On Friday, I shared an infographic on Bad Spending Habits and How to Fix Them, and I started thinking about living beyond our means. It’s a common problem and one, deep down, we know isn’t good for us. So why do we do it?
Debt or Diet. Easy to Fix and Harder to Implement
Becoming financially healthy is a lot like getting in shape. We know that we need to eat plenty of veggies and fruits, cut back on sugar and fat and exercise if we want to lose weight. Yet, we don’t. It’s the same story with getting financially healthy. The solution is simple: Eliminate debt, stop spending money you don’t have and live within or below your means. And just like people yo-yo diet and lose and regain weight all the time, people fall in and out debt regularly too.
4 Steps To Fix Bad Money Habits Permanently
Debt is just one symptom of bad money habits. While it’s certainly something you need to address and eliminate, there are a few steps you need to complete first, if you really want to permanently break your bad money habits. They didn’t don’t form overnight, and there is no magic pill or solution to make them disappear either. Success lies squarely on your shoulders, and you will need to make a conscious effort to change and/or remove some of your long-held money habits and beliefs before you can get rid of debt.
Step 1: Recognize that You Need to Make a Change and Commit
This seems obvious, but if you don’t honestly believe that you need to change and commit to doing the work, you don’t need to bother with the other steps. The first step is where most people fail. They either don’t believe there is a “real” problem or they are unwilling to do the work to get their financial house back in order. You need to take ownership for your situation and commit to changing it. No one else can do it for you. My friend, Grayson, at Debt RoundUp wrote a great post on changing your money mentality. If you still find yourself struggling, ask yourself why.
- Are you afraid that you can’t undo past mistakes?
- Are you worried that friends will no longer like you if you can’t join them on outings?
- Did you always pay the bill and now that you can’t, friends may abandon you?
- Are you afraid you will have failed your children if you have to temporarily pull them from activities they enjoy?
Don’t feel ashamed that the thought of losing friends or disappointing your children scares you. But also don’t let it stop you from doing the right thing. Your true friends will support your efforts, even if it puzzles them initially. And your children’s lives with be 100% better because you got out of debt and demonstrated good financial behavior to them. If you feel any resistance, keep asking yourself “why” until you discover what is really holding you back.
Step 2: Identify Your Emotional Triggers to Curb Mindless Spending
Most money mistakes have an emotion behind them. Anger from getting passed over for a promotion led to buying a big-screen TV. A break-up led to weekend in Vegas. Boredom led to an all-day shopping spree. You know the drill. We’ve learned to quell our emotions through spending. It makes us feel good, at least temporarily. Your next step is to recognize when your emotions are controlling how you spend your money.
One way to help determine this is to ask yourself: “Is this something I truly need or am I feeding an emotion?”
Notice that I used the word, “need”. Most emotional triggers are buy right now moments, so if you use “want” over “need” – then the answer will almost always be “yes”. Slow down and figure out if this something you need or if you’re trying to soothe an emotion by buying something.
Remember, emotions are not bad. We certainly don’t want to stop feeling, but we do want to stop letting them drive our spending habits.
Step 3: Forgive Yourself for Your Past Money Mistakes
This is a place where a lot of people get stuck. They spend countless hours, days, weeks, months and even years beating themselves up for their past money mistakes. Please stop. It’s important to understand the reason behind those mistakes (i.e. your emotional triggers) but berating yourself doesn’t help. In fact, you’re wasting energy on something you cannot undo when you should instead use that energy to propel your life forward. Accept responsibility for your mistakes, forgive yourself and move on.
Step 4: Create a Get out of Debt Action Plan and Follow It
Now you’re in a place where you can tackle your debt. You have the commitment to do the work, have control over your spending, rather than your emotions and have forgiven yourself for past mistakes. So let’s get started.
- Calculate Your Debt. All of it. Credit card, mortgage, student loans, car loans and any other outstanding loans you have. This may add up to a scary number. Take a deep breath and don’t panic.
- Track your expenses.You may be surprised to see what you spend your money on.
- Create a Budget. In order to live within your means, you need to know how much comes in and goes out. Trim the fat from your expenses, starting with the low-hanging fruit, such as gym memberships you don’t use, magazines you don’t read and go from there. Unless your situation is very dire, you don’t need to do it overnight. Too much change can sometimes overwhelm and cause people to quit. Set a reasonable but an aggressive timeline to implement changes and eventually become ruthless.
- Have an Emergency Fund. Please do not skip this step. For most people, eliminating their consumer debt will last at least a year and possibly several years. In that time, things will break, people will get sick and you will need to cover those expenses. I’ve seen people doing great with their debt repayment have all their hard work undone because they had no emergency fund. It’s demoralizing, which may lead you to give up.
- Set Goals. Goals give your money purpose and are your number one defense against mindless spending. They act as a barometer and help you determine whether a “yes” or a “no” will bring you closer to achieving your goals. Just make sure you set goals that align with what YOU truly want, not what others want for you.
- Accelerate Debt Repayment. For some, removing the nonessentials frees up enough money to pay off their debt in a timely manner. For others, it won’t. You may need to earn additional income, whether it’s a part-time job, doing freelance work, selling things on eBay or Craiglist or some combination. This isn’t always easy, but it will decrease the overall amount of interest you pay and help you reach the good life so much faster.
A New, Improved Perception of Living Within Your Means
When you are accustomed to a lifestyle funded by credit cards, it can be a bit sobering to imagine what life must be like when you start living within your means. You imagine it’s dull and boring. You say “no” more than “yes”. It sounds kind of awful. Well, it isn’t.
It’s quite the opposite, in fact. Now you live on your terms, not your creditors terms. You spend money on what truly makes you happy and save for it. You enjoy your vacation or big screen TV without that nagging sensation that you’re about to fall off your own fiscal cliff. You don’t lose sleep worrying about paying bills because you already paid them in full. You realize that living within your means is the good life you always wanted.
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