How to Prevent Financial Relapse

It’s a pretty common story.

You have some debt. Maybe some student loans or a big home mortgage. You have a good job, but you want more. So you put some stuff on a credit card. Then some more stuff. Then you get another credit card. You sign up for a fat data plan for your cell phone and get all the optional channels on your cable plan.

Before you know it, the bills have exploded to the point that it’s hard to pay for everything.

You panic. You buckle down and cut some of those bills. You have a couple big yard sales or take some stuff to the consignment shops.

And – whew – you manage to pay off enough debt that the crisis is averted.

“I’ll never go back there,” you tell yourself.

But in a few weeks or a few months, you start thinking about the things you want. And you pull out that plastic again.

I actually know quite a few people who have lived in a cycle like this for a long time. I’ve lived in it myself for a few years. It’s just like any other negative addiction that you never actually quit – you cycle through a bad period, break free for a while and improve things, and then fall back into the bad routines again.

How can you break free of that loop? How did I break free of that loop?

It turns out that there are several elements that really help. I would describe it as being like a table with six legs. One element is absolutely necessary and six others help support it. You need at least a few of those legs or the table will never stand, but you don’t necessarily need all six.

The Central Piece: A Better Daily Routine

Most people fall into a debt crisis because they’ve adopted a life routine that causes them to spend more than they earn. To make up that difference, they use credit cards or other means of borrowing money.

The simple fact of the matter is that the only way to financial success is through spending less than you earn.

If your “normal” is spending more than you earn and you need to start spending less than you earn, you have to change your “normal.” There’s no other way about it.

How do you do that? Start looking at every single way you routinely spend money in your life. Your bills are the obvious starting point, but there’s also the grocery store, department stores, restaurants, bars, other kinds of stores, online shopping, services, and many other things.

The first step is to keep track of every dime you spend for a month or two. Where does every dollar go? Don’t worry about judging it yet – just focus on tracking it. One good way to do that is to save every single receipt that you collect in an envelope (and request receipts when possible… and make your own when it isn’t), along with your bank statements and credit card statements.

After you have all of that, go through every single transaction. Along the way, ask yourself when you made that transaction, why you made it, and if it was worthwhile. For large receipts – like grocery receipts – go through them item by item in this way.

If you’re like most people, you’ll start to see some real patterns in the non-essential spending. Maybe you eat out a lot. Maybe you spend more on drinking than you thought. Maybe you throw a lot of cash into your hobbies.

Wherever you see a big outflow of money, choke it off a bit – but not completely. You just want to slow down the money flood, not choke it off entirely.

Let’s say that you spend a hundred dollars a month on your… video game hobby (it’s a good example). Rather than spending that $100 per month, just cut it to $50 per month. You don’t need to eliminate it, just put a cap on it that’s lower than how much you’re normally spending.

After that, look for ways to cut back on the spending you don’t care about. This is a really big thing. Doing things like buying generic items at the store and using LED light bulbs has no impact on your day-to-day life, but it does cut back quite a bit on your expenses.

Both of these are vital elements of your daily routine. You can alter a lot of your spending choices by simply altering that routine. Try choosing a different route to work (so that you don’t go by restaurants or coffee shops or bookstores) or simply avoiding a particular store or deleting your credit cards from tempting websites (or even blocking them entirely). You can also make positive changes by committing time to trying out free activities. Instead of spending a few hours a night playing video games or going out drinking with the gang, try doing something like geocaching or playing frisbee golf at the park.

Target changes in the areas where you spend money and regret it. What routine things do you do that lead you to those situations? Whatever those routines are, do everything in your power to change them – permanently.

For me, changing my daily routines was the key to my financial breakthrough. My daily routine was undergoing serious alteration anyway thanks to the birth of our first child, but realizing our financial situation and taking even more action to change my routines cemented the positive progress. I spent a lot of my free time doing free things, such as going to the park or hitting the library (and reading those free books) or building a side business (which eventually grew into The Simple Dollar). I changed my commute to work so that I wouldn’t drive by tempting places. I started packing a lunch for myself the night before work.

Basically, I committed myself to finding a whole new daily routine. I changed as much as I possibly could so that I was further than ever from old routines, plus I was sure that my new routines were pushing me in a positive financial direction. I didn’t give up all of the things that I liked, but instead I opened myself up to trying lots of new (mostly free) things and that reduced the time available for the older expensive habits.

