Save more, spend less.
Pay down debt.
According to a survey done by Go Banking Rates, these were two of the top New Year’s Resolutions for 2016. I’m going to guess that you potentially set these same goals at some point in your life, maybe even this year. I know that I did when we were concentrating on paying down our student loans or even this year when I declared this the year of saving.
These goals are natural. At one point or another, we all want to improve our financial lives.
We no longer want to worry if we will have enough money if something happens.
A debt payment is no longer seen as the way to get what we want, instead it is seen as a burden that slowly sucks the air out of our life.
Luckily, there is nothing stopping us from going after these goals…except for ourselves.
Many of us have the desire to get out of debt or to save more money but we don’t develop the strategies or the plans needed to guide us towards actually accomplishing either one.
Instead, we rely on our drive, passion, and motivation.
However, we all know how that ends up. We start off highly motivated. We save every extra dollar that comes our way. We make extra payments on our debt. We believe we are on our way to hitting our goal….and then the motivation fades away after a couple weeks.
Instead of continuing on the path to a new financial life, we fall back into old habits…our old life.
Making changes is always harder than we think it will be. We can’t just rely on our willpower. To be successful, we need to develop systems and habits to help us along the way.
Below are some habits and tips I have found to be beneficial when starting out in the pursuit of a more intentional financial life.
1.) Track Your Spending
Tracking your spending on a regular basis can be one of the biggest eye opening events on your way towards a more intentional financial life. Many of us think we know where our money goes, but until you sit down and compile everything you spend, you will only see the financial picture you want to see, not the one that is actually there. You may even discover that you have a Latte Factor in your life.
The Latte Factor was popularized by David Bach in his book The Automatic Millionaire. The idea is that people have small amounts that they spend on a consistent basis. When you look at the transactions by themselves, they are insignificant. However, when you look at all the money you spend in this area, it adds up to be large amounts of money you could be putting to better use.
Whether we realize it or not, we all have some sort of Latte Factor in our lives, some bigger than others. The only real way to find these items that may be secretly draining your bank account each month is to focus on keeping track of what we spend.
It doesn’t matter whether you do it manually, use an online aggregator service, or a simple spreadsheet (I personally use Mint and a Google Sheets spreadsheet), what is important is you are capturing all your spending each month so you can see trends and make decisions based on the information.
It is hard to create a new financial life if you don’t fix your money leaks. Track your spending, find the leaks, and put that money to better use.
2.) Establish an Emergency Fund
Let’s face it, shit happens. An emergency fund helps ease the pain when it does.
One day things are going great, then next thing you know your furnace blows up, car breaks down, or you get the Friday afternoon “It’s not you – the market is just weak right now” talk from your employer.. For a lot of people, something like this couple cripple them so severely, it could take them years to crawl out of it.
But if you established an emergency fund for times like these, you would be miles ahead of most Americans. According to a survey released by Bankrate, approximately 63% of Americans have no emergency savings for a $500-$1000 emergency, such as emergency room visits or car repairs.
We buy insurance for so many things in our lives. That is all an emergency fund is. It is self-funding “emergency” insurance for yourself. You are protecting yourself from life.
If you are just starting out, concentrate on setting aside $1,000 and work at growing that amount over time until you have 3-6 months of expenses covered. And don’t over complicate it. Keep it in a high-yielding savings account. This money needs to be there when you need it, so keep risk low.
Don’t let life cripple your financial life. Establish an emergency fund to take care of things when life gets bad.
3.) Create debt payoff plan
Debt can suck the life out of people who have it. As long as you have a monthly payment, you are putting someone else in control of your financial life.
It is understandable why paying off debt is consistently once of the top New Year’s resolutions each year. But how do you finally make it stick after years of trying and failing?
The best way to keep yourself motivated to pay your debt off for good is to make a plan and track it visually.
When it comes to debt payoff, there are two main payoff techniques: the debt snowball and the debt avalanche.
The debt snowball method consists of gathering all your individual loans and ordering them from smallest balance to largest balance. You will take all your excess funds and concentrate them on the smallest balance, while paying the minimum payments on the rest of the loans, until that first loan is paid off. You then shift the additional funds to the second smallest and so on. The snowball method tries to capture the quick win to help keep you motivated. Some people believe that the quicker you are able to see a debt paid off, the more likely you can keep the motivation to keep going.
The debt avalanche, however, is based on attacking your debt in the most cash efficient way possible. Instead of lining all your debts up by balance, you instead will line them up by interest rate, from highest rate to lowest rate. You then attack the highest rated debt first, thus decreasing the total interest you pay. While you may not get the quick win that the snowball method provides, this strategy be completed quicker and pay less interest over the life of the debt pay down.
Personally, I use the debt avalanche when it comes to paying down debt. I want to be as efficient as possible and don’t have problems staying motivated during the process. However, while many bloggers advocate for one or the other, I think you need to use whichever one you think will fit your personality best. The goal is for you to be successful in paying down debt.
Once you decide on the strategy, track your progress visually in a high traffic area of your home. Actually seeing the progress you are making can help keep you on the path of debt freedom. It doesn’t need to be complicated and can be as simple (like this) – the key is to update it and keep it somewhere so you can keep it often.
Don’t let debt cripple your life. Create a plan and track it visually and get rid of that debt once and for all.
If you want a new financial life, you need to change the way you are doing things. The best way to do that is to create habits and implement plans that can help you get there. Tracking your spending and having an emergency fund are cornerstones to a successful financial life while creating a debt payoff plan can help destroy your debt once and for all. These are items that anyone can add to their life, no matter their situation. All it takes is being intentional with your money decisions and truly wanting to make a change. With this steps, you can be on your way to a new financial life.
What other habits, tips, or tricks do you find helpful when creating a new financial life? What helps keep you motivated when making a change?