In working toward happiness, one key process is to gain more control over the major factors affecting your life. Money’s a big one. It’s easy to measure how much you have. It’s harder to measure how much you should have, but let’s give it a shot. [By the way - I am no expert. These are my opinions. Use at your own risk.]
Before you do anything else: Put at least six months of living expenses into a secure, easily accessible account. (If someone else also depends on your income, make that 12 months.) By secure, I mean an FDIC insured bank account, or something else with a real guarantee. By accessible, I mean that you can get to it immediately, either with an ATM card, in person, or by check. This is your emergency money. Don’t worry about the interest rate - all you care about is that it will be there when you need it.
Even during good times, it pays to think about what happens when times are hard. Injuries and illness, clients defaulting, layoffs, sudden damage to your home or car…these things do happen. What would you do if you really had zero income? Your emergency fund can make the difference between a tough time and a real disaster, so make it a priority. If you aren’t putting money aside for it, start now. Find it hard to save? Look closely at where your money is going. Low resources make it even more important to have an emergency fund. Building one may mean cutting out meals at restaurants or foregoing a vacation, but you will never regret having that margin of safety. What’s more, it will multiply your control over money. Right away, adding regularly to your fund means that you’re asserting control. Then, hitting your fund target gives you backup - and options - for when things get tough.
You can’t control what you don’t measure. It’s a great if somewhat sobering practice to figure what it really costs you to live. Count up, as closely as you can, what you must have every month - the rent, utilities, clothes and groceries level expenses. Add in mandatory payments, such as loans, health insurance, car insurance and credit card debt. Then, add up those other things that have somehow become almost necessities: meals at restaurants, entertainment, donations, gifts to friends, vacations, dry cleaning…and bar tabs. It all adds up to a surprisingly large sum. Here’s a key point: pay yourself first. Before you pay the first bill, save some portion, even if it’s a small part, of what you make. You won’t be sorry.
Many people are using credit cards to spend more than they make. We feel entitled to our little luxuries, especially when everyone we know seems to be doing the same thing. It is very difficult to turn down a night out with friends just because the checkbook is bare. But in my opinion, taking on debt to consume more is a terrible idea. For one thing, the interest rates are very high - you would be very happy to get the kind of return on your money that the bank gets. More insidiously, credit card debt takes away our control because it is so easy, and the reckoning is so detached from the things we’ve bought. The more meals, vacations, and haircuts we buy with credit cards, the more it becomes normal, and the larger the high-interest balance becomes.
Adding to your debt just to consume reduces your control over money - the opposite of what we’re looking for. It is almost certain to make you less happy, not more. Paying off your credit cards has a very high return - getting rid of debt with an 18% interest rate is like earning 18% on your money! If you have credit cards, check the interest rate - you will probably find that paying them off is well worth the effort. When buying fewer things means having less debt, you are really giving to yourself instead of to the bank.
Not all debt is bad, of course. There are three reasons to borrow, in my opinion. First, to pay for an education that you couldn’t otherwise get; second, to buy a house; third, to start or support a business. Each of these has a reasonable chance of helping you in a long-run way, unlike the long-forgotten meals and toys we just had to have.
We’re fascinated with money. Look at all the slang terms for it. Although it can’t buy happiness, we do need it. By building an emergency fund, paying yourself first, and paying off the credit cards, you can start making sure that this element of your happiness is under your control.
