If you are broke and you fail to save any money, this post will explain you why. You will also find some tips and tricks how to finally start saving money.
1. You don’t track your expenses
You might be broke because you don’t know your cash flow, meaning you don’t know what you spend your money on.
The first thing to do is to analyze all your spendings from the previous month. If you cannot follow these (for example, you used cash and did not store receipts) start writing down every single expense.
Do it today!
Once you have your monthly expense report, you can start analyzing it.
There are a couple of questions that you can potentially ask yourself about your spendings.
The first is: do I really need it? I mean REALLY? The second is: did this thing improve my life? Am I happier? Was it crucial for my survival or my development?
If the answer to these questions was “no”, then you probably shouldn’t have bought this thing in the first place.
Once you do this exercise a couple of times you will be able to ask yourself those questions BEFORE the next purchase.
2. You compare yourself to the others
Your neighbor drives a Mustang, so you also should, shouldn’t you?
We all have a tendency to compare ourselves to the others. The problem is: you normally don’t really know how your neighbor financed that car.
He may earn much more than you. He may have a crisis and may use all of his savings for purchases, meaning he’s almost broke. He might have leased it. He might have won the lottery. You just don’t know.
You want this car, but ask yourself a question: is it worth ruining your budget, or savings, or even worst: your emergency fund?
How much value is it going to bring to you? How long do you think you’ll be excited about the new car?
Probably a couple of weeks.
3. You are still in debt
You think being in debt is normal because all you friends are in debt?
You’re making the mistake number 2 – you compare yourself to the others.
Do not forget: even if being in debt is quite a common thing, it is in 90% of cases, not a healthy financial situation.
Take care of your debt, pay it off as fast as you can. The more you wait, the worse it gets.
4. You don’t have a budget
You don’t know how much are you supposed to spend this month, so you just walk around and buy, buy, buy.
There is nothing wrong with buying things, but without a budget, you don’t know how much can you spend for this particular purpose.
Once you have your budget and know where you stand (how much you already spend) it is much easier to decide if you actually have the money for the stuff you want to buy.
5. You don’t like to think about money
Unfortunately, most of us (me too) were raised without any personal finance education. I didn’t know how to manage my money when I was a child and I wasn’t thought any basic personal finance rules.
As of today I know two things: I wish I knew basics of managing money when I was a child because I would be in a totally different place with my savings and financial goals today. The second thing is that I know that I’m not the only one in such a situation.
Because we were raised this way, some of us just don’t like to think or talk about money. Some even feel pain if they are forced to talk about budgets, savings, etc.
It is a great setback. The longer you avoid the topic, the worse can it get if you do not follow the principles of personal finance.
6. You don’t speak with trusted people about money
This is connected with the 5’th point. I’m not saying: go out there and tell everyone how much money you have, but you shouldn’t avoid the subject.
You don’t have to talk about numbers, instead, you can discuss the ideas or rules.
Two months ago I talked with a friend of mine for 3 hours mostly about what was his plan to retire in 10 years time. No, he’s not 50-years old, he is in his 20’s. I’ve learned some useful tips and so can you.
7. You make excuses
Those shoes cost $200 but are perfect and you NEED them, right?
You would like to save money, but you earn too little, right?
You will have a budget, but starting from the next year, right?
Making excuses is not going to help you achieve your goals. Once you REALLY dedicate to change your situation, you will focus on finding solutions, rather than problems, or excuses.
Noone said, that achieving your financial goals is going to be easy.
8. Are you sure you need this?
The common problem I see is that people mix “I want it” with “I need it”.
I have a simple system to decide if I need something, or I just want something. I use the following questions:
Will I survive without it?
Will this solve a significant problem in my life?
Will this help assure my health?
Will this increase my security significantly?
Here are a couple examples that may help you understand my “system”:
– 10th pair of shoes – do I need it? NO!
– food – Do I need it? yes, of course
– health insurance – will this help assure my health? yes
– a new laptop, because all of my friends just bought new ones – will this solve a significant problem in my life? NO
– a new laptop, because the old one broke and I need it for work? Will this solve a significant problem in my life? yes
9. You treat your car as a status symbol
You can do this. You can buy a luxury sports car and show off driving around. It’s nothing wrong about it as long as you can afford it.
You can afford a fancy sports car, can’t you?
Let me help you out. If the price of the car you want to buy is less than 1% of your net worth, you probably can. Just do not forget to subtract every debt (I’m talking about your mortgage too) while figuring out what your net worth is.
If the car costs more than 1% of your net worth than I’d recommend focusing on savings or buying a car that you are not going to use as a status symbol. Otherwise, you can make some serious damage to your savings and your budget.
10. You don’t have an emergency fund
This is one of the basic things you need to do if you want your finances to be healthy.
The very first reason to have an emergency fund is that you never know when an emergency happens and how much is it going to cost you.
It’s that easy, yet people fail to maintain their emergency funds.
If you want to learn more about emergency fund you may want to read this article.
11. You don’t have a financial goal
Saving just to save might be tricky. It is not easy to do something if you don’t see the point or you don’t have a predefined goal.
If you don’t have your emergency fund yet you should definitely start with that. Try saving 1000$ first. Once you achieve that you should feel that you are able to cover some unexpected expenses.
The next step would be building up your savings to the level of covering your 3-month living costs (in case you lose your job).
If you are more advanced you can save for some investments like a rental property, 401k, passively managed funds, stocks etc.
Once you’ve been doing this for a couple of years, you may even think of an early retirement.
12. You spend too much money on your cable and or/phone
Once you know what your expenses are you should analyze them and decide which ones you can cut.
You can try cutting cable and replacing it with a digital antenna or with Netflix.
Negotiating you current contracts is the other way. For example, you can try to cut your insurance costs. Why would you pay more for the same service?
Those were common reasons why people fail at saving money. What are your experiences in this area?