Wow, what a year. So much can be said about 2020, but the overarching theme it proved to me was unpredictability. Since I’m a “money nerd,” the COVID-19 pandemic marked the greatest wake-up call in our lifetimes to get our finances in order. While the pandemic has demonstrated that so much of this life is out of our control, money is something that we can control.
We’re now at the moment where we reflect on the year that was and plan for the year ahead. With that comes the obligatory “New Year’s Resolutions.” Repeatedly, “finances” are one of the top resolutions cited each year. However, studies show that only 8% of Americans who make a New Year’s resolution actually keep them all year and 80% have failed by the start of February. As the New Year fast approaches, it’s natural to feel a bit excited by the prospect of leaving behind the old year (especially 2020) and beginning anew.
History of Resolutions
The practice of making a New Year’s resolution has been a part of human history for over 4,000 years when the ancient Babylonians would make promises to the gods they worshipped. History also remembers the Romans making sacrifices to Janus, who they believed symbolically looked backwards into the previous year and ahead into the future.
While the traditions and motivations for New Year’s resolutions have changed, the practice of making New Year’s resolutions continues.
Why resolutions don’t work
Each year I wonder, “Why do people always make ‘getting their finances in order’ one of their resolutions yet fail to do so?” Psychologists and research firms cite a number of issues to explain the massive failure rate of 80%. These include anything from lack of clarity to setting expectations too high. I believe the issue to twofold: 1) lack of financial literacy; and 2) not making the choice to change. So much of how we handle our money is mindset, behavior, and discipline. We must change our attitude and approach to managing money. However, there’s one thing we all want as a permanent resolution – more money – or as I like to say, more margin (also known as disposable income). So, how do we create more margin for ourselves?
Why people hate budgeting
The simple answer is because it’s work and one more thing to keep up with. But it’s YOUR money and a budget allows you to take control of your finances because without one, guess what happens? Other people take control of it! Or as the saying goes, “If you don’t control your money, it will control you.”
Many people view a budget as money jail. My mom always says that she hates budgets because it goes against her nature. The concept of a budget sounds so restrictive and doesn’t allow you to do what you want, when you want. However, if you look at it from a different perspective, a budget actually allows you to allocate funds to the most important things in your life. I’d be willing to bet that most people don’t think a Starbucks coffee is the most important thing in their life, but if you’re buying a cup every day your actions would say otherwise.
Managing Holiday Expenses
Speaking of budgeting, December is the most challenging month of the year to manage our money because of everything thrown at us in the name of holiday cheer. We are faced with an overwhelming amount of decisions to make such as: holiday parties to attend, where to travel (or not travel), who to visit, who to buy gifts for and how much, decorating the house, etc. And guess what? All these things usually end up costing us more money than we anticipate. That’s why setting a holiday/gift-giving budget is imperative.
Try not to view a budget as a restriction but simply a tool to track your money. Knowing where it’s going is the first step in the process of successful money management. Most of us don’t have a money problem, we are challenged with creating balance in our personal finances.
Being Unbalanced
When you’re out of balance you’re not sure what to focus on. Interestingly, people who agonize about money probably have enough of it—they just don’t have balance. It’s the management of money that’s the problem. The more money you have, the easier it is to be out of balance and stay out of balance. Any time we have extra of anything we tend to be undisciplined with it. As a result, the stress and anxiety of being unbalanced with your finances affects your physical wellbeing and will undoubtedly cross over to nearly every aspect of your life whether you realize it or not. Consider the following:
- Money is the No. 1 cause of stress for Americans—even more than work, family, and health problems.
- People who stress out about money are twice as likely to have a heart attack.
- Highly-stressed people are 65% more likely to suffer from back pain and muscle tension and 13 times more likely to suffer from insomnia.
There’s an easy way to avoid stress caused by your finances. Research shows that people who take an active role in managing their finances are less stressed and more confident when it comes to money.
Creating Margin
There are two ways to generate more margin: 1) earn more income; and 2) cut expenses. Since I have no control of if or when I will receive a salary increase from my employer, I’ve realized that cutting my expenses is the most feasible option. In our society, people are hardwired to value earning money over saving it. You might be saying to yourself, What expenses can I possibly cut in order to save? If that’s true, you need to reexamine your expenses and determine what cuts to make. Here are some ideas:
- Cable — Do you really need to pay $100 a month for 300 channels you never watch? Cutting your cable could easily save you $1,200 a year, or more. Explore cheaper alternatives like Netflix (basic plan $8.99 a month), Hulu (starting at $5.99/month), and an HDTV antenna (provides local channels for free).
- Gym — The majority of the people I know are non-attending fitness club members. With the average membership rate at $50 a month, you could save $600 annually by doing pushups at home and jogging at the park.
- Eating Lunch Out — If you’re used to eating out on most workdays, you may be paying $7 for a sandwich and $3 for a drink, for a total of around $10 per day. That can seem harmless enough, but it adds up quickly. That’s $50 per work week and can total $2,500 or more per year.
- Eating Dinner Out — This is a challenge for all of us. What if you went out to eat just two less times per month? At $25 a meal, that would also save you $600 a year.
- Groceries — The No. 1 rule of grocery shopping is to have a list and stick to it. Showing up with a mental list is a recipe for disaster. Figuring out a way to cut just $25 a month in groceries will save you $300 a year.
- Smoking — Quitting smoking can save you more than $2,700 a year if you smoke a $7.50 pack a day.
- Insurance — You might save $1,000 or more over a year simply by calling around and finding a cheaper car/home/life insurance policy.
You see how all this adds up? The seven ideas listed above total $8,900 a year. Do that for five years and you’ve saved $44,500! The easiest way to earn money is to save it. Are you starting to see the big picture now?
Join the 20 percenters
As previously stated, the failure rate for New Year’s resolutions is about 80%, and most lose their resolve by mid-February. Perhaps the reason for such a high failure rate is because we live in a society of instant gratification. If we don’t see immediate results, we give up.
Becoming financially fit is similar to getting physically fit (another commonly cited resolution). There is no quick fix—especially if you desire positive results. In both, taking baby steps is paramount to success. When exercising, you might have the goal of losing weight. With your finances, you might want to lose your debt. You don’t work out and lose 30 pounds after a week, nor will you be able to pay off thousands of dollars in debt in a month. It’s about developing a mindset and changing your behavior in order to achieve long-term success. Maybe this is why many Americans are in such a dire financial situation. There is no quick fix, and those seeking instant gratification are terribly disappointed. Much like your fitness goals, this is going to take hard work, planning, desire, sacrifice, and willpower to conquer. But when you do, it will be one of the best and most rewarding accomplishments of your life.
Get it done in 2021!
By implementing the strategies shared in this blog, my wife and I paid off nearly $75,000 in debt in under three years. Whether your goal is to get out of debt, build and emergency fund, pay for your kids’ college, or simply have more cash on hand for vacations, etc., there’s no reason why you can’t do it if you simply begin to start changing your mindset on money. You can do this!
For more on my financial journey and thoughts from other unique individuals, check out my book Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.