Resolution Checkup halfway through January.
How are you doing with that New Year’s Resolution to change your life by changing your personal finances?
To make that resolution stick, you’ll have to develop some new habits. But how do you do that? First, understand how habits work. Remember that bad habits are easy to form, but become difficult to live with. Good habits, on the other hand, are difficult to form, but easy to live with.
For example, the bad habit of using your credit card to satisfy your need to socialize winds up becoming hard to live with after a while. But developing the habit of living on a budget is difficult to get started, but makes things easier when you get to retire at age 50!
A habit is an automatic response to an internal or external stimulus. Once your habit is formed, it’s like a very strong riptide that’s difficult to overcome. The key is to develop good habits that you don’t want to overcome.
Many of our habits, especially the bad ones, have developed over years and are firmly etched into our lives. To successfully overcome a bad habit, you’ll have to replace it with a good habit, but doing that can take quite some time depending on how deeply entrenched they’ve become. We have a tendency to want instant change, instant results, instant debt freedom, but you didn’t get into bad financial shape overnight. A general rule of thumb is that it takes you 5 to 8 times longer to get out of consumer debt than it took you to get into it depending on the amount.
So, what habits do you and I need to start forming today to get us where we want to be by this time in 2009?
First, we must spend less than we earn each and every day, week, month, quarter, and year.
My personal application: I have to question every purchase and evaluate what is driving me to spend. Do I really need it? Is there a less expensive alternative? Why do I want this?
Second, we must learn to live on a budget. Businesses do this all the time. I perform budget analysis at my job, so why is it so difficult to create and stay on a budget? I think it’s because we make them too rigid, then when something pops up, we break the budget agreement we’ve made with ourselves. Then the floodgates open, we figure we can’t live on a budget anyway, and it becomes a distant memory.
My personal application: I have to develop a realistic budget with my wife and stick to it, but it needs to have some flexibility. Things change, surprises pop up. I have a fully funded emergency fund, but what really hurts us is “running by Wal-Mart” to pick up a few things. Next thing you know, the basket is full of un-planned and un-budgeted purchases. I will have to personally decide to only buy from a list, only buy what I need, and only buy if it is within the budget.
What is a realistic budget? One that includes entertainment as well as debt repayment, clothing as well as the mortgage, eating out as well as groceries, and gifts as well as savings. In other words, it has to reflect what is important to me, but still keep me on track to reach my financial goals.
Third, we need to use the excess we generate by spending less than we earn and living on a budget to pay down our debts. Dave Ramsey has his debt snowball, and every financial guru has their own version, but the basic idea is to look at all your debt payments as one big payment. Just because you pay off one bill doesn’t mean you now have that extra $47.67 to spend eating out. Use that money to increase the payment on your next debt target. Repeatedly using this method and using any bonuses, raises, monetary gifts, or extra income to increase your debt payments will accelerate your journey to debt freedom and financial success.
My personal application: I have to start applying these principles more rigorously to my financial life. I have been debt free before and it felt great. I fell back into some old habits and took out various loans to make major purchases (finishing my degree, a new vehicle, an MBA, a vacation or two). I was consistently earning more and more and justified everything by telling myself that I could afford it.
What’s next? There are many more positive habits I need to personally develop, but I don’t think trying to develop more than three at a time is productive. There is a point where you get overwhelmed and trying to tackle too much is a recipe for blowing out your knees!
Check out these great blog articles to help YOU stay on track:
Gather Little by Little: Are You Discouraged By Your Finances?
Frugal Dad: Have You Outgrown Your Dreams?
Get Rich Slowly: Ten Money Saving Vacation and Travel Tips
The Simple Dollar: Maximizing the Free Things That Make You Feel Good
My Money Blog: Save More vs. Earn More: A Dollar Saved Is Two Dollars Earned
Free Money Finance: Tips To Make Budgeting Easier
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