With the possible exception of the weigh loss/start exercising promise millions will be making to themselves for 2011, getting into better financial shape is probably the top New Year’s resolution, for this year or any other.
Sadly, most New Year’s resolutions don’t survive January! Ever wonder why?
Most New Year’s resolutions set the bar too high. When we make resolutions there’s a tendency to build them up to be cure-alls—sudden and swift changes designed to undo and correct deficiencies that may have been years in the making.
We’re not just confronting a problem, but also the mountain of bad habits that enabled it to happen. It’s too much change too soon.
So it is with all changes in money habits. We can’t fix our finances any more than we can go on a crash diet after years of ignoring our weight. But we can—and should—take small steps that will improve our circumstances gradually and over a long period of time. The key is converting change into new habits, and that’s best done in the smallest steps.
There’s no time like New Years to begin making changes, but small ones are all we need to get started. Try implementing these modest changes in your finances and aim for gradual improvement, rather than radical change.
1. Cut expenses by five percent
There are two ways to do this without making major alterations to your budget. One is to cut expenses across the board; the other is to eliminate some small expenses that will enable you to reach the goal.
Across-the-board reductions will be less noticeable, but it will also require that you be disciplined in many areas. Eliminating specific expenses will require only that you’re disciplined in certain areas.
For example, you may be able to reach 5% by cutting your vacation budget in half, by eliminating eating meals out, or by ditching your land telephone lines and cable TV. You’ll have to live without things you’ve gotten used to, but otherwise your financial life will continue as it always has.
Five percent may not seem like much, but it’s what you can do with it that really makes a difference over the long run.
2. Save five percent of your net income
If cutting expenses by 5% works out to be say, $250 per month, over the course of 12 months, you can save it and bank an extra $3000 by the end of the year. That may not be a fortune with today’s cost of living, but if you have no savings right now, it’s a solid start. And once you get it going, you can take it just as far as you like.
Best of all, you haven’t had to do anything drastic, like selling a car or taking a second job. You’ve tightened a few bolts in your budget and ended up with a few thousand more by the end of the year.
3. Pay down debt—at least a little
Alternatively, you can decide to concentrate extra savings into debt payoff. You’re not making sweeping changes, like attempting to eliminate all of your debt in one year; instead you’re focusing on paying off one credit card, or paying down one car loan.
The bonus here is that each debt you pay off, even the small ones, will produce an improvement in your cash flow for a debt that no longer needs to be serviced. If you took care of one loan per year, in a few years you can be debt free—again without doing anything dramatic to get there.
4. Don’t take on any new debt
Here’s something you can do, quite literally without doing anything—which is the whole point. Make a resolution not to take on any new debt this year.
That may sound simple, but in the credit-driven culture that we’ve become, using debt to get what we want or need has become second nature. The only way to get out of debt is to be purposeful about not getting there in the first place.
Why it’s even easier than it looks
There’s a synergy to all of this—each step you take, regardless of how small it may seem by itself—work together to improve your big picture.
The money that you save by cutting expenses can be used to pay down debt; by paying down debt you’re freeing up income to put into savings. The new debts that you refuse to incur keeps future paychecks clear of new obligations.
You’ve heard of “the magic of compound interest”? You’re doing basically the same thing, only you’re doing it with small steps with financial moves. Over time, they become habits, build up and feed on themselves and grow. One small step at a time.
We’re not doing anything radical here. Instead, we’re keeping it simple and more important, doable. Better to succeed at a series of small changes, than to fail in attempting big ones that may prove too disruptive to ever be accomplished.
And if those small steps don’t bring the radical change you want by the end of this year, there’s always next year—and every year after that.
(photo credit: Shutterstock)
This post is from FiscalGeek staff writer: Kevin Mercadante. I’m very excited to have him contributing to the site. You can find out more about him at his own blog OutOfYourRut.com.