“31 Days to Financial Independence” is an ongoing series that appears every Thursday on The Simple Dollar. You might want to start this series from the beginning!
Last time, we put together a lot of pieces and created a picture of our lives, one that shows how many hours a week we spend just to keep running in place and how few hours per week go toward building any sort of future.
This shouldn’t be an altogether surprising picture. After all, more than three in four Americans are living paycheck to paycheck and 76 million Americans struggle to keep food on the table. This isn’t just low-income folks, either; according to Bloomberg, “[c]lose to half of those who earn from $100,000 to $149,999 a year have less than $1,000 in their savings accounts. Some 18 percent of them have socked away absolutely nothing.”
The truth is that it’s the American norm right now to be running in place financially. The median American is making no progress whatsoever toward their goals in life.
You want to be different. You want to achieve some big life goals. Otherwise, you wouldn’t be here.
The answer starts with debt. Believe it or not, 80% of American adults are in some form of debt. Notice how that number lines up almost perfectly with the number of Americans living paycheck to paycheck? That’s not a coincidence.
The truth is that debt is a weight around your neck, dragging you down and making it very difficult to make any real forward progress. Debt payments not only add yet another bill to your monthly bill-paying routine, they also accumulate interest, which means you’re going to be paying back far more than you were given to begin with. Nothing better than swapping $2,000 of your hard-earned money for $1,000, right?
Unsurprisingly, debt is where we’re going to start when it comes to cleaning up your financial situation. It’s a bill that you can make go away quite easily. If you remember the exercise from last time, debt bills gobble up some of those hours that you work every week. If you eliminate debt, you free up those hours – and the proceeds from those hours – to devote to your long term life plans. The route to financial independence is all about devoting as much of your work week as possible to future financial success and as little as possible to merely keeping the wheels of everyday life turning. There’s no better way to make that happen than to eliminate debt.
You might think, “Great! Let’s sit down and figure out how we’re going to pay all of this off!” Not quite so fast, my friend.
The first step in this process is to have a little bit of cash to work with. There are three big reasons for this.
First of all, you’re going to want to have a cash emergency fund. Cash is king. Cash can’t be declined like your credit card can. Cash can’t have its credit limit reduced like your credit card can. Cash can’t hit a credit limit, either. Cash solves problems, and you’re going to want to put a little aside to solve problems. Like it or not, the road to the future is bumpy. It’s going to involve vehicles breaking down. It’s going to involve having to pay a bill you forgot about. It’s going to involve losing a job. Having some cash on hand will help you out.
Second, you’re going to want to make sure all of your bills are at least up to date. If you’re not paying your bills on time, you’re facing late fees, which makes the challenge of paying things off even harder. It is absolutely vital that you get up to date on all of your bills before you start worrying about debt repayment or any sort of larger future of financial independence.
Third, even if you have an emergency fund and are up to date on your bills, a burst of cash can help you wipe out a bill immediately, eliminating that bill and giving you a great head start on this entire plan. If you can follow the plan presented here and use the proceeds to wipe out a bill or two, then you’re suddenly responsible for fewer bills each month. You have more resources to work with in terms of achieving your dreams even if you change absolutely nothing else in your life.
Thus, rather than building a debt repayment plan first (don’t worry, we will get there), your best first move is to jump start your finances with a burst of cash.
But… how on earth are you going to get a burst of cash? Most of us don’t simply have a big bundle of cash sitting around. If we did, then getting ourselves into better financial shape would be a lot easier.
The tool we’re going to use to get that initial burst of cash is a surprisingly simple one: decluttering.
The vast, vast majority of Americans have items in their home that they don’t regularly use. Their closets are full of all kinds of items that have been pressed into tubs and boxes and into storage. Their shelves are full of media items that are rarely examined in any way. Their garages and their rafters have tons of forgotten and nearly-forgotten items that haven’t been touched in eons.
Why is that stuff still there? It’s because we like to buy into the “someday” argument. Someday, I’ll need this. Someday, I’ll have enough time to use this. Someday, I’ll pick up this hobby. The truth is that someday almost never comes – and even if it does, you’re probably better off acquiring replacement items anyway.
Here’s a simple little rule to follow: if something has sat in your home unused for more than a year, you’re probably better off without it. It’s very likely that if you ever do decide you need that item, you can borrow it from somewhere (like the library or a neighbor) or, in the very narrow likelihood that you do actually need it again, you could re-buy it. Otherwise, it’s just taking up space and it could be converted into cash in your pocket.
The game plan is simple, so let’s get started.
Exercise #6 – Decluttering your home for a big financial boost
This is a process that won’t be done overnight. It’ll take several sessions, at least. You might be able to do it over the course of a weekend if you have a smaller home or apartment. Set aside some time for this – it’s important.
First of all, go through your home and make a giant list of all of your storage spaces. By storage spaces, I don’t just mean closets and rafters and crawlspaces; I also mean places where you collect things together, where there’s a large quantity of stuff. Things like bookshelves or cupboards or pantries or media centers absolutely qualify.
You’re going to find as you go through your home that you have a lot more of these storage spaces than you think. I might just be able to count a handful of closets and crawlspaces in our home, but once we start including things like our pantry and various cabinets and various shelving units, the list adds up. Way up.
After that, one at a time, start going through these different storage spaces. Go through every single item in that space. Your goal should be to remove every single item from that storage space at some point during the process – empty it out completely. You can either do that at the start and make judgments as you consider putting things back, or you can do that at the end and make judgments as you remove things.
What kind of judgment are you making? For each item that you pull out, use a simple litmus test to figure out whether or not to keep the item or to sell it.
