Without a financial plan, you’re like a ship out at sea without a crew. The tides sway you in every direction, and it’s a matter of time before you’re a shipwreck. Most people are in disastrous financial positions because they act impulsively and are driven by instant gratification. The moment that financially inept people receive money, they think of ways to spend it. The problem is that their imagination has no limits. The only limit to their spending is the amount of money they have.
Sometimes, they don’t even let a lack of cash stop them from spending. They use borrowed money to fund their shopping sprees. Then when it’s time to pay for their credit card, they take out another one and use the funds from that to settle the balance of the first card. It’s a downward spiral that leads to accumulating more debt. Yet, surprisingly, that’s how some people live.
You don’t get out of a hole by digging a deeper one. That means you need to stop taking out debt and pay off your current loans. To avoid getting into a financial rut, you need to do one important thing…
Plan Your Spending
You might feel that you don’t know where your money is going. It seems like it comes in and it just goes out, and you have no idea how you spent it. That’s because you’re not tracking it. Most people spend money without recording their receipts. Their spending adds up to a significant amount without them even realising it.
STEP 1: Enter all receipts
The only way to know all your expenses and their totals is to enter the receipts into a spreadsheet or an app. I recommend doing it immediately after getting the receipt so that you don’t lose it. Also, doing this exercise at the end of the month might be arduous because of the excessive processing you’ll need to do.
STEP 2: Analyse your expenses
After you’ve captured all your receipts for the month, you have a clear picture of what you’re spending your money on and the amounts. This is a great place to be in and one that most people have never seen because they’ve never done this exercise. You might need to take a few deep breaths after you realise how much money you’ve spent on ridiculous stuff.
What you have in front of you is what I refer to as a cash flow statement. It’s a realistic representation of your expenses, whereas a budget is usually a forecast. You need to look at your financial situation for the way it really is, not for the way you think it is. You have that now. Thank me later.
Look at each expense and determine if it’s essential or non-essential. Let me define those terms for you so that you don’t make up your own versions. Only expenses that are crucial to survival are essential. Everything else is a luxury, therefore, non-essential.
Eliminate non-essential expenses, such as clothing, subscriptions, takeouts and gym memberships, from your cash flow statement. Don’t dabble in non-essentials, meaning, don’t avoid them one month and then treat yourself to them the next month as a reward. Eliminate them from your cash flow statement until you’re debt-free. You can’t afford them. It’s that simple.
After eliminating non-essential expenses, analyse the essential expenses and look for ways to reduce them. Sure, you need to eat. Food is an essential item, but you can opt for healthy, more affordable food. I’m not saying opt for lower-quality food. Farmers’ markets have great food at affordable prices.
STEP 3: Stick to the plan
Now that you’ve dedicated every dollar to an essential expense, you need to stick to it. No cheat days are allowed. You’ve been cheating yourself for years. That’s the reason you spent money on non-essentials and are in debt.
By having only essential expenses, you should have more money at the end of the month. I dedicated all of my additional savings to debt so I could pay it off as quickly as possible. I knew that after paying my debt, I would have more money to dedicate to savings.
My savings account ballooned significantly after I paid off my debt and stuck to spending only on essential expenses. I have cheat days, but those are very rare. And my cheat days usually consist of purchasing something that I really need, such as shoes and a computer.
Planning for Retirement
You’re never too young to plan for retirement. The sooner you start, the better off you’ll be. Also, don’t think that you’re too old to plan for retirement. That can cause you to give up. It’s never too late to turn your financial life around.
When you’re planning for retirement, it may be a good idea to start at the end and then work backwards. That means knowing the amount that you need to have in retirement to live the lifestyle you want. Once you know the figure, divide the amount you want to have before you reach retirement by the number of months until your retirement. That will tell you the amount of money you need to save each month.
Here’s a guideline for retirement planning: be ultra-conservative. That means a lot of variables can affect your retirement savings, such as health, unemployment, inflation and wars. Most of those factors may be out of your control.
As the saying goes, expect the best but plan for the worst. If you plan to have a million dollars in retirement, structure your savings to lead you to that result but be prepared to live a lifestyle based on $500,000 retirement savings.
Whatever your financial goals are, be realistic when planning them. Rather overstate expenses than understate them. Ensure that you have savings for at least six months to cover rent/mortgage, food and utilities if you lose your job so that you have sufficient time to replace your income. Have an emergency account so that you don’t dip into your savings account if your window shatters or a water pipe bursts.
If you plan well and execute even better, you’ll likely reach an even better destination than anticipated.
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