This kind of change is transformative, but it’s not easy. It has to be supported by the other elements in your life. Here are six “legs” that support this “table” of change. Just like with a real table, you don’t need all six legs, but you need at least a few of them to keep the table sturdy.

Leg #1: Motivation

Why are you making these changes? Are you chasing after a dream? Do you need to protect or preserve something you already have? Did an incident scare you to your core and you never want to go back there?

Whatever the reason for the change is, it’s providing motivation for you to change your patterns. You can draw on that motivation all the time by putting reminders of it throughout your life. Try hanging visual reminders of the motivation around the edges of your computer screen or on the rear view mirror of your car. Move the reminders around so that they always stand out. Have a ringtone that somehow reminds you of your motivation. Wrap a picture of your motivator around your credit cards so you have to see it before you spend.

You can also listen to and read motivating stories to help you with your progress. Here’s my own financial story, which tells how I fell into a financial mess and eventually turned things around (a story I will probably rewrite at some point, turning it into a single article). Almost every personal finance blog out there has a similar story, telling how they fell into a financial pit and clawed their way out of the chasm. Many personal finance books can also be very inspiring and motivating – I found Your Money or Your Life to be incredibly motivating at a particular point in my life and still find a lot of value in it today.

Another way to motivate is to set yourself up for daily success. For example, if you’re trying to motivate yourself to run, set your workout clothes and workout shoes right next to your bed so that you bump into them first thing in the morning. This not only reminds you of your commitment, but provides that push you need to actually go out there and do it. For finances, you can do things like freezing your credit cards (or putting them in another place that’s hard to access). That sense of daily success can be a big motivator – “I did it yesterday, so I can do it today.”

Leg #2: Openness to Trying New Things

People are often more married to their routines than they like to admit. They profess to being very open to change, but when it comes to the actual nuts and bolts of their routine, it’s a lot harder to change than it seems.

The key to making a new routine work is a total willingness to try new things. You have to feel completely okay with ditching the normal parts of your routine and trying new techniques. You have to be happy with using your spare time to try new activities, even if they’re ones you might not have chosen in the past.

Some people really don’t like blowing their routines to bits, so I usually suggest just making your schedule more generalized. Instead of blocking off two hours to do a specific activity, block off those two hours for something more general instead. Then, when that block of time rolls around, choose an alternative that falls within that new umbrella. For example, let’s say you spend the hours from eight to ten each night playing a computer game or watching television. You might simply commit those hours to “leisure time,” then seek out a free leisure option during those hours, one that doesn’t involve a lot of electricity and a cable or internet bill. Like reading a book, for instance.

Others may feel that they don’t have time for new things. If that describes you, look for ways to shift things around in your normal routine. For example, if you do nothing in the last hour before bed, consider just going to bed an hour earlier, then getting up a bit earlier to give yourself time to add a new routine to your life. I’ve done this recently to give myself more time for writing in the mornings and it’s been incredibly helpful.

Leg #3: Goals, Big and Little

It’s hard to really find lasting financial success unless you know where you are headed. What is your mountaintop? What is it that you hope to have in your life? Do you want financial freedom? Do you want freedom from all debt? Do you want to start your own business or to switch careers?

All of those goals are pretty big goals. They can seem nebulous and vague to most people, but it’s worth spending the time to tighten up those big vague dreams for the future.

Spend some time really defining what you’d like to change in your life over the next ten or twenty years. What big positive change would you like to see occur between now and then? Make it as specific as possible. “I would like to pay off all my debts so that my income is all mine.” “I would like to have a secure retirement.” “I would like to have my own business.” “I would like to have a new career.”

Whatever that big goal is, start backing it down a little bit. What would you need to achieve in the next year or so to send you on your way? “I would like to pay off this pesky credit card.” “I would like to get my retirement set up and get a healthy start on that savings.” “I would like to have a firm business plan in place.” “I would like to have a clear educational plan and start taking a night class or two.”

Then, break it down even more, into an action you can take this week (or even today). “I’m going to sell off this junk in my closet on eBay and use it for a big bonus payment.” “I’m going to stop by HR and see what needs to be done to open up my 401(k).” “I’m going to the library to get books on writing a business plan.” “I’m going to research what needs to be done to get the degree I want at the local community college/university.”

Right there, you have a long-term goal, a medium-term goal, and a short-term goal. You have a huge and inspiring long distance target, a manageable project to tackle in the next year, and something to take care of this week. All of them move you toward where you want to be in different ways.

