“What to do if my car breaks down tomorrow?”
“I can’t afford health insurance, what if I get in an accident?”
“There’s no way out of my debt, I’m stuck!”
These are the thoughts of many people, and you might be one of them. And it’s not solely your fault, society hasn’t taught us how to save and keep money for a long, healthy, and happy life.
Therefore I want to provide some reasons why people get into these situations and some tips to change it all.
1 Focusing on the wrong things
I want a pair of new shoes, I would like some junk food for dinner, I want a long vacation to Australia, I would like a new phone – sounds familiar?
I thought so, and it’s the reason why many people have a bad financial situation.
Most people have a wrong mindset resulting in them focusing on what they like and want rather than on what they need and love.
Take a second to reflect.
What do you think will happen if you reduce the things you need and love like a place to stay, time with husband/wife and kids, food, and so on, and increase things you want and like such as a luxurious car, expensive sneakers, cocktails, restaurant visits, etc.?
Your life will become a mess. You’ll feel stressed, worry about if your car will make it tomorrow, and work your butt off just to make ends meet. That’s not sustainable for anybody.
How to fix it?
While it would awesome if we could just change the situation in seconds, that’s sadly not an option. Instead, one way to improve your personal financial situation is to figure out what you need and love, and what you want and like.
Write it down on a piece of paper – it could look like this:
What I need and love:
- A place to live
- Free time with my loved ones
- An emergency fund of $2,500
- Pay off debt
- Health insurance
- Electricity and Wi-Fi
- A phone
- A savings account
What I want and like:
- New Clothing
- Junk food
- Restaurant visits
- Netflix, HBO, and other subscription packages
- Car (anybody can jump on a bicycle or use the public transportation system)
- Diet supplements (just eat like a regular person)
- Other things I buy when I’m out shopping
When the list is in place it’s time to act. Allocate money to all the things that you need and love.
You must know how much of each dollar should be allocated to which category. Maybe 35% of your income goes to rent, and 20% goes to food, and so on.
If the dollar is covered in collars from left to right, you don’t have money to buy what you want and like.
However, as you allocate more and more money to these categories you’ll see how your debt decreases and your savings/emergency funds increase.
This will eventually result in room for other things such as new clothing.
2 Justifying stupid purchases
Are you one of the people who after a long or bad day go shopping to feel better? You’re not alone, a lot of people use this method to increase dopamine levels and feel better.
However this is only short-term joy, and the long-term consequences of such behavior are extremely dangerous, and it can potentially make you end up in an evil spiral.
A spiral where you feel bad due to your financial situation, and that makes you spend more to feel better resulting in an even worse financial situation and so on.
How to fix it?
So the cold financial advisor would say “get your shit together and ignore the urge to buy when you feel bad”… While that’s definitely a way to do it I have a better idea.
While I agree that you should try your best to ignore the justification thoughts, you can still buy items when you feel stressed or down, but with a twist.
Instead of just buying whatever you want you should spend the money on things that could help you grow further, and therefore reach your financial goals even faster. For instance, buy:
- A monthly budget
- A mentor to help you with your financial situation
- Project management tools
Of course, you shouldn’t buy new things every day, but once in a while, when everything gets too much, find something that can help you grow. The rest of the time, you must do your best to ignore the urge to buy new stuff.
3 Throwing money in the trash can
Many people don’t realize that only saving up money is equal to throwing money away. In other words, if you only save up money you must have an extremely great financial situation if you can afford to throw money away.
“Hey, what? I only save up money, but my financial situation I bad, and I would never throw money away!”– Confused reader
I get why you are confused, and it might be because you haven’t thought of how inflation makes your money worth less. Allow me to explain:
The average inflation rate per year is 3.8% from 1960 to 2021 – which means on average your money loses 3.8% of its value each year.
You might have seen how the prices have risen for the last long period and you can’t buy as much for the same amount of money as you could before – that’s inflation.
So if your money isn’t invested you are in reality throwing money away.
How to fix it?
A beginner-friendly solution is to invest in index funds. Instead of using a lot of time to understand the stock market and pay +$100 for a single stock, you can buy index funds.
An index fund is like a basket that’s filled with 50, 100, or even +500 stocks, and you get all of them for a low price. You don’t own 100% of a single stock, but instead, you own a very little piece of every single stock, while you get the benefits of diversification.
Instead of buying an Apple stock, you can get 100 different stocks in different sectors and industries, which lowers the risk of investing.
Need help? Contact me here.
Wrapping it up
The main reasons people go broke is due to focus on the wrong things, they justify stupid purchases, and they’re not investing their money. In the above-mentioned sections, you get three tips on how to fix it and get your financial situation back on track.