By Shane Woodman, vice chair, Generation Next
Onspot of North America Inc. - Onspot Automatic Tire Chains
This article was originally published in the June 2018 issue of Generation Next Edition.
Congratulations - you work in one of the greatest industries out there … it’s stable and has lots of potential for growth. Most people’s ambitions increase as they understand the possibilities the work truck industry can bring. And your continued professional growth will likely bring an increased income. Higher incomes generally translate to bigger purchases, better vacations, and more. Let’s look at three tips to make sure you don’t fall into the trap of “the more you make, the more you spend.”
- Start an emergency fund
- Track your debt-to-income ratio
- Know your operating expenses (add your monthly bills together)
These are three simple things you can start doing immediately – and they don’t require much thought.
Emergency fund: Establish a fund for unexpected expenses (e.g., home repair, illness, job loss) – and diligently contribute to this. You may be wondering how much you should have in this fund. It should amount to four-eight months of living expenses. For example, if your monthly expenses equal $1,000, you should build up to $4,000-$8,000 in your emergency fund. Feel free to go above that number. And take this fund seriously. One day, your hot water heater will break and you will be happy you have the funds to replace it. An emergency fund will help you avoid having to put unexpected expenses on a credit card. You will be able to grow your worth instead of racking up debt.
Debt-to-income ratio: This is simply a calculation. Divide your recurring monthly debt by your gross monthly income. For example, if your expenses are $1,000 per month and your gross monthly income is $3,000 per month, your debt-to-income ratio is 33%.
You want this number to stay below 36%. So, when you are looking to buy a new car, run the numbers first and see if it makes sense for you. Let’s look at two individual scenarios:
- Person A makes $100,000 in annual income. Divide $100,000 by twelve to arrive at their monthly income of $8,333. Although this may seem like a lot of money, they purchased a boat that costs $250 a month to pay down, a new car with a $550 monthly payment, and a home with a $3,000 mortgage payment – plus they have student loan payments of $600 per month. They have some cool things, but their recurring debt is $4,440 per month. They can afford all those luxury items, but their debt-to-income ratio is 53%.
- Person B makes $50,000 in annual income ($4,167 per month). They have a car payment of $200 a month, no boat, a modest home costing $800 a month, and student loans at $500. They may not have the luxury items, but their debt-to-income ratio is right at that 35.9%.
I am not saying you can’t buy the things you want … just make sure they fit into your budget. Debt is a hole that is difficult to climb out of. Track your debt-to-income ratio and stay below 36%. I promise you will have a life of very little financial stress.
Operating expenses: I am talking a lot about your recurring monthly expenses. Your expenses are more important than how much money you actually make. Follow the path of “the more you make, the more you can keep making.” Track your expenses each month. Below is an example of how to track your expenses each month.
Set a budget for each expense and then track the actual payout. I only included expenses that recur. This tells me I have $1,570 remaining after all expenses are paid. I took the $3,000 and subtracted each expense to come up with $1,570. This may seem simple, but it is important to track each month. It will help you identify which expenses are increasing and which are decreasing.
With diligent attention to these three keys, you should be well on your way to stashing away more of your hard-earned income.