Whenever you want something better than what you currently have now, you have to change something. If you keep doing what you’re doing, you’re going to keep getting the results you’re getting, so if you want better results, you have to be doing better things.
Today, I’m presenting a list of 10 (well, really 11) extremely powerful financial changes that you can make to your life to change your trajectory. As with all such lists, not everything is going to apply perfectly to your life. Personal finance is inherently personal, and you should look at lists like this as a buffet of options where you choose the ones that really fit with your situation and skip by the rest.
10 financial changes to make for your future success
0. The first one is so obvious that I’m not even counting it toward the ten: start spending less than you earn every single pay period.
This is the foundation of everything else you do in your financial life. You have to be consistently spending less than you earn, paycheck after paycheck. If you can’t do that, or won’t do that, you will not have lasting financial success.
There absolutely must be a gap between your spending and the amount you’re bringing in. That leftover “gap” money is the money you use to build your financial future. Every time you choose to cut into that “gap” by buying something frivolous, you cut into your financial future.
How do you do that if your bills don’t line up with your paychecks? Pay some bills during one paycheck, and pay some bills with the next paycheck. Take some money from one paycheck and hold onto it until you can add more from the next to pay a big bill. If you have irregular bills, put a fraction of what you owe aside out of every check. After all of that, you should still have money left over after each check.
There are a lot of ways to create that gap, sustain that gap, and increase that gap, and many of the tips below serve to do that. However, if there is a fundamental rule of personal finance, it’s that you have to spend less than you earn and do something smart with the difference, and do that consistently. However you do it is up to you, but that’s the key.
1. Eliminate every high-interest debt you have.
Debt freedom is an incredible goal to have. Not having any debts — no mortgage, no car loans, no student loans, no credit cards — is an incredibly freeing feeling and it’s a great long term goal to have. Your monthly bills become quite small and the options before you seem boundless.
The problem is that, for many people, debt freedom is a very long term goal. Complicating that even more is that the financial advantages of other things you might be doing, like investing for the future, might be better than paying off a low-interest debt.
That’s why, if you want to hit a home run with debt that’s truly powerful and undeniably a good choice, pay off your high-interest debt and don’t accumulate more of it.
What do I mean by high-interest debt? I refer to any debt that’s more than 7% — that’s my cutoff. I use 7% as the cutoff because that is the long term return that Warren Buffett suggests that ordinary investors can get from investing in stocks. When you get below 7% interest rates on debts, you have a much harder problem to solve, but for debts with interest rates above 7%, it’s pretty much universally good to pay them off.
How do you do that most effectively? The most effective thing to do is to make minimum payments on all of your debts each month, then make the biggest extra payment you can afford on whatever your highest interest debt is. While doing that, don’t make an extra payment so big that there’s a real chance you may end up having to accumulate debt to get through ordinary life.
For some, that extra payment might not be all that big, but anything is better than nothing. As long as you’re not accumulating more debt, even a small extra payment gets the ball rolling.
When you pay off your first debt, that’s when the magic starts to happen, because now you have one fewer bill to cover. That means you have more money to throw toward an extra payment on your current highest interest rate bill each month. As you pay off debts, that extra payment keeps growing, like a snowball picking up speed and size as it rolls down a hill.
Remember, this rests on following step 0 from above. You have to be spending less than you earn. That gap money is what you use for these extra debt payments.
2. Build a healthy and perpetually growing emergency fund.
An emergency fund is a pool of cash you can draw upon during moments when the expenses of life exceed what you can handle with the extra money from your paycheck, or when your paycheck shrinks or disappears. Your emergency fund steps up when you lose your job or your hours are drastically cut or your car breaks down or someone gets sick or another unexpected life crisis happens to you.
A credit card is not a good emergency fund. It’s reliant on the credit card network being available. It’s reliant on you not being the victim of identity theft or physical theft. It’s reliant on your bank always being willing to extend you credit. If you can’t repay it immediately, it accrues interest quickly. Rather, the best emergency fund is cash, a small amount stored somewhere where you can physically access it quickly, and a larger amount stored in an FDIC-insured savings account at a credit union or bank with a local branch, ideally one you can easily physically visit. This minimizes the various risks associated with holding cash.
It’s important to note that an emergency fund is not an investment, at least not in the sense that you are aiming for strong returns. Rather, you are seeking a place with high security, no volatility, and high liquidity, and a savings account offers that. I suggest getting to a month’s worth of living expenses in that account as quickly as you can, but after that, simply set up a small automatic weekly transfer from your checking account and never turn it off. If you contribute $20 a week, that adds up to $1,040 a year. $40 a week is $2,080 a year. On top of that, you’ll earn a small amount of interest.
