Posted by Melanie Simons.
When our spending habits can’t withstand scrutiny and our debts are too heavy to think about, a kind of financial paralysis sets in, where we find ourselves stuck in a rut of avoidance and indecision. Here’s my quick-fire guide for snapping out of financial deadlock:
Step 1 – Your first step in breaking out from financial paralysis is to overcome the emotional barrier that’s been preventing you from taking positive action. That means being honest with yourself about those realities you know in your heart of hearts to be true: You’re spending money on things that don’t improve your quality of life. There should be more saved in your 403(b) or 401(k). Credit card companies are enriching themselves at your expense. Regardless of how terrified you are to confront the truth about your overspending, you know that the longer you do nothing, the scarier your situation will get. So logically, now is the best time to get a handle on where you stand financially, and use that knowledge to get your life back on track.
Step 2 - Look at the income that is coming in (like your salary) compared to every dollar going out. Adding up every little expense can be painful but eye-opening. We usually have a vague idea of what our monthly bills and expenses amount to, but seeing them tallied up in black and white will really empower you to make positive adjustments.
You may already have an app that tracks your income and expenses (awesome!) but using a pen and paper can somehow make the information feel more real. This simple budget worksheet divides your expenses into “essential” and “discretionary” items. I would consider retirement savings an “essential.” This should be (at the very least) the percentage of your salary that will give you the full employer match, if you have one—ideally you’re saving 10-15%. If you can swing it, you should be hitting the maximum annual limit (in 2019, that’s $18,500 for an employer plan plus $5,500 for an IRA).
List the things you don’t absolutely need as “discretionary” expenses. It will help to pull up your bank and credit card statements from the previous month, or any 30-day period where you feel your spending was typical. Use a calculator to add up all the dollars you spent on groceries, eating out, buying clothes and gifts. Don’t forget to include monthly debt and loan payments for credit cards, car notes and student loans.
Step 3 - Once you have a concrete number for monthly after-tax income, you can subtract the “essential expenses” to get an idea of how much discretionary income you have left to play around with, if any. Remember, these are the items that you could frankly live without. If you don’t have any extra income left after your essentials are covered, you may have been living beyond your means. If this is the case, your focus needs to shift towards repaying the debt you’ve accumulated. Can you lower any of your monthly bills? For instance, are you paying a competitive rate for internet and cellphone service? There are probably better deals out there, and if you find one, call your provider and request to cancel your service (they will likely reduce your price rather than lose a customer). You should also revisit your idea of “essential.” Take housing—probably your biggest expense. If you are renting, you could look into moving to a less expensive area or into a smaller apartment. How “essential” is cable when you mostly watch Netflix? Break down your grocery bill to see where you’re overspending.
Step 4 – Hopefully, you’ve freed up some money to tackle your debts more aggressively. If not, look at ways to boost your income. Prepare to negotiate a pay raise in your next performance review, or consider finding a second job or “side hustle.” Many people find that additional part-time work or hobby-centered side gigs give them purpose and enjoyment while also increasing their bottom line. Selling unique goods on etsy.com, driving for Uber, or participating in marketing focus groups can be a great way to pad your salary while paying down debts or bumping up savings.