Strategies for Sustainable Finances
By Pat Christianson and Rosana Francescato
What’s the formula for healthy personal finances? It comes down to 20% knowledge and 80% behavior.
That’s according to Tiffany Groode, who spoke at the informative Women in Cleantech and Sustainability event “Financial Planning for Cleantech and Sustainability Professionals.”
Simply increasing your income, she said, doesn’t lead to wealth if you don’t change your behavior. Whether you make $45,000 or $250,000, you won’t get ahead if you spend it all and and more, getting into debt.
Tiffany gave two basic principles for building wealth:
Mistake 1. Not saving for emergencies
A surprising number of people in the U.S. cannot afford to pay an unexpected $400 bill without going into debt. We’re not prepared for emergencies.
So, how do you prepare? Ensure you have some liquid available cash. That means that you don’t need to sell anything to come up with the cash you need.
What can you do to build this emergency fund?
Even though this goes against common wisdom, Tiffany advised not to start saving via a 401(k) plan until you’ve already built up your emergency fund. Not having cash at hand for emergencies can make you go into credit card or personal loan debt, which has a higher interest rate than the gains you can get from your 401(k).
Having an emergency fund allows you to stay outside the credit card debt cycle.
Mistake 2. Not having enough saved in case you lose your job
How much should you have in the bank if you lose your job? The rule of thumb Tiffany uses is enough to cover 3 to 6 months of your basic needs.
This security blanket should not be in the form of something risky, like stocks. It should be in liquid savings.
Tiffany uses the concept of "4 Walls" to define the basic needs you should cover:
Mistake 3. Not having a clear strategy to pay debt
If you find yourself in debt, Tiffany recommends the Debt Snowball effect: Pay the minimum on all your credit cards except for one. Pay the maximum you can on that one. When that one is paid off, that money will be freed up to pay the next credit card. This strategy lets you pay your debt off faster, reducing the interest rates you pay.
It’s worth making sacrifices for a short time, she noted, to get financially healthy in the long run.
Mistake 4. Not planning for the future
As we all know, time is money! And not planning for the future can cost you.
In the U.S., instead of saving for retirement we tend to go into debt, doing things like tapping our retirement funds to send our kids to college. That generates extra penalties and loss of income. Tiffany advised that it’s better to take out student loans, which have a lower interest rate, than to spend all your retirement savings, which will be more difficult to replace.
A rule of thumb is to save 15% of your income for retirement. Saving is only part of the picture, though. Tiffany cautioned that there’s an opportunity cost in saving versus investing. The good news is that thanks to compounding interest, it’s never too late to start building up your finances, even if you don’t have a lot to start with.
How do you avoid these mistakes?
Look at where you spend your money, Tiffany advised.
To do this, list all your expenses by checking your credit card and bank statements. (Also ensure you’ve accounted for all your income.) This will help you see where your money is going.
You may realize you’re spending $300 a month on Starbucks, and $2,000 eating out. Can you save part of that instead?
Give every dollar a job. Understanding your spending and creating a clear spending plan is the most important step, said Tiffany, in reaching your financial goals.
A few of her parting words of advice:
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