It's a well-known fact that money plays a significant role in our lives, and if you're reading this, you've likely decided that you want to make a change in your financial situation.
You may have been at this point before but struggled to make substantial changes. I can empathize with that struggle. It took me two years to transition from thinking, "I should invest," to actually investing. There's so much information out there, and it's easy to feel overwhelmed and hesitant. However, I gradually learned and started investing as I gained confidence.
Drawing from my own experience, I want to share the process I've developed over the years that has allowed me to manage and improve my personal finances more efficiently.
But before delving into the nitty-gritty details of saving, understanding the importance of your credit score, and managing your credit cards effectively, it's crucial to address the challenge of consistency. Once you discover what motivates you and grasp the basics, it's equally important to explore your emotions, or in other words, manage your mindset. Many financial decisions are emotionally charged, and the financial habits you currently have are often shaped by the mindset you've absorbed from your environment, whether it's your parents, school, or sensationalized newspaper headlines. Remember that your perspective can change, and it's essential to understand that financially successful individuals have different mindsets. To reach your financial goals, it's crucial to shift and align your perspective with those who have succeeded in similar pursuits.
How to change your finances in 3 steps?
Find a Compelling Reason to Change
Understand the Basics
Develop your Mindset
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Find a Compelling Reason to Change
Finding a compelling reason to change your financial situation is a crucial first step, especially if you've attempted to improve your finances before. Change often happens when we have a strong emotional incentive to do so. To discover your reason for change, consider the following questions:
What's the positive outcome of changing your personal finances? How would it improve your life? Would it allow you to provide better for your loved ones, afford meaningful presents, or secure a home?
On the flip side, what negative emotions or situations are you currently experiencing due to your financial status? What's the breaking point where you say, "Enough is enough, I don't want to be in this uncomfortable or painful situation anymore"? (9 Questions to ask yourself to uncover a compelling reason to change)
Take those negative emotions and situations and use them as fuel for change. Channel them into motivation to transform what's not working in your financial life.
Self-reflect on your current financial situation: What are your financial challenges, and how long have they been problems? Have you tried solutions in the past, and did they work? How is this affecting you emotionally, and what is the cost in terms of relationships, opportunities, or even your mental well-being?
Project five years into the future if you don't make any changes. How do you imagine your life will be then? Will it be better, the same, or worse? How does this make you feel, and how will it impact the people in your life?
By answering these questions, you can pinpoint your most compelling reasons for change, whether they're rooted in positive aspirations or negative situations. This emotional connection can be a powerful motivator for improving your financial situation.
Understand the basics
Understanding the basics of personal finance is crucial for achieving financial well-being. However, since each person's financial situation is unique, it's essential to start by assessing your current financial status.
Assess your current financial status
Track Your Spending:
- Begin by tracking your spending over the last two months. You can use a spreadsheet, a notes app on your phone, or simply review your bank statements. Categorize your expenses into different areas such as:
- Essentials: Rent, utilities, phone bills, groceries.
- Unexpected or discretionary spending: These are expenses that may not occur regularly but are still necessary, such as car repairs or medical bills.
- Fun or savings/investment: Money set aside for enjoyment, entertainment, savings, or investments.
Calculate Your Monthly Spending:
- For each of the two months, calculate your total spending and compare it to your income. Your spending should be less than your income. If it's the other way around, you may need to make adjustments to your spending habits.
Allocate Your Spending:
- Allocate a specific percentage of your income to different categories based on your financial priorities:
- Fixed Costs: Generally, this should be around 50-60% of your monthly income. This includes rent or mortgage, utilities, insurance, phone bills, and groceries.
- Investments: Allocate around 10% of your monthly income to investments. This could include contributions to retirement accounts, stocks, or other investment opportunities.
- Savings: Allocate at least 5% or up to 10% of your income to savings, such as an emergency fund, a vacation fund, or other specific financial goals.
- General Budget: Reserve around 20% of your take-home pay for discretionary spending, allowing you to enjoy life's pleasures and maintain a balanced lifestyle.
By assessing your financial situation and creating a structured budget, you can gain better control over your finances and work toward your financial goals. Adjust your allocations as needed to align with your priorities and financial objectives. Regularly reviewing your budget and tracking your expenses will help you maintain financial stability and make informed financial decisions.
