Reduce Financial Stress with Clarity and Direction

May 02, 2011

Overwhelming stress takes its toll. Research shows that stress is the leading cause of disease and financial stress is the most common stressor. Imagine the feeling of not making ends meet and not having a safety net – no emergency fund and high debt so you feel like you may never get out of it. In our latest research, we studied stressed out employees who used our financial wellness assessment and found there were two things they all had in common — no emergency fund and high debt. Maybe it was the combination of the two that put them over the edge of “high stress” to “overwhelming stress.”

No amount of yoga or meditation is really going to take that stress away because after the yoga class is over and you drive home, it comes right back. The pain in your neck is back. It is hard for many people to imagine what life would be like with a savings cushion and credit cards with no balance on them. A while back I had an in-person financial planning session with a woman who was having trouble making ends meet. We talked about funding the emergency fund first, getting it a certain dollar amount and then paying off her debt. As soon as we mapped out the strategy, I could see a change come across her face – she looked about 10 years younger like a burden had been lifted. I guess because it was.

Like many people, she had an idea of what she needed to do – but wasn’t sure where to start and wasn’t entirely clear on the strategy. She knew she had to live below her means but seriously, that is an intellectual concept not a concrete plan she could work with – she needed some steps. Once she had them, I could tell she would be able to do it even though it might take a while.

Here is the plan we built for her:

First target the emergency fund for a minimum of $1000. We talked about finding money in her budget and she found ways to save $125 per month by bringing her lunch to work four days a week, cutting her entertainment budget a bit and doing her own pedicures instead of going to the salon. She would set up an automatic transfer from her checking to her savings after the first month. That would take too long – she decided to sell one of her bikes. She is a long distance bike racer and has three road bikes. She’ll sell one and jump start this thing.
Pay the minimum on her credit cards. Until she has her $1000, she’ll pay the minimum on her credit cards because the emergency fund is the key – without it what does she do in an emergency? You guessed it, pull out the credit card and the never ending cycle continues.
Stop using the cards. Important point here.
Pay down one card at a time. Use that $125 per month to pay off the credit card – if she has an emergency and has to deplete the emergency fund, temporarily redirect the funds back to replenish the savings.
Build a stronger cushion. Once the credit cards are paid down, build up the emergency fund to three months expenses at minimum.

There was a little ray of hope that was just enough for her to see that this could be done, and in her case without a huge sacrifice. I think sometimes many people know what to do conceptually but first of all, aren’t sure where to start and secondly, don’t have clarity of what to do.

What makes this plan work?

It is realistic. Starting with a do-able goal of $1000 is the key. This is no longer a theory – it’s a plan.
It is clear. She knows exactly how much she is going to save and what she has to give up to do it.
It has contingencies. Life happens and when it does, it usually costs money. Her plan is flexible enough to redirect her funds back to savings if she needs to spend her savings.
It is motivating. Once she could see the light at the end of the tunnel, she wanted to make it happen sooner and she got thinking about what she could sell.
It is time tested. Not brain surgery here – works for everyone, every income level and age.

It is the foundation and building block of every successful financial plan – the simple emergency fund!

Who knew the simple savings account (coupled with a debt reduction plan) could help people reduce their migraine headaches, ulcers, back pain, neck pain, and even heart attacks. (Check out this study here.)

Maybe that is what Ben Franklin meant by healthy, wealthy and wise.