In some respects this post is like a Dr. Phil episode. I fully admit I watch Dr. Phil every once in a while because I am fascinated by the stories. Frankly, if your life isn’t a Dr. Phil, Maury, or Jerry Springer episode can life be really that bad? The truth is it can, particularly financially.
A lot of us make New Year’s resolutions regarding personal finance, but we don’t follow through with them for a variety of reasons. In my own personal finance journey I have learned a ton of lessons along the way and I have more to learn. I have a lot of personal growth that I need to continue to do on that subject, but one thing I have learned is that to make a better financial future you have to own your past or in the immortal works of Dr. Phil “You can’t change what you don’t acknowledge.”
That simple sentence seems self-evident right? In order to really change you have to really look at yourself and say this is what has gone wrong and/or what I have done to make this situation better or worse.
However, as simple as this advice might be it is much easier said than done. I have spent the last 30 months, primarily at the keyboard of my computer, on my own journey attempting to acknowledge the past and what you can do in the future. I have attempted to be forthright with the best and worst financial decisions I have ever made. At best I hope I have helped some people with these personal revelations and tips. At worst, it has been cathartic for me to put out my personal story. It is my own version of financial therapy.
How Can You Own Your Financial Past?
So if you are tired of being in the financial pickle that you are in then what can you do to get out of it? What can you change? These are lessons that I have learned along the way.
First, do a self-inventory of your financial decisions. I think it is important to acknowledge and figure out what kinds of financial decisions you are making. Doing a self-inventory is hard for anyone because we can always justify our experiences. I didn’t spend that much money on X it was on sale. It wasn’t a bad decision to take out student loans because I got a degree. That maybe true of certain decisions. And I am not saying all purchases or debt is stupid, but if you think about the big decisions you have made would you do it differently now? For example, would you buy that brand new car after graduation instead of a slightly used one that is cheaper? Did you really need to spend all of that money on new clothes or whatever? I mean I think we can all acknowledge and think of some dumb things we have spent money on.
I bought a message chair once from one of those online catalogs for $300. The chair sort of worked, but I didn’t have the money at the time and it was a dumb decision anyway. So I think everyone should do some soul searching on their financial pasts, acknowledge what you have done, and write it down. It is much more impactful when you write it down, particularly if it is something that you are still paying for (ala student loans, an expensive car you didn’t need, etc). So sit down one evening and think back, not necessarily through every single decision you have made, but think about the big ones and jot down your financial inventory/stupid decisions. Check out the previous link for mine.
Believe me this can be hard. But it is important to acknowledge and own your financial past if you want to move forward.
Second, track ALL of your spending. The great thing about today’s world, for the most part, is that practically all of us use debit/credit cards to make purchases so there is an electronic record for everything. There are several sites where you can link your accounts and start to track your spending for FREE. My personal favorite is Personal Capital because of its comprehensive nature. However, you can also use budgeting tools like Every Dollar or Mint.com. Part of changing your financial future is to not only acknowledge your past, but also your present. In order to get the proper data I think you need to track your spending for at least 3 months to see patterns in what you are spending. Only then can you make some changes. You might reveal some things.
For example, one of the things I have found in tracking our spending is that we often spend DOUBLE on eating out/fast food (e.g. coffee in the morning, etc) then groceries at home. That is stupid. So last month, partly out of financial necessity, was the first time that I can remember where our groceries were more than eating out. However, our overall food budget, in my opinion, is still too high for just too people.
- Let me add that you should also WRITE DOWN your expenses/income on a piece of paper. I started doing that every month and I have the list next to my computer on a legal pad at our kitchen table. That way I see it everyday. And write down ALL fixed expenses, not just the big ones this includes things like Netflix or other subscriptions.
Third, change some targets. Once you have acknowledged your financial past and present it is time to then switch to some new targets. Let’s be honest budgeting is a lot like dieting. Most of the time they don’t work because we don’t have the discipline or we don’t have a plan in place. I personally think budgeting is a good thing, but in our house there is no hard and fast budget for extra items. I mean there are some things that are fixed (e.g. mortgage, student loans, etc) so we know that stuff, but it is that money that is left over where we get into trouble with. Having a zero-based budget (where every penny is accounted for) is what I would like, but I think that Mrs. ROB (no I know Mrs. ROB) would think that is too much of a straitjacket. So we do a soft budget. I try to set some targets (e.g. how much to spend on food that month) and try not to go over it. It works sometimes, but the more you do it the better you get at it.
Fourth, maybe you need budgeting software. I haven’t bought it myself, but I have heard some really good things about services like You Need A Budget (YNAB). There software is pretty nifty and they basically have the concept that you stay a month ahead of your bills, which means you budget and find enough cushion in your budget to eventually get a month ahead of everything. That way if something goes wrong (or you need more money) then you have a cushion built in. If I ever try it I will give a review, but for some of you tech savvy people it might be just the thing.
No matter what your budgeting software could be as simple as an Excel sheet or pad and paper. However, I think this would help a lot of people with their own financial goals.
Fifth, forgive yourself. This one is REALLY, REALLY hard for me. I have hard time forgiving myself for past mistakes. It is almost like I keep it on myself to constantly motivate myself. The truth is I should forgive myself and you should too. We all make stupid choices. We all do dumb things with our money, but it is what we do going forward AFTER we OWN our financial past that is what matters. I am still working on this one (e.g. forgiving myself for the student loan debt). But part of my penance/journey is maybe helping others. I constantly tell my students to don’t be like me. Don’t be stupid. And hopefully it helps. They say it does.
Finally, dream a little. What are your financial dreams? This is another hard one for me because you aren’t sure what they can be. My goal is financial independence. I analyze my expenses because then I can figure out what I really need per month to support myself. Based upon that spending then I can project out the money I need. Each person is different, but you typically want 25x your annual expenses. Now I exclude things like mortgage, car payments, etc. because to me to be truly financially independent you need to have this stuff paid off and don’t go into debt again. Others disagree. The other reason I do that is because it makes my financial figure lower. If I include an extra $2000 into my overall goal for financial independence that is an extra $500,000 I have to invest. It makes my target easier to obtain and it gives me something to shoot for quicker.
However, maybe your goal isn’t financial independence. Maybe it is to own a lake house or to go on a world vacation. Whatever it is write it down. Calculate the cost and see where you are? It might look like a daunting task when you do so, but you can’t achieve those dreams if you don’t have a realistic idea of what they will cost. At least this way you will know.
And even if it is a large cost nobody ever (unless you are a billionaire or inherit large sums of money) gets there instantly. It takes years. For example, I have a specific FI number in mind. I have been actively investing for over a decade and I am not even 50% there yet. However, the more money I save, the more I accumulate the more the power of compound interest kicks in. I have gotten closer to that goal in the last year than I did in the previous three because of the saving and the acceleration of the amount I am collecting (the wonders of compound interest).
How do you eat a financial elephant? One bite at at time.
The Bottom Line: Before you can do anything about your financial future I think you have to acknowledge your past. You have to own what you have done wrong and see patterns of what you are doing now to change it. It isn’t easy. I struggle with it every month, but I get better. I don’t stop. I keep going. Hopefully, you will too.