Act as if that money doesn’t exist until a genuine emergency occurs, such as an illness, job loss, natural disaster, mechanical failure, or something similar. Then, use that account as needed.
Doing this will save you from a ton of personal risk and likely save you from significant credit card debt as well.
3. Start saving for retirement or, if you already are, bump up your retirement contributions.
The third major thing you should consider doing with your gap is starting contributions to a retirement account. The reason that this has both urgency and importance is that the earlier you begin saving, the longer you have for compound interest to multiply your money, and the more you save for retirement, the earlier you can walk away from the workplace with confidence to do whatever you want. This is about freedom – you’re free to choose to stay at your job, move to another more meaningful job regardless of pay, or simply walk away.
The easiest way to do this is to simply utilize your workplace retirement account if they offer one. This is doubly true and doubly urgent if your workplace retirement account offers matching for your contributions, as that’s free retirement money you’re leaving on the table if you’re not taking it.
If your workplace doesn’t have one (or it has a bad reputation), you can easily open an individual retirement account (IRA) for yourself through your choice of investing houses. You can do it online in any web browser. Here’s a nice comparison of different kinds of IRAs.
Without getting too deep into the weeds of retirement investing, know three things. One, if you’re uncertain which investing option to use, choose a target retirement account associated with a year close to when you’ll turn 65. Two, saving anything for retirement anywhere is better than saving nothing at all, and the more you save, the better. Three, if you don’t make the perfect choice right off the bat, you can easily change your investing options later on.
4. Eliminate regular bills that aren’t giving you enough value.
Go through every single one of your regular bills and subscriptions and ask yourself what value you’re getting from that service and whether it’s worth what you’re paying for it.
Is it worth paying for cable? Is it worth paying for that gym membership? Is it worth paying for Netflix? Is it worth paying for car registration and insurance (meaning do you really need a car)?
Decide for yourself which services and subscriptions actually bring value to your life. For things like insurance that are a little abstracted, consider the value they bring in terms of the safety net they’re presenting and whether they’re required by law.
If a service — particularly an optional one — isn’t bringing you value, then it should be eliminated. Cancel it.
What if it brings you some value, but you’re not sure if it’s bringing you enough value? My suggestion is to go on a 30-day hiatus from that service. Don’t use it at all and see if your life is adversely affected. If you find yourself really wanting that service, then it probably brings you value. If you find yourself occasionally wanting it or not wanting it at all, cancel it. You can always bring it back later. After you’ve done this, be very wary about new subscriptions and new bills. Don’t sign up for things unless you are very certain that this new subscription or service or bill will bring you real value.
How often should you do this? It’s a good idea to do this once a year as part of a regular financial review, but if you haven’t done it in a while, there’s no time like the present.
5. Make a serious effort to reduce every regular bill that you didn’t eliminate.
What about the rest of your monthly, quarterly, or annual bills? Go through each of them one by one and ask yourself if there’s a way to reduce this bill. Could it be consolidated? Could you switch this bill to another provider? Is there a lower cost plan?
If you think you might get a better deal with another provider, shop around and see if you can find one. If you see a bunch of extra fees on your bill, contact that service provider and ask about eliminating some of those fees or waiving them.
If you have a high interest rate, contact that biller and see if you can get a lower interest rate. If you have student loans that are eligible for consolidation, look into consolidating them.
Remember that “food and household supplies” are also a bill, so you should treat that in the same way. What can you do to reduce those expenses? You can eat takeout or delivery less often and make your own food more often. You can buy more store-brand products.
The goal is to walk through all of your bills and major expenses, ask yourself what can be cut from this without losing any real value to you, and then making those cuts.
How often should you do this? It’s a good idea to review all of them annually when you review your other bills. Some of them might not make sense to review each year, so it’s okay to skip them and wait until a contract ends, for example. If you haven’t done this recently, there’s no time like the present!
6. Go through your bank and credit card statements and figure out where every dime of your money is going.
The purpose of this is to identify where your money leaks are. All of us have money leaks — places where we spend money with minimal thought and often with minimal value returned to us.
For me, for example, my worst money leak is the Amazon Kindle store. It is so easy for me to just go buy a new book for a few bucks that I will sometimes do it without thinking about it.
Reviewing your bank and credit card statements, if done well, can reveal your worst money leaks, and once you see them and the big impact they have on your finances, it’s much easier to be mindful of them.
What I suggest doing is pulling out the last several bank statements and credit card bills, ideally in paper form, along with a pen or highlighter. Go through all of them, line by line. Whenever you start to notice a pattern, where you’ve seen that expense pop up before, go back through and highlight all of those matching expenses in the same way. I like using different colored highlighters for each type of expense, but you can use different symbols with a pen, a different underlining pattern, whatever.
