Ever since 2021 has started, the first thing that comes to mind is the intention of making resolutions and sticking with them throughout the year. Among those resolutions, most of us include the intention of controlling our expenses and begin saving money. Especially, after what the year of 2020 has revealed to us, regarding our financial resilience. Additionally, we tend to include in our year resolutions, losing weight, finding a new job or saving money for those well-deserved and long awaited vacations. However, if we fast-forward to next year, we tend to fall short halfway through its course. This is due to having resolutions that are more a reflection of our expectations, rather than our actions. I must confess that I also fall into this trap, especially when it comes to my finances.
Lately, I’ve committed myself to learning how to successfully plan where my money should go by implementing a budget. As I was researching, I discovered that many of the mistakes that people made when planning a budget rely on the struggle to be consistent and the management of temptations they run into, consciously and subconsciously. Then, I wondered how I could avoid these two frequent mistakes by being proactive and executing a series of actions that could help me maintain my goal. That’s when I remembered that a couple of months ago, I saw a YouTuber called Rowena Tsai talking about setting systems and not goals. In this video, she recommended James Clear’s book called Atomic Habits to learn more about how to strengthen good and new habits by paying close attention to each of our repeated actions, such as spending money on a specific item we really don’t need each day. Ever since I began reading James Clear’s book, I have begun to be more mindful of my actions.
Before I started to implement a budget plan in five easy steps, I sat back and revised all my 2020 transactions (debits and credits reported by my bank of preference) which took me around 6 hours to complete (to make this step easier, you can decide to only revise the past three months). I used an Excel Spreadsheet to register my monthly expenses, which I modified and organized by the prominent types of expenses that exist with Fixed, Variable, Periodic and Discretionary—in order to identify which category is negatively impacted. At the end of this discovery, I realized that I sub estimated the control I had over my spending. I was surprised that my money was mostly drained by discretionary expenses such as dining out and Walgreens purchases (aka “vampire expenses” which tend to suck your income in an “unharmful” way, as indicated by the financial coach, Carlisa Colón). Even make up was a major category where I spent around $300 over the past year of 2020.
After receiving this harsh wake up call, I managed to survive 2020. However, 2021 will surely become another story, as my intention this year is to be debt free by paying off my student loans and have more free money around to make an emergency fund. Also, this exercise will save my butt from any emergencies that may arrive as the pandemic progresses. Eventually, I would like to obtain financial freedom to have the flexibility to create new financial projects to help my community and younger generations like you. Without further ado, here is the plan on how to tell your money where to go in 5 Easy Steps:
1. Use a notebook to register each Financial transaction done daily
As discussed before, find a notebook or use the Excel Spreadsheet for the Registration of Expenses (for optimal calculations) to write off all the money moves you make each day. Assign an hour at the end of the day before going to bed and write off all the transactions made and categorize them using the following symbols:
-
(=) Not a good or bad habit
-
(+) A good habit you want to maintain
-
(-) A bad habit you want to improve
After writing each daily transaction, including its category symbol, add a brief description of how you feel about that money transaction (avoid providing justifications and excuses). Finally, remember to categorize your expenses in the following categories:
-
Fixed – Same monthly quantity expenses, such as student loan debt, gym, rent, etc.
-
Variable – Monthly quantity varies, such as enrollment payments, water and electricity bills, subscriptions, cell phone bill, car maintenance, etc.
-
Periodic – These are cyclical payments that are due some time during the year, such as license plate, car insurance, etc.
-
Discretionary – expenses that depend on the quantity and times you spend on them, such as dates, dining out, buying online, haircut, etc.
Ultimately, to make this first step easy for you to follow, download the following table sheet that will include an example of how to start registering each money transaction.
2. Identify your Financial Repeated Actions that need to improve weekly
After registering your daily money transactions for a week, look back and reflect over which money transactions repeatedly made you feel guilty, sad or disgusted, and mark them with a highlight. Then, write off the repeated transactions on a blank piece of paper and include how you will tackle each transaction in a more proactive way:
✍? Went to drink with a toxic friend – $14.00 → Will deny drinking invitations with this toxic friend and minimize going out for drinks on Fridays and weekends.
