Most young couples with family will spend more than their budget allows. As a result, the difference becomes a debt with elevated interest rates, i.e. credit cards balance. Both of them are working and they figure that a 6-figure combined income will cover all their needs. Not a chance! The more you earn, the more amenities you imagine you absolutely need.
First Rule
Sit down with your spouse at the kitchen table and make a list, a detailed list, of your debts. By detailed I mean how many monthly payments you have left for the house, the car, the furniture, the new boat, etc. Include also an approximate amount for fixed expenses, such as food, gas (ouch!), eating out, school for the kids, clothing, and so on.
This will allow you to figure out how much disposable income you have for the next 5 years, assuming a 5% salary increase annually. You should also include an increase in prices due to inflation. That may vary depending on where you live. For example, gas is more expensive in California. Be conservative! Leave a margin of safety.
Second Rule
Always include the worst case scenario in your planning. For example, a car accident, a serious illness, a layoff and even a pernicious law suit. As much as possible, try to protect yourself with insurance; nowadays, you can obtain a disability protection that will pay you a pre-established monthly compensation if you are unable to work.
Some companies offer to protect you against lawsuits through a really affordable monthly payment. They use some of the best lawyers in the country who will even send a legal expert to represent you in the courtroom (unless you have committed a felony). You know that a frivolous lawsuit can easily ruin you.
Third Rule
Make sure you check your bank statements every month to reconcile the balance with your checkbook. Establish a friendly relationship with a bank employee who will keep an eye on your account and let you know if there is suspicious activity. Call the automated bank service at least twice a week to verify the balance. Tell the bank to let you know if there is a withdrawal over an established limit. For example, they call me or send me an email if the amount is above $300. That will protect you against ID theft.
Fourth Rule
One credit card is more than enough for emergencies or purchases that require one (on the internet, for example). Get your scissors and cut the rest into little pieces, but do not cancel them (if they are paid off, duh!) because it will affect your credit score (unbelievable; here I am behaving as a responsible customer and they punish me).
Be careful with balance transfers from one card to another because of the 0% interest offer for one year. If you don't pay it in full, they will sock you with a hefty rate for the whole year (it happened to me).
Fifth and Final Rule (The most important)
Do not spend more than you make! We are bombarded by credit cards offers, fabulous discounts, one time only low prices. Baloney! Do not believe the hoopla! Be strong, buy important items only after making a careful and detailed analysis of the various products, comparing prices and monthly payments (if needed).
If you don't carry the credit card in your wallet, you won't succumb to the temptation of using it, so leave it at home.
Carry out the following experiment for one month: If you have two salaries, try living with one and put the other into savings. If you can't do it, it means you are not prepared for a crisis situation (one loses his/her job).
One last important advice: Make it a healthy habit to save between 10 and 20% of your income every month. It sure will add up after 20 years and it will provide you an umbrella for whatever needs you may have (College any one?).