What you’ll find is that you have several big groups, each consisting of the same type of expense. Maybe you’re like me and it’s a bunch of small expenses at Amazon. Perhaps for you, it’s a bunch of expenses at various Starbucks, a bunch of fast food stops or maybe stops at convenience stores. It could be anything.
Now, total up your expenses for each of those groups. How much did you spend over the last few months at those places? The total will likely be shocking. It should be.
Using that knowledge, consciously cut back on your usage of those particular services or products. If you’re using a particular thing over and over and not realizing how much you’re doing it, you’ve probably become numb to it. Cut back. Go on a 30-day break without that particular service. When you do restore it, make it a lot less regular, so that you consciously appreciate, anticipate, and savor that service.
I find that doing this once a year is very helpful. It helps me to see what’s become a boring routine in my own spending and nudges me to consciously change it. If you haven’t done this before, again, there’s no time like the present.
7. Systematically improve your shopping and spending habits.
Quite often, when people are encouraged to “spend less” or “improve their spending habits,” their minds immediately snap to whatever things they enjoy the most. They visualize themselves giving up the two or three things most important to them and, unsurprisingly, that feels miserable.
The thing is, that’s a horrible way to improve your spending. Those most important things are the things that you shouldn’t give up. What you should be looking for is all of the other expenses that you didn’t immediately think of.
Obviously, many of those things are tackled by addressing all of your regular bills and evaluating your repeated shopping habits, but another big part of that is simply changing how you make spending decisions in the moment. You need to change how you think about shopping and spending money.
Here’s my suggested approach: every single time you are about to spend money, ask yourself three internal questions. It won’t take long — just a few seconds — but you have to establish these questions as a habit.
First, do I really need this thing right now? In other words, is there any reason why this purchase needs to be done this second? Will I still get value out of it if I wait for a little while? If you recognize that you can wait, put that item back and instead just add the thing you were considering buying to a “wish list.” I have an Amazon wish list and another one that I keep on my phone. Once a month or so, I go through that list and evaluate everything that’s older than a month (usually signified by putting a line in it at the start of each month). If I still want it, I start looking into buying it. If I don’t, I delete it. The funny thing is, 90% to 95% of the stuff is stuff I don’t want any more, which makes me glad that I didn’t buy it.
Second, if it is an urgent and important need, is this something I could borrow from someone? This one helps me with things like books and with tools I might only use once or twice. I can always use the library to get a book. I can borrow lots of items from neighbors or friends. There’s a lot of content that I can easily rent online instead of buying it.
Finally, if this is an urgent and important need and I can’t borrow it, can I find it at a better price? This nudges me to look for used items. I’ll often scan Craigslist or local buy/sell/trade groups for the item or something similar. I’ll also see if any other local stores or quick-shipping online stores have the item (I prefer to buy local unless it’s just not available reasonably from a local source.)
Those three questions — particularly the first one — keep me from buying an awful lot of things. I’d say the first question eliminates 90% of unplanned purchases and the other two together eliminate half of what’s left.
The thing is, if something gets through all of those questions, I still buy it. If something hits my wish list and is still desirable a month later, I’ll still buy it, but with some care (I’ll shop around, research it more, and look at used options).
This system doesn’t keep me from any important purchases. It just keeps me from wasteful ones, the kinds of things where I’ll forget about it tomorrow, or I’ll find the item in a closet in six months and wonder why I bought it.
What about impulse buys? Yes, sometimes there is a lot of value in spontaneity. Maybe something unexpected happened, or there’s a big sale on something you’ve been eyeing for a while. For me, I find it’s much better to occasionally decide to splurge than to just never splurge at all. I also keep some pocket money for small splurges, but I replenish it pretty infrequently (about once a month).
8. Break up with expensive hobbies and life routines and seek out other ones.
Most people have at least a few hobbies and interests in their lives that draw away money. At this point in my life, my biggest ones are reading (I buy some books) and tabletop gaming, though sometimes I spend a bit of extra money on food because I enjoy cooking. I have several free (or very close to it) hobbies, too – hiking and geocaching and baking, and birding is starting to become a thing for me.
Once upon a time, though, I had much more expensive hobbies. I collected trading cards. I played a lot of golf. I had a huge video game collection. I got really into home brewing and bought a ton of equipment (I still brew occasionally, but I absolutely need no more equipment ever).
What I learned over time was that while I really loved those expensive hobbies, I couldn’t pretend there wasn’t a huge downside to them. The sheer expense of those hobbies meant that other areas of my life and other goals were effectively being starved to death.