3. Identify the cues & cravings that are negatively associated with the financial habit to be improved
Due to the nature of these money transactions being repetitive, you must pay close attention to the cues and cravings you get before acting on them. In the same paper, write some cues. Cues are typically triggered in the form of certain situations or events that make you predict a possible reward from the info obtained, according to James Clear in his book, Atomic Habits. Meanwhile, cravings can be defined as your motive or desire to engage in a certain behavior to obtain love, acceptance, money, power, etc. To better understand these terms, we could apply them to the toxic friend example; it can be supposed that you hang out with that friend because you crave their acceptance, even though they don’t treat you right and, in worst cases, influence you to get excessively drunk. In this situation, the cue could reside in the particular sound of their text messages, which is frequently assumed to be an invite to hang out on Friday nights.
As a rule of thumb, include a description of cues that typically inspire you to fall into the trap again and into committing that specific bad money move; note that cravings might surge after the action or before you repeat it all over again as shown below.
✍? Cue – Every time I hear the ringtone of my toxic friend’s message I know she will probably call me later.
✍? Craving – I get excited because I will have another chance to hang out with cool people like them. I always catch myself daydreaming about our possible conversations that will make them pleased to talk with me.
4. Establish blocks and new pathways to avoid/ hide triggers
Now that you understand what cues and cravings trigger the bad money habit, it is time to design simple steps that can guarantee that such bad actions are off limits. Therefore, some blocks and new pathways that can be replaced instead:
✍? Block my toxic friend’s messages
✍?Go to sleep earlier on Fridays or substitute drinking by watching movies or series at home
✍? Keep my phone on silent and away from me on Fridays and on weekends
✍? Hide credit cards, away from my eyesight
The same can be applied to new habits by making new pathways that are easy to follow:
✍? Instead of using my phone on Friday nights, I will be doing exercises or taking music lessons at the usual time that my toxic friend calls me, that way I’ll be happier and productive.
It will be more proactive to remove a bad habit by swapping it with a new one. This can include making the new experience of exercising easier by laying out the materials (water bottle, exercising clothes, workout video,etc.) you will need to be prepared, on the day or hours before. As for music lessons, it could be to have your music notebook and instrument ready in an assigned place to remember and start learning immediately at the assigned time.
5. Assign when, where and how your new financial habit will be prioritized
Finally, to resume all the previous steps, don’t forget to declare the new money habit that will be substituting the bad one by using the following questions that James Clear recommends in his book:
-
When does your bad money habit happen?
-
Where does your bad financial habit take place/come from?
-
How would you prioritize a better financial habit instead?
-
How much money will you assign or save in three months as a reward?
Example of the toxic friend case:
✍? I will reject my toxic friend’s invitation starting tomorrow morning (Feb 20th) when his/her message is received around 9:30pm and later, changing their ringtone. Instead, I will be investing in music lessons from 8 to 10pm, to later go to bed early on Fridays. As a reward, I will use the $14 I would normally spend with that toxic friend, and I will save it to put it in an emergency fund and accumulate a total of $168 ( = $14 x 4 Fridays x 3 Months) after three months.
It is important to emphasize that when you begin implementing these steps it will be normal to experience some drawbacks. But the main goal is to focus on one habit at a time, find those triggers that come with it, and replace them with a more productive and positive activity. Thus, it hopefully will become your desired habit. Just remember that is all about practice; learn to appreciate progress and not perfection, and be forgiving with yourself in the process.
Finally, do not forget to keep track of your progress and reflect your development through the following months. If you found this useful and wish to know more about finances, be sure to follow The Pink Dollar in the Room (TPDR) Podcast with whom I have teamed up, to design the free resources given to you. Also, be sure to follow and share your progress with our Her Campus at UPRM team to get featured on our social media platforms: Instagram, Twitter or Facebook. Best of luck ? on this new journey and discovery of your personal finances!