Financial Goal
Defining clear financial goals is a fundamental step in managing your personal finances effectively. Your goals provide direction and motivation for your financial journey. Here's how to establish and categorize your financial goals:
Identify Your Financial Goals:
- Consider what you want to achieve with your finances. These goals can vary based on your current financial situation and priorities. They may include:
- Paying off debt: Reducing or eliminating high-interest debt like credit cards or student loans.
- Building a savings account: Establishing an emergency fund, which typically covers three to six months' worth of living expenses.
- Saving for specific purposes: Whether it's a vacation, a down payment on a house, or starting a business.
- Living below your means: Creating a budget and sticking to it to ensure you spend less than you earn.
Set Long-Term and Short-Term Goals:
- Create a mix of long-term and short-term financial goals.
- Long-term goals: These are typically set for the future, such as saving for retirement, paying off a mortgage, or achieving financial independence. Long-term goals might have a timeframe of several years or even decades.
- Short-term goals: These are more immediate and achievable in the near future. Examples include paying off a credit card in three months or saving for a vacation in six months.
Break Down Goals into Smaller Steps:
- To make your goals more manageable and stay motivated, break them down into smaller, achievable steps. Smaller goals that contribute to your larger objectives can provide a sense of accomplishment along the way.
For example, if your long-term goal is to build an emergency fund, your smaller steps might include:
Step 1 (Short-Term Goal): Save $1,000 within the next three months.
Step 2 (Intermediate Goal): Reach three months' worth of living expenses in your emergency fund within two years.
Step 3 (Long-Term Goal): Maintain and continue growing your emergency fund for the future.
Prioritize Your Goals:
- Not all goals have the same urgency or importance. Prioritize your goals based on your immediate needs and long-term objectives. For example, if you have high-interest debt, it may be a top priority to pay off that debt before focusing on other goals.
Review and Adjust Regularly:
- Your financial goals may evolve over time as your circ*mstances change. Regularly review and adjust your goals as needed to ensure they align with your current situation and aspirations.
Having well-defined financial goals, both long-term and short-term, helps you stay on track and make informed financial decisions. It provides a roadmap for achieving financial success and allows you to celebrate your progress along the way. Read more on different goal-setting techniques here.
Budgeting
After setting your financial goals, the next step is creating a budget to help you achieve them. Here's how to go about it:
- Refer to the percentages mentioned earlier to guide your budget allocation: fixed costs (50-60%), investments (10%), savings (5-10%), and general budget (20%).
- Take your unique financial situation into account. Prioritize your spending based on what matters most to you, you can use the A La Carte Saving Method for that.
- You can use various tools to create and manage your budget:
Spreadsheet: Create a detailed budget spreadsheet with categories for income and various expenses. Track your spending and make sure it aligns with your budget.
Mobile Apps: Many budgeting apps are available that can help you set spending limits for different categories and track your expenses on the go. (Best Budgeting Apps for Beginners)
Bank Apps: Some banks, like Monzo, allow you to set monthly spending goals for different categories and provide insights into your spending habits.
By maintaining a budget, you can ensure that your spending aligns with your financial priorities and goals, helping you stay on track and make informed decisions about your money.
Debt Management
If you have debt, it's essential to address it systematically to improve your financial situation. Here are the key steps:
- Determine the total amount of debt you owe, including student loans, credit card debts, or any other loans.
- Understand the interest rates associated with each debt. Higher-interest debts may be more costly in the long run.
- Consider different strategies to pay off your debt:
Snowball Method: Start by paying off the debt with the smallest balance first. Once that's paid off, apply the amount you were paying to the next smallest debt, creating a snowball effect.
Avalanche Method: Prioritize paying off the debt with the highest interest rate first. This can save you money in interest charges over time.
- The most important step is to start paying down your debt. Making more than the minimum payments can significantly reduce the time it takes to become debt-free. Depending on the amount you owe, paying only the minimum could take many years to pay off the debt.
By addressing your debt systematically and choosing a strategy that aligns with your financial situation, you can work towards a more secure and financially stable future. Reducing or eliminating debt is a critical step in achieving your financial goals.
