In my last post, I outlined the basics of a personal finance plan. That article is the “what to do” where I answer questions about insurance, debt management, savings and investments. If you haven’t read it I suggest spending a bit of time with the post because it provides the foundation for getting your proverbial ducks in a row. This week, I’d like to get into the “how to do it” part. This part is about the mindset to get yourself on track. There are a lot of general principles for good financial health but what I outline below are the most time-tested. Since what I’m talking about this week is more about attitude, this is the part where you make adjustments and decide for yourself what works best for you.
- Spend less than you earn.
It feels stupid to even write that, it’s so obvious. But I mention it because it is the key to financial health, and many people —maybe most—don’t do it. In fact, it’s so easy to say and hard to do, that I often compare it to talking about the path to enlightenment through meditation. Focus on your breathing not your thoughts sounds like a breeze, but is equally difficult to execute.
To break down this simple idea, spending less than you earn has two sides to it. You can either work on earning more, or you can work on spending less.
I’m not giving you advice on how to make more money – that’s a subject many have written books about. But do think about how it applies to you.
For the cutting your spending part, which is usually easier, I have some thoughts. Here’s a concrete idea: keep a journal of what you spend. I first did this in a little sketchbook I carried with me, but you can do the electronic version using Mint or a Spending Tracker. Just be sure it includes everything – including all the little items you pay for in cash, like coffee. If you’ve ever done this for dieting, you know that it works – the simple act of observing where your money goes can change some of the bad habits right off the bat. The apps are even nicer, because you can go deeper by looking at the trends and categories you spend the most on, and from there, it helps you make assessments about where your money is going, and whether it lines up with your priorities.
I don’t want to be a scold, and tell you not to drink lattes at your favorite coffee shop anymore. Everyone has special pleasures they really love spending money on, and it’s not my goal to guilt you out of those. As I write this, I’m enjoying a $4 coffee in a nice coffee shop, and indeed, it is a pleasure. But some of the stuff we spend money on is actually mindless, and could be cut out without much pain – like ATM fees. That is good stuff to know. The point is that taking a good look at where your money is actually getting spent can help you make sure that your spending lines up with your priorities. And, of course, if you’re in a more hunkered-down emergency mode of cost-cutting, (and most of us have been there) then there are times when cutting out pleasures is warranted, too.
- You can afford anything, but you can’t afford everything.
It is easy to look at budgeting as self-denial, but a better way to look at it is as priority-setting. Budgets can empower you to do the things you want in life. You want to quit your job and spend five months hiking the Appalachian Trail? You can save enough to do that. You want to buy the laser cutter that will bring your silkscreen business to the next level? You can do that. You want to drink artisanal cocktails with your friends at the hottest bars five nights a week? Awesome. But can you do all of those things at the same time? Probably not.
You can do the big thing you want to do with your money. But you can’t do all of the big things. You need to be clear on your priorities, because for most people, those are the only things guaranteed to be funded.
line up your financial priorities. And when you have been tracking your spending for a little while, take a look at what your actual spending is. The point is to match the priorities with the actual spending.
- Pay yourself first.
This is an extension of the last idea (priorities). If you have a priority spending list with ten items on it, you will likely run out of money before you fund numbers nine and ten – that’s the reality for most people – there just isn’t enough money for everything. But too many people put managing their long term financial stability last. They pay all their other bills first, and think that they will use whatever is left at the end of the month to fund their emergency fund, pay off their debt and fund their retirement and other savings. But the reality is that this method rarely sets anyone up for financial well-being, because by the time those bills are all paid, there isn’t money left. Don’t do this.
So make your own financial security a priority, and fund it first. The last items on your priority list will never get funded.
It’s a small attitude shift that makes a big difference. Put money from your paycheck into your credit card debt or retirement savings, and then use the rest for rent, bills and entertainment. You will likely find that to do this, you need to cut out a little more of your spending than you expected. That’s normal. The idea is to look at what that healthy spending number actually is, and work with what you have. It may send you back to your priority list again – you may decide that to actually fund your savings at a good level, you need your expenses to be even lower. Perhaps this means that you ask for a raise. Perhaps it means you move to a lower cost area, or shop around for a cheaper cellphone plan. Discovering that you’ve been living beyond your means and making adjustments can feel hard. But don’t get down on yourself – addressing it is a huge accomplishment. Be proud of those big first steps.
DISCLAIMER: I am not a financial planner or advisor, so don’t take this as financial advice for you. Your situation has its own unique curves. This is a basic framework for your general information and understanding.
Bio: Hannah Cole is an artist and Enrolled Agent. She is the founder of Sunlight Tax.
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