Explore Your Hidden Volcano

November 29, 2013

The Earth is still so full of mysteries even though we have had scientists exploring what seems like every nook and cranny of Earth’s surface, the oceans and the atmosphere. As much as we think we know (from a global perspective, not an individual one) about how the planet works, there is still much to learn and discover. Recently, there was some volcanic activity in Antarctica and the implications for the planet are completely unknown at this time.  It’s fascinating stuff!  (or at least it is to me)

The same thing can be said (It’s fascinating stuff!) about our personal financial lives. We know where money flows in and flows out of our accounts, or at least we think we do. But is there some hot lava flowing under the icy glaciers of our financial lives ready to do some damage? And if so, what do we do about it?

For most people I talk to, there is a general sense of their cash flow but when I ask more detailed questions, that general sense of knowledge dissolves a bit.  There is a whole lot of unknown in most budgets and that’s where the exploration concept can come in handy. Digging into our expenses can be incredibly revealing. The “big things” in our budgets give us the best chances to make significant strides.

I recently spoke with someone who felt like she was living paycheck to paycheck and was making absolutely no progress toward saving for an emergency fund, much less her retirement goals.  She wasn’t even contributing up to her company’s 401k matching level, so she was walking away from “free money” with each paycheck. She had a general sense of where her money was going each month, and we dug deeper into her budget using a few of her recent bank statements and Mint.com.

She was right about one thing; there was not a whole lot of “fluff” in her budget. What there was, though, was a far too large share of her income going toward housing costs. Her mortgage and utilities were consuming almost 65% of her take-home pay.

In our conversation, she said she would do anything possible to keep her house because she loved it and it was a top priority.  She kept the house during her divorce but was struggling to maintain budget sanity with only one income to pay the bills rather than two. When we looked at the cost of the other things in her life, the mortgage made her financial life (in the current state) totally unsustainable without a bankruptcy filing happening in the not too distant future.

It was a difficult conversation, discussing the fact that her #1 priority jeopardized her entire future.  She had started incurring credit card debt to pay for routine items like groceries and gasoline.  She was in full blown crisis mode when we talked for the first time.

Over the course of time, she got forbearance on her mortgage, then a modification of her mortgage, and eventually she came to grips with the fact that if she wanted to do more than live to pay the mortgage, maintaining that particular house was not in her best long term interests.  She eventually sold it and downsized to a much more budget friendly condo and is enjoying NOT mowing the lawn and NOT shoveling snow.  She is also able to contribute significantly more than the company matching contribution limit to her 401k and has a small emergency fund started and is fueling it with each paycheck.  The biggest change was that during our last conversation, she was smiling a lot and actually laughed out loud a few times.  Her stress level is down tremendously.

If you are feeling overwhelmed or stressed or just stretched to your limit, take a very hard look at your expenses to see if there are things that are flowing like hot lava out of your account. You’ll read a lot about the “real cost” of buying a coffee or a lunch, and for very good reason – those things add up quickly, but start with the top 3 biggest expenses in your budget.  If you explore those areas, you may find ways to make huge strides in a short time frame. In today’s world of short time horizons and limited patience levels, uncovering your hidden active volcano might be the best thing you can do financially.