Each week, look for the next step you can take on your projects. What can you do next to keep this moving forward? How can you keep moving toward your big goal and your medium goal? Do these things still make sense?

As long as you keep looking ahead and keep taking one step at a time in the right direction, you’ll get there!

Leg #4: Understanding of Your Finances

I’m often shocked as to the number of people that really don’t have a clear view of their financial picture. They make big spending choices without really knowing where they stand on things. The most valuable step anyone can take in terms of preparing to improve their financial situation is to know where they stand financially.

Perhaps the most powerful way to do this is to calculate your net worth. Your net worth is simply the sum of all of your assets – the value of your home, your car, your bank accounts, your investments, and so on – minus all of your debts – your mortgage, your car loan, your student loans, and so on. Some people – particularly recent college graduates – can have a negative net worth.

It can be really useful to make a list of your assets and their values, along with a list of your debts and their values. That way, you can clearly see the impact that each element has on your life.

To get a great picture of your progress, calculate this net worth monthly and track the change from month to month. If it’s going up, you’re doing well. If it’s going down, then you have a real problem. The faster it goes up, the better your financial health is.

Another useful tool to have is a debt repayment plan, which is a listing of all of your debts, their balances, and their interest rates. This plan is usually ordered in terms of interest rate, from highest to lowest. This lets you see the real state of your debts in one clear view and tells you which debt you should be tackling first.

A household budget is another great tool. I strongly suggest using You Need a Budget, which provides a great methodology and some sweet tools for preparing your own family’s budget.

Leg #5: A Supportive Social Circle

Every major life change you might make becomes that much harder if you don’t have a supportive social circle in your life. If the people in your life don’t work with the changes you’re making and aren’t heavily supportive of those changes in how they talk to you and treat you, change is going to be difficult.

You can take a number of active steps to improve this factor, though.

First, choose to spend more time with friends supportive of your changes and less time with friends who aren’t as supportive. If you’re choosing to be frugal, trim the time you spend with your big spending friends. If you’re choosing to read more, minimize time spent with friends who look down on reading.

Second, seek out friends in places that are more connected to the changes you’re adopting. Look for low-cost community organizations and community events, attend them, and make an effort to meet people and get involved. Your local library is often a treasure trove of these kinds of activities.

Third, host events and invite like-minded people. If you’ve found yourself adopting some new low-cost hobbies and interests and know local people who are interested, find ways to spend more time socially with those people by hosting things yourself. Start a book club. Have a geocaching day. Start a board gaming club. Have a potluck dinner.

You’ll find that the people in your life who are positive toward your changes will stick around and the people who are negative will fade, and those people will be replaced by your new connections.

My social circle today is almost completely different than what it used to be – and I couldn’t be happier about it. Sure, I miss a few old friends, but I wouldn’t have so many new ones if I hadn’t made some changes.

Leg #6: Pride and Self-Identity

The final ingredient in your mix is pride in what you’re doing. The change you’re making is a positive one, so take pride in it. Identify yourself with it.

You’re no longer the person who spends like a fool. You’re the person who’s smart with your money.

You’re no longer the person who eats at every expensive restaurant. You’re the person who cooks delicious low-cost meals at home.

You’re no longer the person who always has the latest gadget. You’re the person who has creative ideas for using and reusing things.

Take ahold of that new identity and take pride in it. Take pride in the fact that you continue the progress you made yesterday and that you’re better today. Take pride in the person you’re striving to become.

Don’t identify yourself with the mistakes of your past. Identify yourself with the positive directions you’re taking and the person you’re becoming.

Personally, I found great power in stepping away from being “the person with the gadgets” and “the person who treats people to lunch sometimes” and instead worked to be “the caring husband and father” and “the person with good ideas.”

Final Thoughts

It all starts with the choices you make every day. Without good choices on a daily basis, you can never achieve the things you want to achieve in life. Period.

Those better choices are supported by a lot of things in life – the people you associate with, your knowledge of your situation, your self-identity and pride, your willingness to try new things. Those things can lift you up if they’re strong, but they can also let you down if they’re weak. Work on them. Cultivate them.

You’ll find that these pieces synergize together incredibly well, bringing you forward to a better life, one that you’ve only dreamed of before. The pieces that held you back in your old life are tossed aside, giving you the freedom to blaze a completely new path.

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