You’ve realized (finally) that you’re in a precarious financial situation. You’re spending more than you earn – sometimes quite a bit more. You’ve racked up a fair amount of debt. Now, you’re seeing that some changes are going to have to happen in your life, but those changes sound utterly painful.
What do you do?
Getting to Zero
The most vital thing that you must do in this situation is “get to zero.” What do I mean by that? Getting to zero means that you’re trimming your spending enough that your income matches your spending. If you bring home $2,000 a month, you can spend only $2,000 a month.
In order to make this number, I usually encourage people to look for big changes – single moves that can save them a bunch of money each month. Some options include eliminating cable, eliminating a telephone landline, moving into a smaller apartment, downgrading to a less-expensive car, bundling your insurance, refinancing your mortgage, or renegotiating your credit card interest rates. Almost everyone is capable of making at least one of these changes, and such a change can make a huge difference in your month-to-month spending.
Sometimes, though, making one or two big changes isn’t enough. The next step is to focus on what I call “one-off changes.”
These changes revolve around activities you can do once to either bring in a quick money spike (which you would then apply to paying off a debt) or to lower a bill for the foreseeable future.
Some options here include cleaning out your closet and selling off unwanted items, having a yard sale, selling off the contents of a collection on eBay, installing a programmable thermostat, replacing light bulbs with more energy-efficient ones, air sealing your home, and/or putting your home electronics on a more energy-efficient plug setup (with the devices set to a switch or to a “master” outlet that cuts power to the other devices when the master one isn’t in use).
The one-off options that produce a money spike can be applied toward your debts, preferably the smallest debt. Ideally, you’ll be able to pay off at least one debt very quickly, which naturally reduces your monthly bills.
The next step is the part that people think of as being “painful” when it comes to making more frugal choices.
These changes revolve around making better choices every day. We’re constantly inundated with choices that have some financial consequence, from the moment we get up until the moment we go to bed.
Should I grab a bite at home or grab something on the road for breakfast? Should we go out with coworkers for lunch? Should I stop at a store on the way home? Should I hit Starbucks? Should I order take-out tonight? Should I go out with my friends or stay home? Should I buy this neat item from Amazon or hold onto my cash? Should I prep some stuff for tomorrow or should I just turn on the whole home entertainment system and veg out?
Each one of those situations is a choice, and each one has a financially good and a financially bad option. Quite often, it seems as though the expensive option is easier or more fun, and it seems utterly painful to give them up. It is choices like this – where you’re made to give up something you enjoy – that gives frugality a bad name for some people.
If you’re in that boat, I encourage you to not give up big swaths of stuff. That approach will leave you feeling miserable and will inevitably lead to a big backlash against making changes. If your heart is not into a big change in your life, you’ll never make that big change.
Instead, I suggest a different route. Simply focus on the choice you have at hand. Don’t make big plans about giving up Starbucks only to find yourself resenting it later. Instead, whenever you have the option to stop at Starbucks, ask yourself whether you’d rather stop or you’d rather put yourself in better financial shape. If you choose to stop today because you could really use that giant cup of sweet coffee, then go for it and don’t think twice about it. On the other hand, view it as a personal success if you decide not to stop today.
Retaining What You Save
What I usually encourage people to do is, once they’ve reached zero and are spending only what they bring in, they start directly setting aside every dollar they save to get rid of their debts.
Let’s say you’ve decided not to stop at Starbucks. At that point, literally take a $5 bill out of your pocket and put it up, or log onto your online banking service and move $5 to another account. You can also just track this with a pocket notebook with a note that says “$5 – saved by no Starbucks.”
Over time, with every good choice you make, it’ll add up. “$10 – didn’t buy that book and hit library instead.” “$12 – made dinner at home and ate leftovers for lunch.” “$8 – used coupons at the store.” “$30 – stayed home with friends instead of going to a club.”
Remember, you’re looking at individual choices here. If a choice seems too hard, don’t make it. Do not let yourself get miserable because of frugality. What I found at this stage is that most of the time, making the financially sensible choice felt really good – better than what I was giving up. I was proud of it. However, there were certainly times when I didn’t want to make that good choice, and I found that if I forced myself to do it, I ended up resenting the whole thing. Don’t fall into that trap.
The perfect is always the enemy of the good. You’re far better off making three good financial choices and two ordinary ones and feeling really good about it than making five good financial choices and resenting your life so much that you eventually backslide out of everything.
As these numbers add up, make sure you’re putting that amount to good use. It is a bad idea to make these good moves, then look at your checking account balance, think that you’re rich, then spend it all on something silly. Instead, pour that money into improving your financial situation by paying off debts, building an emergency fund, saving for a down payment, and so on. Use a debt repayment plan and make sure your dollars are going toward something powerful.