Saving
Saving is a fundamental aspect of personal finance that provides financial security and helps you achieve your goals. Here's how to approach it:
- Create an emergency fund: Setting aside money for unexpected expenses is essential. An emergency fund typically covers three to six months' worth of living expenses. It acts as a financial safety net in case of unforeseen events, such as medical bills or car repairs. Use the Bi-Weekly Saving Challenge to save 1000 in 4 Months.
- Research savings account options: Different savings accounts offer varying returns and features. Tools like Money Supermarket in the UK can help you compare the options and select an account that aligns with your financial goals.
- Save at the beginning of the month: When you receive your paycheck, prioritize saving by setting money aside at the start of the month. This ensures that you consistently save before spending, making it easier to manage your budget effectively. Waiting until the end of the month can lead to overspending and financial stress.
Prioritizing savings is a key step toward achieving financial stability and preparing for your future financial needs. To learn more about different money-saving methods check out my article here.
Credit Score
Your credit score is a critical factor in your financial life, impacting your ability to secure loans, rent property, or obtain favourable terms on financial products. Here's how to manage and improve your credit score:
Understand the importance: A credit score reflects your current financial situation and responsibility in managing debt and credit. It's a crucial aspect when applying for loans, housing, or other financial commitments.
Use credit monitoring tools: Tools like Experian and Money Saving Expert's Credit Club provide a comprehensive overview of your credit history. These tools help you understand what factors have influenced your credit score.
Build a positive credit history: Consistently pay bills on time, such as phone contracts or utilities. Responsible use of credit cards, by paying off the balance in full each month, can help establish and maintain a positive credit history.
Maintain a balance between credit and credit history: While having a good credit score is vital, having no credit history can also pose challenges. Lenders may want to see evidence of your ability to manage credit responsibly.
Working on your credit score by managing your credit accounts diligently can lead to better terms and opportunities when it comes to borrowing or making financial commitments. It's a valuable aspect of personal finance that should not be overlooked.
Credit Cards
Credit cards can be valuable financial tools when used responsibly. They offer benefits such as building credit history and earning rewards, but it's essential to manage them wisely. Here are some key points to consider:
Building credit: Responsible use of a credit card can help establish a positive credit history. This, in turn, can enable you to secure lower interest rates on loans or qualify for better financial terms in the future.
Paying the balance: It's crucial to pay off your credit card balance in full every month to avoid interest charges. Setting up automatic payments or reminders can help ensure you never miss a payment. Or use a savings pod in your bank app like Monzo, each time you spend on your credit card you can transfer the specific amount to the savings pod to avoid spending that money. Or at the beginning of each month put an amount into the savings pod that will be your credit card depend. That way you avoid unwanted surprises.
Avoid impulsive spending: Before making a purchase, especially on non-essential items, consider whether you can afford it. A helpful rule is to ask if you can buy it three times over. If not, consider saving for the purchase instead.
Impulse purchases: Overcoming impulsive spending can be achieved by instituting a "cooling-off" period. If you see something you want, wait for a month before buying it. If you still desire it after that time, you can make the purchase.
Using a credit card responsibly can offer benefits such as cashback rewards and perks, but it's essential to exercise discipline to avoid overspending and accumulating debt.
Investing
There's a lot of noise out there about investments, and of course, I'm writing from my personal experience my personal situation as a millennial woman in her late twenties who has learned about investments in the last three to four years.
It's important at this point to come back to the financial goals you've set for yourself. Where do you want to get to? Is it financial stability, security, financial freedom, becoming a millionaire, or saving for retirement? Depending on that, you could say your investment strategy could vary a bit.
I looked at my personal situation, and that's the experience I can speak about. I live in a big city, so a lot of my money goes towards rent. My parents do not own any property, and it would take me a long time to save up for a house. Even then, the house I would be able to buy at this point in my life wouldn't be of the quality I'm looking for. So, I knew for myself that, at this point in time, investing in property may not be the right decision. I have invested in cryptocurrency just to try it out, but it personally felt like gambling, and I had to stay on top of it, checking it every week and every month. I want to set up my personal finances and then not worry too much about it. After reading different finance books and listening to various finance podcasts, I've come to believe that investment should be simple and somewhat boring. It may take some time for it to provide returns, but once you start, the power of compounding will benefit you after five years or after twenty years. So, the earlier you start, the better. Here are some key considerations when it comes to investments:
Align with your financial goals: The choice of investment should be aligned with your specific financial objectives. Whether you aim for financial stability, security, financial freedom, retirement savings, or becoming a millionaire, your investment strategy should reflect these goals.
