I wish I knew how to coherently describe the process of fixing your bad habits. This may be snarky, but if you spend too much, you must quit doing that.
Of course, that’s like telling a person struggling with their weight to eat less. It may be obvious; it isn’t going to change their habits. But I’ve seen obese people get highly motivated and have great success losing lots of weight, without chemicals or surgery. They just started tracking every calorie they ate. They set a daily calorie budget and they stuck with it for months.
It is said that anything measurable can be improved. Since money itself is a unit of measurement, well, keeping track of it should be easy. Every one of your financial institutions provides a monthly statement. All the data is in those statements.
Aha! Therein lies the problem.
You get the statements; you probably don’t spend any time with them. For whatever reason. You’ve got to find the internal motivation to change your bad habits, and if you’ve already read this far, I’m guessing that you’re somewhat motivated.
Habits are not easily formed without regular and frequent efforts to address them. Once a month might be too little attention. To change bad habits, you must elevate your corrective behavior to “top of mind” and that means you must give yourself at least a daily or more frequent budgeting activity.
I use the term “budgeting activity” loosely because I’m assuming that you’re not already managing a budget. Heck, the term budget is either sedative or sends a chill up your spine. You wouldn’t be looking at this article if you had good financial habits, and a budget is foundational. So, let’s ease into the idea by calling anything looking at your spending a “budgeting activity”.
And this blog is about creating a habit of good decisions about money. That’ll take some time, maybe a lot of time, and some effort, probably a lot more effort than you want. Changing a habit, or creating new habits, requires frequent repetition of small behaviors. So, what we want to do is identify a triggering event that’ll get you to do something. Like the weight-loss example above, making note of every time you spend money. That’ll work for starters.
How about every time you get a statement, or a notification of a statement, you immediately look at the details? Do this for any monthly statement coming your direction, including credit cards, bank statements, utility bills, and online subscriptions.
And set aside some time every day (or three times a week) to review the day’s statements. Give it 15 minutes, maybe with your morning brew, or while dinner is cooking. On days that you don’t have statements, you use the time to cross reference all the charges you’ve recorded to the statements you’ve received. The important thing is to give yourself a routine that’ll be easy for you to maintain, and then maintain it. Heck, one day a week is better than once a month, and even that is better than never!
Do us both a favor and commit to at least three sessions a week at the beginning. You need to establish the personal habit of paying attention to your spending and frequency will reinforce that objective.
So, what are you looking for? Charges or debits that you haven’t recorded. The initial goal is to get yourself into the habit of paying attention to your cash flow, by simply looking for every time you spend money, either through everyday expenses, monthly subscriptions, major purchases, or systematic debits. Those monthly charges that come straight off a credit card or bank account can get forgotten, and often add up to a lot more money outflow over time than you realize.
You’re going to put all those amounts into categories, like groceries, fuel, rent, interest, clothing, etc. Include categories for your fun stuff, too. You might choose a gym membership as entertainment, health care, or fitness, and the smoothie you buy afterward could go into the fitness, dining, or impulse columns. It’s not so important how you set it up, just remain consistent, and make sure categories include similar expenditures.
After a couple of months of paying attention, you’ll start seeing patterns, and you’ll probably have discovered expenses for which you’re not getting the value you’d like. Maybe there’s a lame streaming service ($10/mo), or a membership at the car wash ($30/mo), or a monthly bank service charge ($3/mo). You’ll investigate and decide to turn those things off, saving $43 per month, or $516 for the year. That may be a little or may be a lot compared to your income, but regardless of its magnitude, you’re tightening up the leaks in your financial plumbing.
Ideally, you’d redirect those savings into something productive. Depending on your situation, that could be building an emergency reserve fund, paying down high-interest debts, or funding long-term investments.
If you like technology, there’s a website with an app called You Need a Budget. It gets good reviews. It uses virtual envelopes for the categories we’ve discussed above. And they’ll go into more detail on how best to categorize all your expenses.
Oh, by the way, I’m assuming that you’ve got income and that it’s consistent. You’re looking to do better with what you’ve got. If you’re starting a business or side gig, or work just for commissions, the principles still apply. In fact, it’s even more important to pay attention to the cash flow. It’s just that inconsistent income adds a layer of complexity, and you might get discouraged by the details. Especially if your motivation is to overcome your financial difficulties through earnings rather than through disciplined spending.
And in the final analysis, good financial habits boil down to disciplined spending, or “living within one’s means.”
An Enduring Wealth Advisor can help you set priorities and can even serve as an accountability partner if that’s what you need to break your bad financial habits. But it only works if you’ve got the self-motivation to stick with a routine long enough to create good financial habits on which we can build a reasonable plan.
Ralph Bender is a registered representative with, and securities offered through, LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.