This didn’t mean that I had to give up something that I loved. It just meant that it was worth my time to seek out and try potentially interesting low-cost hobbies. I intentionally tried out tons of lower-cost things that were interesting to me and let them naturally start to fill my time.
What I found, over and over again, was that when I consciously explored lower-cost hobbies and found ones that clicked with me, I didn’t feel nearly as bad dialing back expensive ones. I really enjoy a day-long hike, and because I’m enjoying myself, I don’t really miss a day of golf. I don’t object to golf, but when I see something else fun I could be doing all day without the big expense, it makes the lower cost option a good choice for me.
Reading is another interesting example. For a time, it almost turned into “book collecting” rather than reading. When I realized that, I consciously aimed to make sure that the hobby was about doing what I loved — actually reading books — rather than collecting them. I consciously moved to visiting the library rather than visiting the bookstore, and I checked out lots of books so that there was always stuff on my shelf to read. I also started to set reading goals for myself, nudging myself to go through the backlog of books I had accumulated.
Try out low-cost hobbies and let them grow to fill your time. Focus your hobbies on doing something, particularly something that doesn’t have an entrance fee or a cost associated with doing whatever it is. There are so many wonderful things to do for leisure that don’t require an endless outlay of money that it is a true shame to get caught in leisure that does require lots of money.
9. Make a realistic but optimistic picture of your future, then figure out what needs to change for you to get there.
Once every several months, I spend some significant time thinking about what I want my life to be like in five, 10 or 20 years. It becomes my preoccupied thought for about a week or so, and then I sit down and actually write out what that looks like in as much detail as I can.
Each time I do this, the picture of the future looks a little different. After all, I do change as a person. However, many broad strokes of it remain the same; those tend to be in line with my core values.
I usually try to make a picture of my life about five years from now and then another about 20 years from now. I don’t sweat the exact year that much, but it’s usually one that’s about half a decade to a decade down the road and one that’s maybe a generation down the road.
These pictures are on the optimistic side, but reality-based. I don’t write about how I’m going to be an NBA star and an astronaut, but I might be someone who published a couple of books.
Then, I ask myself, “What needs to change in my life so that the vision of that life is likely to become real?” I start making a list of those changes.
Those changes are sprinkled throughout my life, but many of them are professional and financial in nature. In other words, I’m building a financial plan for the coming years of my life.
Why do I consider this a powerful financial change? There are two reasons.
One, every time I do this, it makes my dreams for the future seem a lot more concrete. They move from daydreams to “hey, I could actually do this.” When that shift happens, it becomes something I want to actually work for.
Two, when I make a list of things to be done, it gives me concrete and specific things to do. It’s not just a realistic dream, but a list of how to get there. Having that list nudges me to actually take real steps toward my goals.
For me, at least, having that checklist makes me want to start doing those things. For others, a more structured approach may be called for. You may want to develop a daily habit of asking yourself what you can do to bring yourself closer to those goals. “What can I do today to make this happen?” Use that list of things that need to change as a guide, and remember that you don’t need to accomplish any full item today, just take steps in that direction.
This applies for your career, too, but those are worth looking at separately.
10. Improve and diversify your job skills and develop a real career plan.
Where do you want to be in your career 10 years from now, provided things fall realistically but optimistically in your direction? What does that look like?
Are you in your career, but advanced? Are you in a different career? Are you simply in a good stable position? Are you retired?
Now, what do you need to do between now and then to get from point A to point B?
Hopefully, you have some ideas about what to do on your own. You can write out a list and you can start executing it.
If you can’t, seek out an informal mentor. The best way to do it is to find someone who’s further along in their career than you, in a position where you’re not perceived as competition, and simply ask them for advice. Tell them you need some career advice and you’ll buy them lunch if you can pick their brain, then use that as the foundation of your checklist.
Another powerful step, particularly if you’re in a job where your supervisor is on a different track than you, is to sit down with your boss/supervisor and simply ask them what you can do over the next year or so in order to earn a raise or a promotion (or be a very strong candidate for one). Ask for specifics, and understand that they will come with some criticism.
What if you want to change careers? Find someone in your ideal career path and talk to that person. Understand what that career actually entails.
This information should be enough to help you develop a clear plan for whatever’s next: the skills you need to build, the relationships you need to build, and so on.
Let that be your professional checklist. Try as hard as you can to find ways to achieve items on that checklist while performing well at your job. If your path leads you away from your career, use the next few years at your job wholly as a springboard to get ready for that career change – spend as little as possible, develop any and all transferable skills, and really hone your plan for jumping ship.
These changes make all the difference.
These steps will help you to build an extremely strong financial and professional foundation under you that will set you up to do whatever you want in life.
Ideally, you’re already doing some of these things. Hopefully, this list spurs you on to a few more.