Getting to Zero
Not all of us are lucky enough to be born with a silver spoon; and even those who are sometimes find the management of money and the growth of wealth to be a challenge. For those who come from modest backgrounds, we’re lucky if we get to start life at zero: zero debt, zero baggage, and zero obligations. However, things rarely work out that way. As we try to climb our way up the income ladder and better ourselves, we incur debt, we experience trauma, and we often find ourselves financially responsible for people who are close to us. With no real knowledge of budgeting or business acumen, the idea of financial security or independence can seem like a far-off dream. Believe it or not, not everyone can be a billionaire, but most people can be better off. To start building a better life for yourself and for those around you, you have to establish a firm foundation; you have to get to zero.
Setting your goal at zero might sound simple (or even stupid), but there’s a lot more that goes into zero than you may think. First, there’s “net worth zero,” where the difference between your assets and liabilities equals zero. Next, there’s “balanced zero,” where your monthly income and expenses balance to zero. And then there’s a third that I’ll call “stable zero.” Stable zero combines the characteristics of “balanced zero” with financial planning. “Stable zero” is where your foundation for wealth building begins.
So what is “stable zero”? You’ve probably never heard of it (because we just made it up). There may be a better way to describe it, but here’s our best attempt: stable zero is when your income exceeds your necessary expenses, fulfills any financial obligations you have incurred, allows for some form of recreation, and contributes toward your future. We’re going to use a recent college graduate example, but hopefully, you’ll find ways to apply these points to your current situation.
Congratulations, you’ve graduated college, you’ve found a job (hopefully one that pays), and you’re completely ready to live independently. Okay, two of those three things might be accurate, but the third is unlikely (kudos to you if you’re killing the game). Let’s say you were fortunate enough to find a job right out of school (one that pays), you’ve checked off the first step of achieving “stable zero,” you have income. Now we have to apply that income to your expenses. If your net salary is $50,000 a year, you’re bringing home a little over $4000 a month. If you’re paying your own rent and it’s the recommended ⅓ or less of your income, you’re paying approximately $1300/mo in rent (which is below the national average). You then have $2700 leftover for other expenses. Additional necessary expenses, like utilities, car-related expenses, and food, add up to $700. You’ve only spent $2000 grand on necessary expenses, less than half your income, which is recommended. Now we start looking at other obligations (Side note: if you receive additional income or support from outside sources other than your own personal income, please share, no but seriously, contribute more to savings, insurance, or investments discussed later). As a recent college grad, you have a little time before you have to start paying off your college debt, but let’s say you’re planning ahead or starting payment early. The average student loan payment is roughly $400 (assuming you have no other debt obligations, i.e., credit cards, your remaining balance is $1600.
Woohoo, with $1600 in the bank after paying all of your living expenses and fulfilling your financial obligations, you can now go out and get bottle service with your friends. Oh no, you went out, got bottle service, had a little too much fun, fell off the table, and broke your arm (this is based on actual events). You don’t have insurance, so you’ll have to pay out of pocket for your treatment, a minimum of $2500 (or more if you require surgery). Fortunately, you find out that you’re still on your parent’s insurance until you turn 25, so you really dodged a bullet. However, you realize that at some point, you might want to get your own health and life insurance, which for health might average you $200 (if you’re pretty healthy) and $200,000 in whole life insurance will run you about $50 (with adequate health). Budgeting for those things, you figure you really only have about $1300 to play around with at the end of the month.
We hate to be the bearer of bad news, but sometimes things don’t go according to plan, so if you don’t save money or put something aside for emergencies, you can actually make a tough financial spot a whole lot worse. It’s generally recommended that you save about 20% of your income each month. For a person with a $4000 salary, that works out to be $800. Additionally, you might decide to contribute to a work-sponsored or independent retirement plan; let’s say these things average around $200 monthly. So instead of $1300 to blow, you have $300, which is still a nice chunk of change, but it’s not enough to lose your head.
Getting to zero actually takes a lot of work and time, but we can set ourselves up for a really bright financial future once we can achieve this starting goal. One where we have the freedom and means to take advantage of opportunities and pursue our interests. You just got a lot of information, most of it comes from personal experiences, but we can’t see your financial picture. This is not something that you have to deal with alone; there are trained professionals out there who can help you (many of whom will offer you free consultations), take advantage of their services, and use their resources to get yourself to zero.