You may be wondering where all your money went. I had this issue. When you have no financial discipline and you just swipe a card and your money goes quickly. So let’s talk about how to address it.
Addressing your Spending
The first thing to do is look at your spending. I guarantee you have no idea where all your money is going each month. I know I didn’t. Take your bank statement, your credit card statement, and any other payment methods you have and review them.
That means go line by line in each one of these statements and breakdown where your money is going. I guarantee you will find that you are spending more on several categories than you thought.
Once you have figured out what you are spending your money on, figure out what is a necessity.
I know where my Money is Going.
What’s next?
Now it’s time to create a budget. That means take your necessities and add them up to figure out how much you need to live each month. So let’s say you take home $2500 dollars a month and your necessities are $2000 dollars a month then you only have $500 dollars a month left over. You can use this excess cash to pay debt down, invest, save and what ever else you decide.
Fixing Bad Spending Habits
How do we fix bad spending habits? It’s harder than you think for most people. The answer you always hear is to spend less than you make. There is truth to this, but how do we do this? What does this look like?
The first step you have already done. That’s creating a budget! Now that you have created a budget it’s time to adjust your spending habits.
Adjusting your spending habits will look different for each person. Maybe you eat out a lot. Maybe you shop a lot or have countless other habits or hobbies. It’s time to have some self discipline and stop spending. Myself I set goals to reach to help with this. I personally wanted to pay off debt. So on each pay day I would pay required bills and put my excess cash towards my debts.
How much you cut back is based on your finances and how aggressive you want to be about paying debt off and/or investing. No one is saying you have to cut everything out. I gave myself $200 dollars a month to go and have fun with. Be it going out to eat, going to a bar, or anything else I desired to do. However, when I spent my $200 dollars that was it.
Cut your credit cards up. Yes, that also means removing them from your wallet on your phone. You are shooting yourself in the foot if you keep using your credit cards. If I pay $300 on a credit card and then spend $200 then all I really did was pay $100. This will postpone your debt free adventure and your financial freedom. By doing this you will stop spending on these credit lines and allow you to pay them off instead of incurring more debt and paying more interest.
Now that you have stopped spending your excess money. It’s time to pay off your debt excluding your mortgage and/or invest/save. Take the excess money you have and pay it towards debt, invest, and/or save. This does two things for you. As you pay off debt it will lower your monthly required bills. Which will allow you to pay more toward other debts you have. As well as eliminate interest. As you pay interest off your dollar will go farther cause your no longer giving money away.
I Paid my Debt off What’s Next?
I’m debt free! It’s time to celebrate. Now what do I do? Your next step is to establish a 3 to 6 months emergency fund. What is an emergency fund? It is 3 to 6 months of expenses not income. This will keep you from using credit in case of emergency.
It is important for you to keep these new financial habits once you’re debt free. Otherwise there is a good chance you will fall into the same hole you just dug out of.
I have an Emergency Fund. What is next?
This is the exciting part. This is where you get to have a little more fun. Your financial adventure just started to be honest. Now it’s time to invest. You may be asking how much. This will be different based on the person. I am not saying you need to invest every dollar you make. You can afford to have more fun. Whether that is going out to eat, going on vacation, shopping, etc… The key to this is paying yourself first. I personally follow the 50/30/20 rule.
What is paying yourself first?
Paying yourself is investing into your own future. So you do not have to die on the Walmart floor working in your old age.
A few rules I follow personally are. Always take the company match. This means if you have a job that has a retirement account and they offer a match, always get the match.
The second rule I follow is always pay yourself first.
What I don’t do is let my money sit idly in my account. Idle money is commonly lost.
Paying yourself is setting money aside before you do anything else. Whether that be putting it into a 401k, IRA, Savings, etc… The first thing I do every pay day is put money into my IRA. Before that even happens I have money directly taken from my paycheck and put into my 401k. The goal here is to figure how much you need/want to invest for your future and set it aside first.
Then you can spend the rest available. This doesn’t mean you should spend all of what you have left. I personally spend within reason. I can afford to spend more now that I have paid off all my debt, have a fully funded emergency fund, and invest money each pay day.
I personally have multiple savings accounts set up with my bank. That I use as different buckets. They consist of emergency funds that I never touch, another is for home insurance and property tax, another for vacations, and the last is my play money. I never cross these funds and only spend what is allotted for each category.
What will work best for you is something you will have to figure out.
Conclusion
Once you have found where you’re spending excess money you need to eliminate the excess spending. Then use the excess cash to pay debt off. Once debt is paid off, establish your emergency fund. Once your emergency fund is fully funded it’s time to invest. This is where life gets exciting! This is where you get to have your fun. This can be a long process. If you are willing to make these sacrifices for the short term the rest of your life will be so much better.
