What factors determine a credit score?

As it turns out, demonstrating good credit habits will naturally build your credit score. As you may expect, the biggest chunk comes from your track record of payments. Thirty-five percent of your credit score comes from your payment history. If you pay all your bills in full each month (including housing, installment loans, and credit cards), that’s 35% in your favor. It demonstrates reliability.

The next-largest chunk of your credit score (30%) comes from your credit usage. If you don’t pay off the balance in full each month, how big a balance do you carry over? What percentage of your available credit are you using? Carrying a balance on one or more credit card isn’t the end of the world, but if you want to raise your credit score, you definitely need to use no more than 30% of your credit line per account, and it would be even better to get those balances down to zero each month. Just because you have credit available doesn’t mean you should use it. Showing restraint works in your favor. Additionally, getting an account balance down to zero is a great thing, but if you close the account after doing so, it decreases the total credit available to you. If you’re still carrying hefty balances on other accounts, closing an account will mathematically increase the percentage of remaining credit you’re using, which could drop your score. It’s better to pay off the balance and then simply avoid adding any new debt to that account. If you really want to close the account you should wait until you’ve paid down more of your total debt.

Those two items, making payments on time and showing restraint in your credit usage, account for nearly two thirds of your credit score. If you want to improve your score, start there. The remaining 35% is broken up into smaller categories that will be less impactful in the immediate term, but play a significant role over a longer period of time.

Another 15% of your credit score comes from the length of credit history. How old are your oldest and newest accounts? What’s the average age of all accounts combined? There are a few other considerations in this category, but for the most part, you just have to have time on your side for this one. Keep reliably making those payments.

Ten percent of your credit score comes from your credit mix. There are fixed obligations (rent/mortgage, student loan payments, the cable bill, etc.), variable obligations (credit cards), and some that are sort of in between (the electric or water bill). Showing you can manage more than just one type shows you can handle the responsibility of credit. At only 10%, this isn’t a huge factor, but it still plays a part if you’re in the gray area between “poor” and “fair” or “fair” and “good.”

The final 10% comes from “new credit.” Don’t open lots of new accounts in a short period of time. Lenders will see a lot of new accounts and wonder why the credit you’ve already got isn’t enough. Is it due to mismanagement? Are you in some kind of financial trouble? It just adds a perception of risk to the mix.

A handful of items go into a basic credit score, but by demonstrating that you can handle various lines of credit, you also make yourself more likely to get the best rates. Access to better rates means you free up resources you can use in your pursuit of furthering God’s kingdom, however you’ve been called to do it.

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Your Money Can’t Work for you if Someone Already has Dibs on it

I’m not sure why I didn’t realize this earlier, but it recently occurred to me that lots of people get themselves into trouble when it comes to money and I might be able to help them by offering a few tips.

I’m speaking specifically about debt in this case. Maybe you’ve learned about debt the hard way, or maybe nobody’s ever told you the basics before, but my goal for this post is to help some people get on the right track to worrying less about their financial situation so they can focus more on the purpose God’s given them. After all, with high levels of debt, it’s easier to lose focus on striving toward becoming the person God wants you to be. If you’re weighed down by worry about your debt load, I’d like to help you get started on a path that allows you to reach more of your God-given potential.

Money itself isn’t a bad thing, but a love of it is dangerous. Money is a valuable tool in this life. Having the knowledge to wield that tool effectively means you have the capacity to accomplish more by using it wisely, preferably to the glory of God. Because debt might be holding you back from doing the stuff God wants you to do, here’s some practical insight.

We’ll start with the basics. Let’s say you owe a lot of money to credit card companies. I can give you the first couple of steps you need to take, but it’s important for you to realize that even if you dig yourself out of debt, you’ll probably end up right back in the same hole if you don’t curb your tendency to buy stuff you can’t afford. That’s something you’re going to need to address right away. Make the switch to only paying cash if you need to. (Having to physically hand over something tangible has a way of making people question whether or not the purchase is actually necessary or if it’s more of a luxury.) Alternatively, enact a rule that you won’t ever buy something the first day you think about it. Forcing yourself to “sleep on” such decisions will help you cut out a lot of impulse buys.

Ok, after you get a handle on spending habits, the hard work begins. Here come three steps to follow. Each step should be completed (or nearly completed) before moving on to the next step.

(Before I get started, a note to the parents of kids under 18. Starting this month the Federal Government is giving advance payments each month for the rest of the year that will total half of the year’s child tax credit. If you normally have to pay taxes when you file, don’t spend this money, because getting an advance on your tax credit is going to result in a larger tax bill when you actually file. If you normally get a refund though, this is a great place to start for step 1.)

