Money Smart Medics Part 6: Life After Debt

freedomSo far in the #MoneySmartMedics series, we’ve talked about getting caught up on bills, writing our first budget, mastering the budget and getting out of debt. So what happens when the smoke clears and you’ve achieved what you once thought was impossible?

Try to imagine a life with no car payments, no credit card bills, no past due accounts, and having plenty of money saved for emergencies. Think your outlook on your EMS salary might be a bit different?

Once your debt is paid off, there are all kinds of neat things that we get to do with our money that we never imagined. Setting up retirement, planning for emergencies, paying cash for vacations and truly breaking the “paycheck-to-paycheck” cycle are just a few. It’s now YOUR money, you can do what you want with it. Having said that, it’s going to be extremely important that we continue to be intentional with our money and continue to live on the budget. We have to remember what got us into our financial troubles and make sure that we don’t slip back into our old ways. We also need to make sure that we get the most out of our money.

This is one of the best parts of the process, because the pain is over. We won the battle and now it’s time to enjoy the rewards of a debt-free life!

Building Up an Emergency Fund

Remember the $1,000 we put away for emergencies in our sinking fund? Well, that was just a small amount to provide us with some security while we paid off debt. That was for things like unexpected car troubles, ER co-pays, etc. That doesn’t really last long if you lose your income or have a truly catastrophic event. Once our debt is paid off, we can really prepare for the worst. Now we can plan for a potential loss of income.

While I’m sure you will want to treat yourself to something nice after paying off all your debt, we will need to get back on track soon to build up a nice reserve of cash for emergencies. This step in the process is going to alleviate stress and anxiety that you never knew existed. The majority of us live our lives literally one missed paycheck away from hitting rock bottom. While we tend to accept this as normal, we can’t really understand the toll this takes on our mental and emotional well being until we finally get to experience life without it.

If you’ve read Dave Ramsey’s baby-step process, you can see that he recommends saving up 3-6 months worth of expenses. Due to the high risk of injuries that we face in EMS, I would strongly recommend that you save up closer to 6, if not more. If you’re still in debt as you’re reading this, that number may seem impossible to you. Just remember that anything is possible when it comes to money. By using the same intensity that we used to pay off debt, we can easily fund our emergency fund in no time. Before you become discouraged, actually do the math and see for yourself. Be reasonable with yourself. Add up all of the monthly expenses that you would need to be reasonably comfortable. Add up essential items like rent, utilities, transportation, insurance and food. You can even throw in some luxury items like internet. Add up the total amount, multiply it by 6 and BAM, you’ve got yourself your first major savings goal.

While it may be tempting to skip over this step, trust me, you need to stay focused and do this. Remember, you’ll never regret saving money, but you will certainly regret not doing it.

Start Contributing Toward Retirement

I’m going to briefly touch on this subject as this is a huge topic and I’ll be covering it extensively in later articles. Pension plans and employer-contributed 401k plans are awesome, but we aren’t going to depend on them. Remember that whole financial independence thing I keep telling you about? Well, it’s kind of hard to consider yourself independent if you’re tied down to a pension plan. We need to setup a plan for retirement that’s completely separate from what our employer provides us. We’ll consider anything we get from pension plans and 401k matches to be extra.

There’s all kinds of investment options for you depending on how many years you plan to stay in the workforce and there’s simply no way to cover them all in this section. What I will say, is that you need to start putting away 15% of your income to invest for your future. I HIGHLY recommend putting the maximum allowed amount into a Roth IRA. One of the benefits of a Roth over a traditional IRA is that your funds go in after-taxes, which means you won’t be paying whatever astronomical tax rate our lovely government comes up with by the time you retire. The other HUGE perk of the ROTH IRA is that you don’t pay capital gains taxes on your earnings. You’ll understand why that’s so awesome once we dive into investments and compound interest.

While I’ll be able to give you the basic knowledge you need to make investment choices, you will really need to sit down with an experienced financial adviser to make sure you get the most out of your money.

Start Saving for Your Child’s College

This may or may not be easy depending on how old your children are. If your children are still very young, then I would recommend speaking to a financial adviser to get you setup with a college fund. There’s a lot to cover here as well, so I’m not going to dive into the specific options that are available until a later article.

I will say that you should be planning to send your child to a college where he or she will pay in-state tuition and get the most for your money. Ivy league schools are like brand new cars. They’re great if you can afford them. You know as well as I do that the workforce will care far more about skill sets and experience than they will about which school your child attended.

We’ll be doing some serious discussion later about furthering education not only for ourselves, but for our children as well. Until then, I would highly recommend reading “Smart Money Smart Kids” by Dave Ramsey and his daughter Rachael Cruz.

Learn to Live off Last Month’s Income

This can be confusing at first, but I promise you that it will make sense soon. For most of us, money leaves our hands shortly after it lands there. Living on last month’s income is where we truly break the “paycheck-to-paycheck” cycle.

When I explain to people how living off last month’s income works, I like to compare it to owning a spare battery for your cell phone (sorry iPhone users) or a portable battery bank. If you only have one battery in your phone, you’ll find yourself having to plug it in at the end of every day to keep it running. Well, our paychecks are no different. If we live off our current paycheck, we run the risk of running out of money and having nothing until we get paid again.

If we have a spare battery charging at home, we can swap out the batteries when we get home. That way we have a fully charged phone to get us through another day while the other battery charges. When you live off last months income, your budget is your battery. Still confusing? Hang in there, it will make sense soon.

Getting to a point where we are living off last month’s income isn’t as easy as just buying a new battery. It’s going to take a little of bit of time. What we have to do is figure out exactly how much we make every month and work to save up that amount in a “buffer” category or envelope. That is going to be our spare battery. Now once we get it saved up, we write our next month’s budget for that amount and use that money to fund our categories or envelopes. Now as we get paid throughout the month, we use our paychecks to fill that envelope back up, just like the battery that’s sitting on the charger at home. Starting to make sense?

If it’s February 1st, we should have every dollar we made in January sitting in our bank account or in our envelope. We will have budgeted that money to spend throughout the month and use our paychecks in February to fill the account or envelope back up. We repeat this process every month. When we do this, we are essentially 1 month ahead on our finances. This means the days of wondering what bills come out of which paycheck are a thing of the past! You’ll find this to be huge relief if you’ve been working a 24-hour shift pay cycle when you have short and long pay periods.

Conclusion

I want you to really take some time to think about what it’s going to mean to be at this step in the process. A month ahead in your finances, a fully funded emergency fund and a plan for retirement and your children’s education. Now I want you to ask yourself if finding a job with a pension plan or higher pay is really going to be what’s important to you, or if you’re going to be more concerned with finding or staying in a job that you love and that makes you happy?

This is what financial peace is all about folks, and it can be achieved by anyone.

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