Avoid getting into the financial ‘red zone’ with these helpful expert tips

·5-min read

On this episode of In the Know: Money with Marsai Martin, we explore what it means to get into the financial “red zone,” and how to stay out of it. Humble Lukanga, a celebrity financial advisor and founder of Life Line Financial Group, talks to host Marsai Martin about strategies for staying out of the financial “red zone” and how to set yourself up for future financial success!

Before discussing financial strategies, Marsai asks Humble to explain exactly what the financial “red zone” is. Humble explains that the “red zone” is a type of chronic debt that becomes more and more difficult to escape from over time.

“[The red zone is] the place where you’re drowning in debt,” Humble tells Marsai. “That’s where you feel like the money that you’re making, you’re not saving. You’re spending more than you’re putting away, and you’re not growing. You’re actually sinking every month.”

Unfortunately, getting into the financial “red zone” is incredibly common. According to Humble, as many as 3 out of 4 Americans could be considered to be in the “red zone.”

“3 out of 4 Americans don’t have $1,000 saved up, so if you think about it, the average American is $400 away from not being able to make their ends meet, so the majority of people are in the financial red zone,” he tells Marsai.

While ending up in the “red zone” is frustratingly common, there’s a simple way to ensure it doesn’t happen to you: Save your money. “Live below your means,” Humble recommends. “I’m not saying don’t enjoy life, but I’m saying save some money for a rainy day. Put some money away that you can invest, not only in growing your wealth but also in growing your knowledge or education.”

A good rule of thumb, according to Humble, is to save a third of your income and invest another third. “Use this very simple formula that I try to teach young people,” he recommends. “Spend a third, save a third, and invest a third. Keep it that simple. If you have $100, it’s okay to spend $33 of it. Save the other third and then use the other third to invest in yourself, whether it’s reading books or educating yourself further. But if you stay like that consistently, even as your money grows, you’ll be fine. You’ll be able to stay out of the red zone.”

Once you reach financial security and are safely out of the “red zone,” the next goal, according to Humble, is financial freedom. While there are many different definitions of financial freedom, Humble views financial freedom in terms of time. “The question I ask myself is… ‘how long could you be comfortable if your job disappeared today?’” he tells Marsai. “The key is to get to a place where you’re only working because you want to, not because you have to. That’s freedom.”

In order to stay out of the red and achieve financial freedom, a good credit score is key, Humble explains. “A credit score pretty much is a credit report on how capable you are in repaying back what you owe,” he tells Marsai. “It is so important to have a high credit score so you can always get a low interest rate when you borrow money.”

But building a credit score can be difficult when you’re young. “What exactly does it take to have a high credit score?” Marsai asks Humble.

“When you’re young, you pretty much don’t have any credit because you haven’t taken out a loan,” Humble tells Marsai. “Maybe you take out a small credit card when you’re 18 for $500 and you start paying it off, you’re starting to build credit.”

Next, Marsai raises a subject that is likely on the minds of many young people: student loans. “Do you have any tips for staying ahead on student loans?” she asks.

First, Humble explains, it’s important to make sure you’re choosing to go to school for the right reasons. “I think before you even think about student loans take a step back and ask yourself, ‘Why am I going to school?’” he tells Marsai. “Make sure if you’re going to school it’s something you want to do.”

Then, once you decide that taking on student loans is worth the risk, Humble recommends seeking out subsidized government loans. With subsidized loans, the government helps pay off interest while you’re in school, reducing the overall amount of money you need to pay back. “If it’s an unsubsidized loan, while you’re still in school [the interest is] getting bigger and bigger,” Humble explains. “So try to take out a loan that’s subsidized if you can.”

Building financial success and staying out of the “red zone” may seem daunting, but Humble encourages young people to take their financial journey one day at a time. Success takes time to achieve, but with dedication, Humble believes young people can do anything.

“I think the advice I want to share is believe in the power of your dream and have courage to walk your own path at your own pace. Understand that success doesn’t just come. It’s not an event. It’s a process,” he tells Marsai. “The best thing you have is your youth. Don’t waste it. It’s the best thing you have because the world is yours and so whatever dream you have, start now. Anything is possible.”

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