How to Go on a "Financial Diet"
Date: January 24, 2017
The comparison between saving money and cutting calories goes beyond clever analogies. Some principles have much in common, such as the slow-is-best approach. Quick weight loss and sudden money-saving ideas may produce short-term results, but they rarely address underlying conditions where effective, ongoing change can be introduced. Like dieting, spending works best based on a plan. When your bank account gains weight, it's a good thing!
Step On the Scales — Analyze Your Finances
Understanding where your money goes is the first line of attack when slimming your spending. Many weight loss plans involve keeping a food log and this is a sound strategy to apply to a financial diet as well. You may find that your less obvious spending isn't accounted for.
Keep a tally of all your purchases for at least a month. Include essentials such as mortgages, car payments and occasional costs for clothing and grooming, as well as discretionary spending on extras like that cappuccino or other impulse splurges. Identifying every financial "calorie" creates a resource to help you prioritize spending.
Stock the Pantry — Gather Your Financial Tools
Create a file for bills, invoices and receipts and use it daily. Not only will this help you keep track of your spending, but it has a couple of other benefits that can save you money down the line as well. If you often misplace and forget about utility bills, monthly late fees start fattening costs. When it's time to complete your tax return, everything will be in one place if you're itemizing expenses.
Paperless billing means your file may be partially electronic. At a minimum, keep a separate email folder for financial content. Better yet, use personal finance software like Quicken, that permits you to link e-bills directly into the app. You can also make payments directly from the app, saving you time, postage and stationery.
The Money Menu — Your Budget
Personal finance apps can make the budget process easier, but even if you use the back of an envelope, creating a budget is essential. "When you're dining out, you can't make a smart food choice without a menu," says Terry Baker, financial planning consultant with Investors Group. "Cutting the fat from your finances requires a budget, one place where you can see all your options and consider all your trade-offs."
Pick Your Portions — Set Realistic Spending Goals
Every plan needs a yardstick to measure its success, whether it's losing a pound a week or saving an additional $50 a month, but it's important that you be realistic. List your long-term goals, whether they involve a down payment on a house or paying cash for a new car, and then break the big goal into workable pieces that fit your monthly budget.
Committing to save $500 has little meaning without a time frame. It's probably not going to happen by next Friday, but six months from now is a reasonable goal — less than $100 a month. Avoid unrealistic goals that lead to discouraging results.
Cut the Fat — Attack Your Debt
There's a reason why finance management advice always mentions getting rid of debt. Accumulating interest is the equivalent of sneaky, hidden calories in your diet. Left unchecked, debt spends your money for you. While debt such as a mortgage may be necessary, unpaid credit card balances and other high interest loans are priority targets in an effective financial diet.