29 January 2008
You start by analysing your financial activities of the past year. Examine the statements for your cheque and savings accounts, your credit and store cards, your ISAs, your retirement accounts, and your investment accounts. This process should not take lots of time. Your goal is to get a snapshot of how you used your money during the past year and your current financial situation. Doing so will help you:
1) face the mistakes you made or unfortunate actions you took during the past year that wasted money
2) develop strategies to avoid repeating the same distressing financial behaviours
3) give yourself praise for the things you did well, and
4) commit to doing more of at least one of the good things you do so you will increase your financial security during the remainder of the year.
Notice that I don't suggest you work on or try to improve too many different areas of your financial life at one time. It's better to keep your approach simple and clear. Why? Just imagine if you try to diet, stop smoking, cut spending, and work out regularly at the gym, all during the same period. What are the chances that you will be able to maintain your resolve, much less succeed at so many different disciplines? Almost zero, I suspect.
A wiser approach that increases your likelihood of accomplishing your goal is to focus on one thing each year and master that part of your financial life. Over time, the actions that may seem a bit burdensome at first will gradually become almost second nature, requiring less and less time - both mental time (you'll stop fretting) and actual time (you'll work more efficiently).
Next year you can focus on another part. Over the years of implementing this simple strategy, you'll achieve the financial control and balance which are appropriate to your financial situation, needs, and aspirations.
So let's look at what you can do in early 2008 to put yourself on the right path.
Get Yourself Out of the After-Christmas Pinch
Whether it was buying too many or too-costly gifts or giving in to the temptations of this year's amazing after-Christmas sales, you must start the New Year with a commitment to get out of all - not some, but all - of the consumer debt you've accumulated. For every month that you don't pay off those outstanding balances, they accumulate interest. As a result, the total cost of those gifts you gave and those bargains you grabbed increases. That beautiful jumper you bought on sale at 30%, 40% or 50% off may end up costing you the original full retail price when the interest charges are added to the cost.
To get yourself out of this spiral, first set a definite date by which you want to pay off this debt. This step is important because it gives you a target - a fixed date when you know the pinch or pain (depending on the size of the debt) will come to an end.
The next step is to reduce your spending. Cut the coffees you buy on the way to work. Stop eating out every day for lunch and bring a sandwich instead. Cut back on prepared foods and limit the amount of money you spend at the supermarket. (While doing the TV series "Your Money or Your Life," I found that people can waste significant amounts of money buying food that ends up being thrown away.) Consolidate your trips in the car so that you use less petrol. Avoid those tempting special offers. And don't use those store or credit cards at all. (If you're really weak, freeze them in a block of ice in your refrigerator. You'll have to wait for the block of ice to defrost before you can use the card, which may give you enough time to gain control of yourself and your spending impulse.) Be aware that the sacrifices you are making will be easier to tolerate because you are only doing it for a limited time - a target date which you set for yourself.
The third step is to allocate all the money you accumulate from spending less toward paying off your debt. Be disciplined and be aggressive in cutting spending and allocating money toward debt repayment. The more you do of both, the sooner your debts will be paid off and the sooner the stress of the situation will be removed from your finances - and from your mind.
If you pay off your debts by your target date, give yourself a treat - one that is both satisfying and financially prudent. Let this treat be a reward for your tenacity and for the self-confidence you've gained in being able to get yourself out of this pinch.
Keep the Positive Momentum Going by Challenging Yourself
Now that you have accomplished your goal, turn what might have felt like a negative (sacrifice) into a positive. One of the ways to build more financial self-confidence is to create a simple challenge for yourself. Look at the areas in which you reduced your discretionary spending to be able to pay off your debt and make one (and only one) of them permanent for the remainder of the year.
I give myself this kind of discretionary spending challenge every year. Two years ago I could not buy a new shirt for the entire year. Last year I could not buy a new sweater. This year I cannot buy any new items for the kitchen or dining room. How do I determine my annual challenge? I examine the past year's purchases and determine the area where I didn't need to or should have avoided spending the money. (Importantly, I may have wanted to, but I did not need to.) I can tell you from experience, you will be surprised at how much money you can accumulate in a savings account or have available to pay off debts if you give yourself just one such annual challenge. And because it's only one, the challenge won't be easily forgotten like so many other New Year's resolutions.
The complementary part of this challenge is to improve something you already do well with your money. Combine the money you save from your discretionary spending challenge with your other earnings and use them to:
- increase the amount of cash you have in savings
- pay off more of your mortgage
- contribute the maximum amounts to your ISA
- increase your contributions to your pension plan.
You don't have to do something fancy or take undue risk with the money, certainly not during this time of economic uncertainty and high volatility in the stock market. Don't let yourself be tempted by schemes involving "guaranteed" above-average returns. Be conservative. Be prudent. Know your risk tolerance. When the economy is in flux, nothing will help you sleep better at night than being debt-free and having cash in the bank.
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