Personal Finance Essentials
Change Your Financial Mindset
The Spending Habits Keeping You Broke
And How to Break Them
Recognize that most expenses are optional. Focus on your financial goals instead of today’s spontaneous purchasing inclinations. And be willing to make adjustments in your lifestyle if needed – including getting new friends if your current social circle entices you to engage in spending behaviors that are detrimental to your financial health.
Many people treat money as if it exists in separate buckets that don’t affect one another. This is called compartmentalizing. You carry a credit card balance while saving money for your child’s college education. You make extra mortgage payments to pay off your house sooner while also saying you aren’t saving enough for retirement. In each case, the two actions work against each other, reducing your ability to build wealth. Rational financial thinking means recognizing that all your money comes from the same source – your work – and treating every dollar with equal discipline.
Adjust Your Spending When Life Changes
People who do well financially are not always the ones who earn the most. They are the ones who adjust their spending whenever their circumstances change. When a baby arrives. When income drops. When major new expenses come along. If your spending habits don’t change to match your new reality, debt will fill the gap.
Consider a couple earning a combined $85,000 with $35,000 in credit card debt. Tracing their expenses, every dollar is spoken for before it arrives: taxes, mortgage, car payments, commuting, food, camps for three children and clothing for a growing family. They weren’t reckless. They simply never adjusted their habits to reflect the true cost of their lives.
Track Where Your Money Goes
To fix a problem, you first have to see it clearly. Track your expenses so you can understand exactly how you are spending your money. There are two ways to do this. The fast – but harder – way is to spend a weekend reviewing the past six months of bank statements and credit card bills. The gaps will be wherever you spent cash, but by Sunday night you’ll have a picture worth acting on.
The slow – but easier – way is to begin tracking all expenses as they occur over the next six months. To do this effectively, stop spending cash entirely. Cash leaves no trail. Use checks, debit cards and credit cards only, so every dollar you spend is recorded somewhere. Once you can see how you’re spending, you’ll be surprised how quickly and easily you identify areas to improve – without needing a formal budget.
Pay Off Credit Cards Before Investing
If you want to build wealth, pay off your credit cards first. It makes no sense to earn a return on investments while simultaneously paying 18% or 21% interest on credit card debt. Those two things cancel each other out, and the debt usually wins. Start by joining your workplace retirement plan and contributing enough to capture any employer match. Then use all available cash to eliminate credit card balances. Once those are cleared, build your cash reserves. Only after that should you begin a long-term investment program.
Mortgages, car loans and student debt are different – simply make those monthly payments on time and don’t accelerate the payoff. Focus your extra dollars on credit card debt, which is the most expensive and least productive debt you can carry.