Bad financial habits aren’t always easy to correct. In fact, they can be one of the most difficult things to overcome when it comes to your finances, often requiring a complete shift in the way you think about money.
If you’re like a lot of Americans, you’re living paycheck to paycheck, and it might not be all about needing a bigger income. Thirty-seven percent of Americans polled recently said they don’t have enough savings to pay for an unexpected expense like a car repair or visit to the doctor.
If you’re in a similar situation, you might be able to chalk it up to bad habits. But you can break these financial habits if you stay focused.
One of the first important steps toward doing that is to take a good, hard look at the money you have coming in versus the money you have going out so that you can establish a budget — and stick to it. That’s solid advice from Amanda Clayman, a financial therapist in New York City. But you shouldn’t stop there. You also need to pay yourself and build a cushion for emergencies.
Sound impossible? Here’s how to get started.
1. Measure Your Finances
“The first thing you need to do is just take a picture of what is happening in your financial life right now,” Clayman said. “So, not thinking about what to change, just getting a really accurate measurement on how you naturally and intuitively manage your money.”
How much money do you have coming in? Including your paycheck is a given but don’t forget other income: a second job, alimony, child support or any other miscellaneous cash. Write it all down, and add it up. Then calculate your expenses.
One of the most difficult steps in establishing a budget is determining how much money you’re spending. You can start to get a better handle on this by making a list of all your fixed expenses. This would include rent, mortgage payments, car payments, insurance, utilities, cable, etc. Next, include variable expenses like food, gas and entertainment. Don’t forget about miscellaneous and maintenance expenses like property taxes, car maintenance, tag renewals, birthday gifts, etc. Once you’ve added up your outgoing monthly expenses, subtract them from your income, and that’ll tell you whether or not you’re spending more than you earn and help you get a better idea of where to cut back.
“If we’re going to be making changes to our money, that means we’re going to be making changes to our life, so we want to start to think through some of the things that might need to be adjusted and what are alternative ways we can do that,” Clayman said. “That’s a very common reason why budgets fail. People think, ‘I’ll just not spend that money,’ but they don’t think about how that need is going to get met.”
This measurement process is important, Clayman said, because once you understand what’s going on with your income and expenses you can be clear about what’s not working and how to fix it.
2. Weigh Income vs. Expenses
The next step is determining where the imbalance lies in your budget. Is it on the income side or the expense side? “People naturally will either want to reduce spending or they’ll want to put their focus on the other side on the earnings,” Clayman said. “The next step is just encouraging people to pay attention to both sides of their budget, because sometimes people are really excellent at being frugal, but the problem is there’s just not enough money coming in.”
If you determine you spend too much you’ll want to start looking at cutbacks. One way to easily determine areas that you may be able to cut costs is to evaluate which expenses are actual needs versus wants. This can add a whole new perspective to your budgeting efforts and give you the extra push you need to cut the expenses that aren’t necessarily needs.
If you’re on the opposite side of the spectrum and need to make more money, you might want to take a look at whether you’re earning less than you should be. The single biggest impediment to making more money is that people “get used to” their current situation in life. They dream of starting a side business or getting a promotion or moving to a new company, but they are like the frog in slowly boiling water that doesn’t know its life is at risk. They simply let days turn into years and miss their opportunity to grow. They get acclimated. Their incomes flatten out. Here’s some advice on getting out of the income rut.
3. What Can You Control?
Whether you conclude that your primary budget issue is on the income or expense side, it’s still a good idea to see if there are some things you can cut back on. Your short-term discretionary spending is an easy place to start making these cutbacks. Do you buy coffee every day? Stop. Do you eat out for lunch? Take a brownbag instead.
“Some of your out-of-pocket expenses can be changed on a daily basis … versus things like cutting the cable cord or moving into a cheaper place to live,” Clayman said. “With these bigger changes, you might not have to exercise daily discipline around them, but they can be more complicated to put into place.”
Still, the savings can be substantial if you cut back on things like cable television. In fact, “Skinny TV,” or trimmed-down cable packages, can bring the price of pay TV more in line with historical trends, and consumers worried about spending more than $1,000 annually on television should consider it. Call your provider and ask if it offers a skinny package.
Whether skinny or cable, if you’re going to pay a television service bill, you might as well do it with a cash-back credit card and reap the rewards. (Just be sure not to carry a balance and create a new headache for yourself — credit card debt.)
4. What Do You Want to Protect?
It’s also a good idea to look at what is really important to you and how you can maintain that in your new budget. So, for example, if living in a certain location is important to you, because the schools are good or it’s close to your work, you might need to cut back in other areas in order to afford living there.
“There’s always competition for your money,” Clayman said. “So use this as an opportunity to think about what’s truly important to you so you can adjust down or adjust up those things that are easier changes and preserve what is important to you.”
5. Set Your Budget & Stick to It
Once you’ve determined where you can most comfortably make cuts in your budget, begin putting that money toward getting not just caught up with your bills (if you’re behind) but actually a month ahead.
“Ultimately, where I try to get people is to a point where if you are a month or more ahead of your bills, then you can begin to have your income deposited directly into your savings account,” Clayman said. “And then at the beginning of the month, you can slide whatever you’ve budgeted for the month into your checking account.”
This, she explained, can help people who might see the cash accumulate in their checking account and begin to increase their spending simply because they have extra money there.
Getting to this point certainly will take some dedication on your part, but the reward is well worth the effort. If you have a spouse, you can work together to hold each other accountable for any spending oversights. If one of you overspends, set rules that the guilty party has to contribute more to that month’s savings fund — a sort of penalty jar with a twist. It’s much easier to do when you’re working at it together, and you can make it more of a competition to keep it interesting.
If you’re single, consider creating a support group among your friends with a monetary reward for reaching your budgeting goals. Whether it’s a vacation fund or a night out on the town, the extra incentive will help keep your eyes focused on the goal and make it fun in the process.
And, as always, keeping your credit in good shape can help your budget immensely by reducing what you spend on loans over time, since good credit gives you access to lower interest rates. Checking your credit reports at least once a year (you can do this for free through AnnualCreditReport.com) and checking your credit scores (which you can do for free through Credit.com every month) can keep you aware of your standing. This can encourage you to reduce your debt and make your payments on time in order to build and maintain good credit so that you have it when you need it.
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Image: Petar Chernaev