There is no stereotype when it comes to labeling debt. It’s not just young families or students. It’s not just single moms or teens. It’s not just senior citizens. Unfortunately, when it comes to debt, almost everyone in America is in it.
While it’s safe to say that most of America is in debt, most Americans know they shouldn’t spend more than they earn. Yet, reports continue to show that living outside our means is exactly what most of us are doing.
Knowing you should spend money intentionally and actually spending with intention are two very different things. When it comes to the issue of debt, it’s not the fact that Americans don’t know how to save or plan. The issue is deeply engrained in financial behavior and long-term habits.
The bottom line? If you want to climb out of debt, you have to start at the bottom.
To change your financial behavior and begin to manage your spending, you need to:
- Identify your baseline.
- Analyze your baseline and pinpoint bad spending habits.
- Create new (and realistic) financial goals.
Identify your baselineBefore you develop your financial goals, you need to find your financial baseline. Your financial baseline is your honest starting place. It’s an all-encompassing look at how you’re spending, saving and giving today. Your baseline is not your budget. It’s not what your finances should be. It’s what they are today.
To find your baseline, look back on 60-90 days of bank statements or start new and begin recording spending habits. Either way, your result should be the same: a report that reflects how you spend money. Your report should also show how you save money. At the end of your 90-day tracking period, take some time categorizing your spending habits into necessary and unnecessary expenses. This will help you move into the next segment of finding your baseline: analyzing.
Analyze your baseline and pinpoint bad spending habits
"Where there is no vision, the people perish…” -Proverbs 29:18
Once you’ve created your spending report, it’s time to step back and take a hard look at it. After figuring out where you are financially, you now need to figure out where you want to go. Studies show that many Americans are spending 103% of their income. That's 3% more than they generally earn. For most, 45% of income goes toward debt, 25% goes toward taxes and 33% goes toward other spending. That leaves nothing for saving and giving.
When you’re looking at your baseline, ask yourself:
- How much am I saving?
- How much am I giving?
- How much of my spending benefits me long-term?
- Where is the majority of my money going?
- Do I have any money left at the end of the month?
- Where can I reduce spending?
Create new financial goals
Setting goals is an important part of any change you’re taking on in life. Goals help you stay on track, keep you accountable and play an important role in measuring success. When it comes to money, you need both short-term and long-term goals, and they need to be SMART: specific, measurable, achievable, relevant and timely. Build in wins and be realistic.
Financial experts recommend that you have 3-6 months of income in your savings account as an emergency fund. But that’s a big number and takes time to build. Start small and keep savings goals manageable. Build in wins. Don’t create a budget or spending plan that’s too tight. Create short-term goals so that you can celebrate success each week. Examples include:
- Setting weekly spending goals and, when you meet them, putting extra cash straight into your savings account.
- Allowing room for fun. Don’t set goals that don’t allow you to eat out or seek entertainment. The key is that those additional expenses happen only once in a while, not consistently.
- Finding something to save for. Sometimes saving for long-term goals is difficult. Break it down. If you’re saving for a down payment on your house, for example, set milestone marks when you get 25%, 50% and 70% of the way there. Take time to recognize your hard work.
- Sharing your goals. When you tell a friend or family member what you’re changing about your finances, it’ll not only help you stay accountable but also add to your celebration when you reach important milestones.