I have a couple of friends who I would consider are obsessed about the future. They work their tails off, live a frugal lifestyle, and put a bulk of salaries into their retirement savings.
Many experts would applaud them. But, I struggle with this. I mean, I try my best to be financially responsible. At the same time, I don’t want to live my life 20 to 30 years from now. Who knows what kind of shape I’ll be in or what the world will even look like.
Some may say that’s being irrational. But, it’s actually something that most of us agree with.
According to research from Dan Gilbert, the reason we struggle with this is that we find it hard to imagine who we’re going to be.” As a result, we believe that whoever our future selves will be won’t happen.
For example, Gilbert says during his Ted Talk, he and his team asked people “how much money they would pay right now to see their current favorite musician perform in concert 10 years from now.” On average, “people said they would pay 129 dollars for that ticket.”
“And yet, when we asked them how much they would pay to see the person who was their favorite 10 years ago perform today, they say only 80 dollars,” adds Gilbert. “Now, in a perfectly rational world, these should be the same number.” However, “we overpay for the opportunity to indulge our current preferences because we overestimate their stability.”
To me, that makes sense. At the same time, 27% of adults have stated that they would have borrow or sell something to cover an unexpected expense of just $400.
So, what’s the answer here. Well, I don’t think that you should put your life on hold for a hypothetical future. However, you also need to take steps to ensure that you aren’t heading for a financial catastrophe.
If that’s an area you struggle with, here are the first action steps you must take for your financial future.
What’s behind your financial decisions?
According to the nonprofit Smart About Money, which is a part of the National Endowment for Financial Education, the first step in taking control of your financial future is understanding your relationship with money. Usually, your spending and saving habits are based on your LifeValues — the Inner, Social, Physical, and Financial drivers of your financial decisions.
For example, you may have no problem shelling out the money for an expensive vacation. But, you can’t set aside $500 into an emergency fund. When you’re aware of this, you begin to make changes, like learning how to control impulse spending. It will also make it easier to clarify your goals and priorities.
When you have a couple of minutes, go ahead and take the LifeValues quiz. Just remember to be honest and that there are no “wrong” answers. Instead, use it as a stepping stone.
Assess your financial health.
After coming to terms with what’s behind your financial decisions, it’s time to check-in on your financial health. You might not believe that this is important. But, it’s an essential step to take before establishing any goals.
To get started, gather, and organize essential information and documents. These include:
- Bank statements
- Credit card statements
- Investments, like stocks, mutual funds, real estate
- Emergency and retirement savings
- Insurance policies
You may also want to check out your credit score. The healthier it is, the more likely you’ll be able to secure lines of credit or loans. Overall, that means your financial health isn’t too shabby.
When you have all of this data in front of you, you want to subtract your liabilities from your assets. The reason? It will help you determine what your net worth is. If it’s not positive, then you need to make some changes to rectify that.
Be SMART about your financial goals.
Your financial health will determine what your goals are. It’s like when you visit your physician. If you have high blood pressure, they will suggest actions like dieting and physical activity.
The thing is, even though you know that you need to improve your physical health, you’ll be less likely to follow through if your goals are SMART.
For those who aren’t familiar with this, these are goals that are specific, measurable, achievable, realistic, and trackable. In this case, an example would be “I will walk for 30 minutes after dinner.”
The same concept is applicable when it comes to your financial goals. Let’s say that your beloved car is on its last leg and will need to be replaced within the next year. Your financial health isn’t in the best condition, so financing a new vehicle may not be an option. So, you’re going to have to set a goal that could be something like:
- Specific: Purchase a used vehicle under $10,000.
- Measurable: Plan to save $2,000 for a down payment.
- Achievable: By setting aside $200 per month.
- Realistic: I can cancel my cable and gym membership to reach the $200 goal each month.
- Trackable (or Time-based): I can reach the $2,000 goal within 10 months.
Now that you’ve successfully reached this goal, you can use this to your advantage to keep up with the monthly car payments.
You need a budget.
Sure, your goals may be SMART. But, the only way you’re going to reach them is by creating and sticking to a budget. Even though the example listed above sounds good on paper, if you aren’t able to come up with that $200 each month, it’s not going to happen.
Creating a budget may send a chill down your spine. But, it’s really not all that terrifying. It would help if you simply subtract your expenses from your income. Seriously. That’s it.
Hopefully, this is in the positive. If so, you can put towards paying down your debt, building an emergency fund, or thickening your retirement.
To keep you on-track, use something like the envelope system. Here you would place your money into various “envelopes. “The theory is, if you only have $200 in your food budget for the month, you will only use that $200,” explains William Lipovsky in a previous Due article.
Even though you shouldn’t spend a penny more in each envelope, you can do some shuffling it, you must. For example, if you spend less on groceries for the months and your eclectic bill was higher then expected, you could move the excess grocery fund over so that you pay your electric bill.
Keep your spending in check.
While the envelope system is effective, it can only take you so far. That’s why you need to identify budget leaks and find ways to plug them.
For example, maybe you’ve found that spend too much money getting takeout on the weekends. The reason? You’re just too tired to cook. Knowing this, you could prep your meals in advance to remove this temptation.
Another suggestion would be leaving your credit cards at home and removing them from online shops. Also, if there’s any memberships or subscriptions that you aren’t using, cancel them.
Build a moat.
You’re not literally building a moat around your home. What this means is protecting and growing your financial well-being by:
- Getting your employer match contributions to your retirement accounts.
- Making sure emergencies don’t become disasters. Ideally, you should have enough money saved to handle up to six months of essential living expenses.
- Tackling high-interest debt, such as credit card bills. A budget, picking up a side gig, or debt consolidation are ways to achieve this.
- Investing in building your savings. In addition to a 401 (K) and IRA, look into high-yield savings accounts, CD’s stocks, and bonds.
- Using insurance to protect your financial stability. Prevent car accidents or health problems from putting you into debt by having the proper insurance.
Become financially literate.
“Making money is one thing, but saving it and making it grow is another,” writes Ken Hawkins for Investopedia. “Financial management and investing are lifelong endeavors. Making sound financial and investment decisions is important for achieving your financial goals.”
“Research has shown that people who are financially literate end up with more wealth than those who are not,” adds Hawkins. “Taking the time and effort to become knowledgeable in the areas of personal finance and investing will pay off throughout your life.”
Some of the resources that you can utilize include:
- Free online resources, such as the Financial Literacy and Education Commission and MyMoney.gov.
- Newspapers like the Wall Street Journal and The Financial Times.
- Magazines such as Fortune or Barron’s.
- Financial programming on networks like Bloomberg TV, CNBC TV, or Fox Business News
- Books like “Your Money or Your Life” and “The Millionaire Next Door.”
- Radio shows or podcasts like The Dave Ramsey Show or The Clark Howard Show.
- Take a financial literacy class online or in-person at an adult education center or junior or four-year college. A couple of suggestions are Personal and Family Financial Planning (Coursera) and Saving and Budgeting (Khan Academy).
Schedule frequent check-ups.
Remember when you did a financial health check-up? Well, you’re also going to have to schedule a follow-up. And, at the minimum, that should be every 6-months.
This probably isn’t how you want to spend your downtime. However, you need to block out this time to track your progress and adjust your plan if there have been any major changes.
Most importantly, you want to make sure that there aren’t any issues. It’s like putting off a sinus infection. If not treated, it could cause long-term complications within your ears, eyes, and nose. So, the sooner you treat the problem, the less likely it will become any worse.