When working as a Money Coach, my primary goal is to help each client achieve complete financial control. While an improvement in one's financial decision making is likely to increase overall wealth long term, the immediate effect is a more peaceful existence, resulting in more time and space for the things that matter most in life.
Similar to diet habits, financial habits are rooted deep within our psyche. As we come together, client and me, we work together week by week to create an adjusted powerful strategic mindset resulting in new impactful behaviour. This new behaviour helps facilitates a new outcome - complete financial control.
As you might imagine, shifting well-rooted habits can feel something like pushing against a glacier. After all, whatever state we find ourselves in (with any aspect of our lives) is the result of creating, (and executing) the perfect system for the given result. Making change can be tough - really tough. But it's necessary, after all, as the saying goes,
"The definition of insanity is doing the same thing over and over while expecting a different result".
So when looking for change, just go ahead and change your behaviour. Sounds easy, right?!
The truth is, change isn't easy. It usually requires ignoring your best instincts and trying new strategies that are unfamiliar and uncomfortable.
But here's why it's necessary...because the magic (the things we feel most proud of in life) happen outside of our comfort zone. Stay comfortable, then you'll stay put - it's that simple.
If you're looking to improve your relationship with money, I wanted to share Five Money Management Tips to help you get started. The intent, to push you beyond your comfort zone, and to have you try and tackle new approaches to achieve a better fiscal outcome.
The mindset shifts proposed below can help move you from financial frustration and angst to financial fluidity.
Tip #1 - Partition Your Money
Imagine being given the choice to receive $10,000 a month or $60,000 twice per year, which would be your preference? Over the course of one year, either option is really the same ($120,000), but poor money management skills make the second option ($60,000 twice per year) a risky choice for most people.
Because many people make decisions from their bank account balances. So, when $60,000 drops into an account - most consider the new car they might purchase, a shopping spree, debt to be paid, etc. They forget to consider everything that needs to be considered over the entire 6 month period - the truth of which might mean they don't buy anything extravagant, rather continue living exactly as they are now.
Regardless of how you receive your pay (every two weeks, irregular self-employed income, etc.), Tip #1 is to decide what every bit of it will do before you're paid next.
If you receive $2,000 on pay day, sit down and write out all the regular bills (rent/mortgage, strata, property taxes, electricity, phone, internet, car payments, insurances, interest payments, minimum payments etc. etc.) that are due between this pay day and your next pay day. Then list of other variable expenses (groceries, gas, gifts, dining, etc). Now, considering if you have any money left? If so, it's only at this point you should decide to pay down debt, save it (for more infrequent expenses), or buy something unplanned.
Keeping track of what each dollar is supposed to do is challenging with all your money in one account. If you don't use budgeting software, opening sub bank accounts can be helpful. This way, you'd physically move money from your main account to remove the temptation of spending it.
Alternatively, explore budgeting software that can help you streamline this process. As you know I'm a fan of YNAB - take peek at how YNAB can help through my video tips found HERE.
Tip #2 - Make Spending Decisions from Category Balances, Rather than Bank Account Balances
I believe wholeheartedly in budgeting your way to financial success. While financial success can be possible in the absence of a budget, I believe it expedites the pace at which financial goals are achieved. If you're unfamiliar with how to develop a robust budget, take the time to look at my previous post on creating a budget.
The most powerful psychological shift occurs when, rather than spending with your bank account balance in mind, you consider the balance available in any given category.
For example, if your budget for eating out is $400 per month and you've spent $390 by the 20th of the month, your subsequent decisions to eat out in the month would be based on having only $10 left in this category - even though your bank account balance may have $3,000 remaining. Because, after reading Tip #1, the $3,000 in your account would be allocated for your other life expenses. Spend beyond the $400 category limit and you'd limit or slow the progress of any other financial goal.
Tip #3 - Make Plans for the Money you Physically Have and Dream with the Money You're Yet to Receive
When considering a budget, most of us consider a monthly budget, even though this might be different from how (and when) we get paid. While you can have a sense of what you'll spend and what you'd require financially over the course of one month, your pay may not cover the entire period. Consider a monthly budget of $3,000 with two pay days of $1,500.