Step 1: Using money you can scrounge from your budget, money you can swing from a side gig, or even irregular windfalls like stimulus money, yard sale proceeds, or gifts, save up $500-2500 for your emergency fund. You determine the amount by looking at where you are on the scale of expenses. If someone else pays your rent and you take either public transportation or a ride-sharing service to get where you need to go, it’s okay to shoot for the lower end. If you have a mortgage and a vehicle or two, shoot for the upper end. This money is not to be spent unless…you guessed it…there’s an emergency. Cars break down, kids destroy stuff, water heaters reach the end of their life and quit working. The idea is to avoid going further into debt for unexpected expenses, and life is full of unexpected expenses. This money should be available quickly (not locked up in a certificate of deposit, for example), and should be considered your new “zero balance.”  That means if you’re keeping $500 as your minimum, $500 in your account actually means you have zero. A balance of $510 means you have $10 to play with. The emergency fund is not to be used for regular bills…your regular bills should be covered by your budget. This is not for celebrations, splurges, or any sort of “I want” situation. The emergency fund is kept for unexpected but necessary expenses. If you use money from your emergency fund when you’re in a later step, halt progress on that later step until you replenish your emergency fund.

Step 2: Start tackling the debt. This is the one that takes time and persistence. After you’ve established your emergency fund, continue using the same type of income you were saving to build the emergency fund and instead apply it toward paying more than the minimum payment on your credit card bills. Credit card statements are now required to have a section that tells you how long it will take you to pay off your balance if you only make the minimum payment. By taking several months to pay off a purchase, you’re not getting away with anything…you’re actually inflicting a good amount of financial harm on yourself. With high interest rates in the teens, even a minor balance will take a ridiculously long time (and a ridiculously large amount of money) to pay off a small balance. So if you want to get out of debt, you’re going to have to make more than the minimum payment on your accounts. The best way to use a credit card is to pay off the balance in full every month. (And no, don’t just buy stuff to get the points or rewards for your credit card’s rewards program!)

Lots of people that are heavily in debt carry balances on multiple accounts, and they play a version of a shell game to shuffle the debts around from one account to another while carrying a debt load on yet another account. If you really want to get out of debt, you need to make your money work more efficiently for you. Let’s say you’ve got five accounts that you’re reliably making minimum payments on. It’s good that you’re meeting your obligations, but let’s start retiring some of those debts. Now that you’ve built your emergency fund, it’s time to keep the momentum going. The additional funds you were using to establish your emergency fund should now be added to the minimum payment of one of your accounts. Even if it’s only an extra $20 per paycheck, add it to the minimum payment you’re making on one of the accounts.

Your success will likely depend on the type of person you are. If your attitude is “I want to get out of debt without paying one cent more than I have to,” then your plan should be to start throwing all the extra money you can possibly muster at the account that’s charging the highest interest rate, regardless of how large the different balances are. Once you pay that off, you’ve grown the potency of your arsenal; you’ll now be able to use the money you used to build your emergency fund plus the amount you used to make the minimum payments on the account you just paid off. If your monthly minimum payment was $30, your new capability will be that $30 per month plus the amount you used to build your emergency fund. One of your debts is paid off and you’re gaining momentum.

This strategy is the one that makes the most rational sense, but in reality it can be disheartening for some people because it might feel like it takes forever to make any progress. If you know you’re going to need some small victories to encourage you along the way, you may need a different approach. If that’s you, take a look at your complete list of debts and start making extra payments on the account with the smallest balance. Add whatever additional principal you can to the minimum payment, and keep chipping away at it until that balance is down to zero. After that, do the same thing as in the other example: add your newfound cash flow to the minimum payment on a different debt. The bigger the debt that you pay off, the more cash flow you’ll be able to create and apply to paying off other debts.

The idea is to concentrate your extra cash on one account at a time. By all means, continue making your minimum payments on all your accounts, but any leftover capacity you’ve got should be directed at only one account. (If you’ve got an extra $20 a month for paying down debt, it’s better to throw that whole extra $20 at one account rather than throwing an extra $4 at five different accounts. Persistence is important, hang in there. It may take some time, but being debt-free is within your grasp!

Step 3: Built your savings large enough to contain at least three months (but up to six months’ worth) of living expenses. Even without global pandemics, this is a common goal for a lot of folks. Mortgage or rent payments are likely going to be the largest expense, but don’t forget car payments (if applicable), grocery bills, utility bills, any subscriptions that you don’t plan to cut in the event of financial hardship, insurance expenses, gasoline/commuter costs, and anything like alimony or child support payments. Layoffs, natural disasters, market downturns, and any number of other triggers can set off a financial catastrophe for earners, and having a cushion large enough to last you a few months will give you more options as you await resolution (find a new job, wait for the insurance check to arrive, sell your house, or whatever that resolution looks like).

By the time you’ve completed all three of these steps, you’re in a much better situation than you were before you started. Persistence and focus are your key assets in this fight.

You don’t have to be religious to put this advice to good use. Know someone that could benefit from it? Please pass this along to them. Too many Americans are living paycheck to paycheck. Whatever your life story or wherever you come from, our society is better off if people and families can effectively manage their cash flow and keep their financial house in order. Spread the word!