Avoid emotional decisions: Emotional reactions to market fluctuations can lead to impulsive and potentially detrimental investment choices. Checking your investments every day can create unnecessary anxiety. Instead, focus on a long-term strategy that withstands market ups and downs.
Diversification: Diversifying your investments is a strategy to spread risk. Index funds, like those based on the S&P 500, provide a diversified approach to investing in the stock market. Diversification can help protect your investments from the volatility of individual stocks.
Research and choose a platform: Selecting a reputable investment platform or brokerage is crucial. I picked Vanguard because it is known for its low fees and reliability. Choose a platform that aligns with your investment goals and offers a range of investment options.
Understand the risks: All investments carry some level of risk, and it's possible to lose money. It's important to be comfortable with the level of risk associated with your investments. Different investments, such as stocks, bonds, real estate, or cryptocurrency, carry different levels of risk.
Consider index funds: Index funds are a popular choice for long-term investing. They offer a simple and passive way to invest in a broad range of assets. They are typically managed without the emotional fluctuations associated with individual stock picking.
Start early: The power of compounding is one of the most potent tools for building wealth. The earlier you start investing, the more time your investments have to grow. Over time, the benefits of compounding can significantly increase your wealth.
Investing in index funds, which are passively managed and typically diversified, can be a solid, long-term approach to growing your wealth. It's crucial to be aware of the risks, remain patient, and stick to your investment strategy. Additionally, choosing a reputable platform that suits your needs is a key step in your investment journey.
Mindset
Changing your money mindset is an essential step in achieving financial success and security. Here are some practical steps to help you change your limiting money beliefs:
Self-awareness: Start by identifying and writing down your current beliefs about money. Consider what you've learned from your parents, school, friends, and the media. Recognize that these beliefs might not be serving your financial goals. Here you can find examples of limiting beliefs about money.
Evaluate the source: Analyze where these beliefs come from and why you hold onto them. Consider whether they are benefiting you or holding you back. This introspection will help you understand the root causes of your money mindset.
Question your beliefs: Challenge your existing beliefs about money. Look for evidence that contradicts these beliefs. Seek out examples of people who have changed their financial situations despite having similar beliefs or backgrounds.
Set new, empowering beliefs: Once you've identified limiting money beliefs, create new, positive beliefs that align with your financial goals. For example, "It is possible for me to reach financial security," "I am worthy of financial success," or "I am financially secure." These affirmations can serve as your new guiding principles. For more positive money beliefs read this article.
Repetition: Repeat these new beliefs daily. The more you affirm them, the more deeply they will become ingrained in your subconscious mind. Consistency is key. You can set reminders or create a daily routine for repeating your affirmations (44 Money Affirmations for Financial Freedom).
Emotion and visualization: When you repeat your new beliefs, try to feel the emotions associated with them. Visualize yourself in a financially secure and successful position. This emotional connection will help reinforce these beliefs in your subconscious.
Surround yourself with positivity: Seek out sources of inspiration and support. Listen to podcasts, read books, or follow individuals who share your new money mindset. Surrounding yourself with positivity can help reinforce your beliefs.
Create a vision board: If you're inclined to incorporate visualization into your practice, consider creating a vision board. This board can feature images and words that represent your financial goals and desired beliefs. Place it in a visible location to remind yourself daily.
Practice meditation: Meditation can help calm your mind and create a positive space for reinforcing your new beliefs. You can incorporate your affirmations or simply focus on mindfulness to reduce stress and anxiety related to money.
Stay committed: Changing your money mindset is a long-term process. It may take time for your new beliefs to replace old ones. Stay committed (How to stay motivated? More on that here), and be patient with yourself. Over time, you'll find that your mindset and relationship with money will evolve.
Remember that your money mindset plays a significant role in your financial decisions and outcomes. By actively working on changing your limiting beliefs, you can create a more positive and empowering relationship with money, paving the way for financial success and security.