To combat this, consider this example:
1st of the Month Pay Day = $1,500
I'd ask myself: What bills are due? What do I need to buy or pay for between now and the next time I get paid?
Cell Phone $100
Gym Membership $50
For my next pay day, I'd ask the same two questions. What bills are due between now and the next time I get paid? What do I need to buy or pay for before I get paid next?
15th of the Month Pay Day = $1,500
Car Insurance $100
Property Taxes $250
Credit Card Interest $100
Loan Interest $75
Debt Payment $175
Notice that although I budgeted $600 for groceries, I only budgeted half for each pay period. The same principle is applied to fuel. The reason is because accounting for $600 (in the case of groceries) from the outset means I can't cover my other expenses during this period.
The point of working with only money that you physically have closely overlaps with Tip #1 but does have a critical difference. Relying on money you are certain you'll receive is a HUGE money mistake. It's not yours until it's in the bank - financial disasters are made of spending decisions based on bonus cheques that don't come through, job losses, cut-backs, etc.
Dream of what you might do with extra cash, but don't act on any spending decisions until you physically have it in your possession.
Tip #4 - Hone in on What you Really Want and What it Really Costs
Have you ever caught yourself wishing for a vacation only to repeatedly find you can't afford it?
If you want it, it needs to be prioritized.
Part of drafting an effective budget involves budgeting for the things you want in life. After all, what's the point of working so hard, if you receive no reward and only pay bills.
Go ahead, brainstorm now…dream big. What do you want? And, what does that thing cost?
At one point, I decided I wanted to increase how often I flew home to visit my family. In my old life, I could never afford it. The money just got absorbed elsewhere.
Eventually, I broke it down into a more manageable picture.
Goal: I want to see my family at least twice per year and go on one tropical vacation per year.
Money Required: Flight Home $250 X 2 = $500.00
Tropical Vacation: $2,000
Cost to Save Per Month: $208
So, month by month, $208 dollars gets added to my monthly budget then tucked away into savings. Now, you will never hear me say I can't afford it.
Breaking larger financial goals into tiny increments not only smooths out cash flow, it turns your wishes into your reality.
Tip #5 - Put on your Oxygen Mask Before Assisting Others
Do you have debt that just doesn't go away? Even though you make efforts to pay it down, it inevitably stays put or grows in size?
This usually happens because people make arbitrary decisions to pay debt down without giving thought to the cash they still need to operate their regular life. They don't put the oxygen mask on their life expenses before assisting their debt.
Consider this example:
Sally has $10,000 in credit card debt.
She receives $5,000 as her paycheque.
She has guilt about her credit card debt, so rather than hoard the $5,000 she received, she decides to make a responsible decision and put $4,000 against her debt, leaving $1,000 in her cash account.
She feels relieved and proud of her decision.
Following this, her rent is due in the amount of $800. She now has $200 left in her bank account. She starts to sweat. Out of her fear of running out of cash, she starts using her credit card. She uses it for her gas, then her groceries, then her gym membership, then her cellphone, then her car payment, etc. etc.
Slowly overtime, he debt creeps back up to $10,000.
She thinks, the next time she has a big check, she'll put a dent in the debt. It'll be different next time.
Eventually, she thinks, she'll get the debt under control.
Does this scenario sounds familiar to you?
How then, should someone tackle debt repayment?
The most crucial component of debt repayment is ensuring that every other aspect of your ongoing life expenses are taken care of first. Why? Because inevitably, you'll need to cover these costs. Once you know you have money in excess of your regular life expenses, it's then that you can make a conscious decision to make a debt payment.
I want to clarify that I'm not suggesting ignoring minimum payments or the like. I'm suggesting that arbitrary decisions to put bizarre lumps of cash against debt just doesn't work as a long term strategy. Debt payments need to be well planned and strategized. The amount paid, should be as part of a plan - not any random number that sounds good in the moment.