The simple test? Have you used this item in the last year? If not, are you realistically going to use this item in the next year? If the answer is not a strong affirmative yes, get rid of it.
During this process, you’re often going to have emotional responses to particular items. You’re going to try to convince yourself that you would, in fact, use this item because you’re attached to it somehow.
But would you really use it?
If you have a DVD of a movie that you really love that also happens to be on Netflix, are you going to really watch that DVD any time soon?
If you have a book that you love that’s easily available at your library or is already on your Kindle, are you going to really read that book again any time soon?
If you have supplies from a hobby you used to love, are you really going to pick up that hobby again and devote time to it, even if it’s something you remember fondly?
If you have a tool that you haven’t touched in years and you’re sure your neighbor across the street also has it, are you really going to use that tool again any time soon?
The answer to all of these is “no,” of course. Yet, so often, people convince themselves for emotional reasons that the answer is “yes,” and that’s how junk gets built up over time.
Don’t let your emotional response guide you. Trust that question. Have you used this lately? Are you really going to use it again any time soon? You might have an emotional response here, but are you really going to use that item? If you’re not, it probably makes sense to put it aside.
As you go through this process, you’re going to accumulate a big pile of things that you’re intending to get rid of, and that brings us to the second half of the process: selling.
How on earth are you going to sell off all of this stuff?
First of all, recognize that the more time you put into it, the more money you will make from sales. It’s also worth noting that as you invest more and more time, the return on any additional time is going to go down – as you get closer and closer to the best price for that item, you’re not going to continue to see big jumps in the sale price. Having said that, for many items, the money you make for your extra time quickly goes below minimum wage, so for most items of relatively low value, it’s worthwhile to accept the first reasonable price you’re going to get.
I use a simple four step process when selling things.
First, I use sites like Amazon and eBay to get a sense as to what my used items are selling for. It’s worth remembering that unless they’re in shrinkwrap, they’re not going to be considered new. They’re used, even if they’re in great shape. So, what are they selling for used? I’ll usually make a list of actual selling prices, not the crazy prices that sellers sometimes ask for their stuff. What did this sell for recently? Ebay is usually a good source for this.
Next, I put aside the 10% most valuable individual items for later, then sell the remaining 90% on Craigslist in big bundles. I’ll list all of the items for sale on there and give them prices that are around 50% of what they’re selling for online. I also usually include a “bundle deal” of some kind, where they get a bit of a discount if they buy lots of items at once.
Why so much lower? For starters, you’re not necessarily going to have someone who wants that particular item in your local area. For another, if you do try to seek out full price on an online site, you’re going to have to devote quite a bit of additional time to it (which is why we set aside the most valuable items).
In addition to Craigslist, I also use local community sales pages on Facebook. Our town has one, as do many nearby towns, and I’ll post in all of those places looking for buyers. I usually offer to meet the buyers in neutral places for the sale if the items are small (like books or DVDs or video games).
Any items that don’t sell on Craigslist or a local sales site gets put away for a yard sale. We occasionally have a yard sale, during which we drop our prices very low. I’ll usually start selling items at half of what I listed them on Craigslist for, then keep lowering the prices throughout the weekend to get rid of all of the stuff. To me, a successful yard sale is one in which I have nothing left at the end of the sale, even if it means I just earned pennies on some of the items.
For the individually valuable items, I turn to eBay and Amazon Marketplace. Since those items are of significant value, I’ll take the extra effort with them to sell them individually online. It takes time to do this – you have to deal with the listing, collect payment, figure out how to ship the item, ship it, and watch the feedback, and you have to do all of it efficiently.
Once all of the items are gone from that one storage area, move on to the next one. Keep going down that list of storage areas until every single one of them is cleaned out.
The goal of all of this is to turn a lot of your unused items into extra cash that you can smartly use to get the ball rolling toward a better financial future. So, how do you do that? What exactly do you do with this wad of money that you’ve made from the sale?
The absolute first thing you should do with that cash is make sure that all of your bills are up to date. An endless cycle of late fees can really hamper your finances. If you’re notching late fees on some of your bills each month – let’s say even three of them – and those late fees are $35 a pop, then that’s $105 that just vanishes into the ether. It’s gone. Getting yourself up to date on your bills and in a position where you’re not going to be late any more can make a giant difference in terms of making ends meet and having at least a little bit of breathing room in your financial state.
What do you do if your bills are up to date? The next step to take is to build an emergency fund, which is simply a bundle of cash that you keep in your savings account for personal emergencies.
Many people rely on their credit card for an “emergency fund” of sorts, but the truth is that a credit card isn’t actually all that good of an emergency fund. It fails you completely during a lot of emergencies. It doesn’t help if your identity is stolen. It doesn’t help if you reach your credit limit, or if the bank reduces your credit limit, or if your card is cancelled. It doesn’t help if your card is lost or stolen. In all of those cases, you can just go to your local bank and still make a withdrawal from your cash emergency fund to fix your problems.
Why not put that emergency fund in the stock market and earn a better return on it, then? Money in stocks isn’t nearly as liquid as cash in a savings account, for starters; you’ll have to wait for a while to get that cash out. For another, you run the risk of losing money due to the volatility of the stock market right at the very moment you need it. You buy stocks, they dip 20%, then you have an emergency – that’s not a recipe for success.
Cash is king, and that’s why cash makes the most sense when it comes to an emergency fund. Keep it in a local bank that you can personally visit if necessary in order to make a withdrawal.
The thing is, if you go through all of your extra stuff and make a sincere effort to sell the extra stuff off, you’ll likely still have a fair amount of money left over even after taking care of the basic financial steps above. What do you do then?
Well, the next step is a debt repayment plan… but we’ll get to that next time.