People have a lot of habits. Have you ever thought why you are repeating the same habits every day? Are the habits smart? When was the last time you reviewed your habits? By repeating the same habits all over again it seems to be what is considered “normal” for us. What happens if you change your habits? The “old normal” becomes a “new normal”. Would you like to see how your financial situation can turn into a new normal?
Using the easy steps presented in this model it should be possible for almost everyone to improve their financial situation. There is no model that is perfect for everyone, but this model should be suitable for many people. Just remember to keep things simple and rely on facts. The key elements are:
- the willingness to change things
- an extremely patient and persistent way of working
- not being influenced by others’ opinions on what’s the right decision for you.
You could compare saving money to weight-loss. When saving money, it usually requires new habits and takes time. Like in weight-loss a new diet is introduced and you must stick to it in order to lose weight. The same goes for spending habits, you need to stick to your new budget every day and every month. Usually, when trying to lose weight, exercise and workouts will be helpful in achieving the preferred outcome. Not all types of exercise are suitable for everyone. When saving money people have different types of expensive habits that need action to be taken. Therefore, no model can state: “get rid of this and your problem is solved”, because everyone has a unique situation. If the goal in weight-loss is achieved but the old habits start taking place you keep putting on weight instead of losing weight. The same goes for money. If you don’t stick to your budget there will be no money to save.
This model is divided into three parts: the mindset, target setting and action needed.
There is no magic that improves your financial situation overnight. Whenever you buy something better or bigger it becomes the new “normal”. Next time you get a raise at work and your income level goes up, so do your expenses as well! This goes on forever and every time the old normal is not good enough and there seems to be a need to spend on something even fancier and more expensive. Shortly afterwards this becomes the new normal and the rat race never ends.
- Are you willing to change your habits and routines? Do you want or need an expensive take-away coffee every morning?
- Are you willing to make sacrifices? Is it more comfortable to drive to work than to take the bus? Would you consider sleeping in the living room if it reduces your expenses?
- Are you willing to stop saying “but I need this”, “but I cannot”? But I need this new shirt – do you really need it? But I cannot take the bus to work as I want to listen to the radio in my private car – a habit.
- Are you willing to invest time in improving your daily life? Declutter your apartment and you will need less time to clean and organize your stuff.
- Are you willing to stop desiring for more? Next time you get a raise at work will you save the money or buy something fancy and expensive? How long did the great feeling last when upgrading or buying an expensive item?
- Set yourself financial goals, do it in writing. It is impossible to work towards a goal if you don’t know what the goal is.
- What do you want to accomplish? Take a course and learn new skills? Where can you enroll? Want to learn how to cook? Start reading books and watching videos on how to cook. Don’t do it later, do it now.
- What can you improve immediately? Take small steps first if it’s difficult to make decisions on significant things. Stop buying the take-away coffee, then move on to more difficult tasks. Set daily goals.
- Set short-term goals. What kind of action needs to be taken on daily basis to reach the goal?
- Set long-term goals. What kind of action needs to be taken on daily basis to reach the goal?
How much money is enough money for you and what will you do with it when you have reached your goal?
- What is your income and what are your expenses? Only accept facts, don’t rely on estimates. Don’t think how much your grocery bill is, but save the receipts and calculate the amounts together. How boring it may sound, make a monthly budget and stick to it. When analyzing the expenses, it quickly becomes evident which categories can be improved. Constantly repeat this, possibilities for improvements always exist.
- Your income must exceed your expenses. If this is not the case, the easiest way is to cut on your expenses. If possible, increase your income as well. Downsize: move to a smaller and less expensive house. Get rid of your car. Buy less clothes. Sell stuff you don’t need. Have less expensive hobbies. Don’t go to restaurants, cook at home and do meal prepping instead.
- When you have reached the goal mentioned in (2), move the surplus funds to another account, and do this immediately and every month.
- Be sure you have an emergency fund of 3-12 months salary on another bank account. The money can be used in case of illness, unemployment or unexpected bills. Whenever you have used money from this fund make sure to refill the emergency account immediately when it is possible again.
- Find out how to invest your surplus funds. Everyone should find what’s best for themselves regarding risks, understanding the investment object and tax consequences. Be prepared that it takes some time to investigate the different alternatives and there will be mistakes especially in the beginning of the process. Again, rely on facts and your calculator, how much is the return on the investment – or is it anything at all?
Remember, change doesn’t happen overnight. Some results can be seen already in a few months’ time. Results usually motivate to continue. At some point, the new spending habits become a “new normal” and this is when your financial situation is improving.