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10 Reasons Why You Are in Debt

10 Reasons Why You Are in Debt

If you are young, just out of college, starting a business, or starting a family, chances are that money is tight. Education costs dollars, as do building a business and creating opportunities for your children. Managing money is not always simply about noting how much money is coming in and what expenses you have. Money management is about your relationship to saving and spending and your attitude toward sharing your resources with others. Do you love giving to others? Do you share what you have or does it feel easier or safer to hold back, perhaps from a fear that giving means there is less for you? Here are some reasons for why you are in debt, along with some ideas and tips on how you can improve your relationship with the dollars, pounds, or euros in your wallet.

1. You haven’t realized that saving money is about creating new attitudes and emotional habits

Saving money is about creating new habits and attitudes. In reality, it has very little to do with the actual amount of money you have in your bank account. You can put aside money each month, but if you constantly overspend, you will end up borrowing from yourself and saving nothing. Rather than seeing money as a value in itself, consider what it gets you in relation to your goals and plans. Create an attitude that everything in your life is about moving towards your goals. The wealthiest entrepreneurs view money not as something scarce that must be guarded at all times, but as a tool or asset to help them invest in their goals and dreams.

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2. You haven’t worked out what is really important to you and what you value

Money is a resource. Resources can be wasted, misused, or directed to create even more wealth. What do you value? At the end of your life, what would you like to be remembered for? Working out what your values are will help you work out how to spend your money. If you love a hobby, then investing money in that makes perfect sense. How do you know what you value? Exercises such as writing a personal mission statement can be very valuable. Money is a resource like any other — move its focus to create the life you want to have.

3. You haven’t set up an easy-to-use budgeting system

Do you know right now if you are in credit or in debt? Imagine that you see a pair of shoes or a new tablet that you don’t need but would love to have. Would you know if you have enough money in the bank to cover the cost? Create an easy-to-use budget tool. There are some online, and often a notepad and pen works well too. Credit cards do have to be paid off and you will need to plan how much a month you can afford to contribute to paying these off. Debts don’t magically resolve themselves, so get to know your spending habits and ask yourself if you can afford all these items you want but might not necessarily need.

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4. You buy when you could just borrow or rent

You want to dig up a plant, so why buy a spade if you can borrow one from a kindhearted neighbor? If you need a big saucepan for a dinner party, why buy when you can borrow from a friend? We love to justify purchases by saying that the item will come in handy in the future. Yet, how many times do you really use it later? If you love a movie, don’t buy it, borrow it — the same goes with books. Think of all the things you own and have used only once or twice. Borrow or rent rather than buy.

5. You fall for those too-good-to-be-true, get-rich-quick ideas

Sorry to say, but it’s really true that success is normally 1% inspiration and 99% perspiration. Not everyone wins the lottery, so don’t assume it will be you. Use your time to create value that will last and give you pride and lasting returns on your efforts. Building a business or working up the career ladder takes time and effort, but the rewards will come. Get-rich-quick schemes work well for the people who create them when they convince you to part with your cash to buy into the dreams they are selling, but real wealth creation is a slow process.

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6. You have money-sucking (and life-sucking) habits

Where do you actually spend your money? What activities do you do regularly which cost money and return transitory pleasure? Most things are okay in moderation, but when you are spending money on smoking, gambling, drinking, or other bad habits, it’s time to think about changing those habits. Why do we spend our time and money on these activities? The simple answer is normally that addictive habits help us to avoid our feelings. If you are fed up with work, then a few drinks in the evening helps you forget that annoyance. If you are feeling bored, then some chocolate or cake can relieve that frustration a little. Gambling is an addiction which itself involves money directly. Though many gambling sites acknowledge that gambling is addictive and have put policies in place to help problematic gamblers, it is generally not in their interests to actively stop you from gambling. For any addiction, you should seek appropriate help.

7. You use credit to buy items you don’t have the cash for right now

It’s simple: if you cannot afford to pay in cash right now, don’t put it on your credit card. For necessary purchases such as repairs to your car or paying tuition or other costs, work out a payment and saving plan so you can see how much you need to save or can afford to pay each month. Don’t allow yourself to get into debt that you can’t get out of. Also, don’t borrow money from a bank unless you really need to. Banks will charge interest and often want to encourage you to take out loans.

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8. You pay retail prices on everything you buy

There are sales every six months and often you can find stores selling very good clothing or other items at discounted prices. An online search will direct you to goods with price cuts too. Many charity shops have started selling “seconds,” or clothing from last season. These garments are perfectly fine but since they are now no longer the most up-to-date line, they can be purchased at a reduced rate. The same is true of cars. Buy a brand new car and pay a higher price. As soon as it is driven off the showroom forecourt, a car is automatically significantly cheaper than a brand new one with very little difference in performance or condition.

9. You pay extra for labels or brands as status symbols

Consider two identical white men’s shirts. One is plain and one has that small blue polo player woven on it. Both are made the exact same way and in the same factory, but which is more expensive? The fashion industry makes a large chunk of money from our desire to be seen wearing a particular brand. Remember that you are lovable and wonderful as you are, without the need to have a name or label to confirm that. Think about purpose rather than about what others will think of you. Dazzle people with your wit and charm instead. Also, store brands are nearly always cheaper than national brands.

10. You think too much about today and not about tomorrow

We love advice like “Live life for today” or “Don’t put off for tomorrow what you can do today.” Of course, have as many experiences as life affords you. However, the money you have now can be set aside or invested so that in the future you will have a financial cushion. We also need to save for retirement and it is estimated that most of us are simply not putting aside enough for our futures. We are now living longer, and so the years post-retirement are increasing too. Think about what your money can create for you long term rather than the immediate gratification it can get you in the present. Think about your long term life goals and save now, whilst you have the opportunity.

Featured photo credit: picjumbo.com via picjumbo.com

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Last Updated on August 20, 2019

How to Set Financial Goals and Actually Meet Them

How to Set Financial Goals and Actually Meet Them

Finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. And that’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

In this article, we will explore ways on how to set financial goals and then actually meet them with ease.

5 Steps to Set Financial Goals

Though setting financial goals might seem to be a daunting task but if one has the will and clarity of thought, it is rather easy. Try using these steps:

1. Be Clear About the Objectives

Any goal (let alone financial) without a clear objective is nothing more than a pipe dream. And this couldn’t be more true for financial matters.

It is often said that savings is nothing but deferred consumption. Therefore if you are saving today, then you should be crystal clear about what it is for. It could be anything like kid’s education, retirement, marriage, that dream vacation, fancy car etc.

Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives, however small they may be, that you foresee in the future and put a value to it.

2. Keep Them Realistic

It’s good to be an optimistic person but being a pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going out of the line will definitely hurt your chances of achieving them.

It’s important that you keep your goals realistic in nature for it will help you stay the course and keep you motivated throughout the journey.

3. Account for Inflation

Ronald Reagan once said – “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”. And this quote sums up the best what inflation could do your financial goals.

Therefore account for inflation whenever you are putting a monetary value to a financial objective that is far away in the future.

For example, if one of your financial goal is your son’s college education, which is 15 years hence, then inflation would increase the monetary burden by more than 50% if inflation is mere 3%. So always account for inflation.

4. Short Term vs Long Term

Just like every calorie is not the same, the approach towards achieving every financial goal will not be the same. It is important to bifurcate goals in short term and long term.

As a rule of thumb, any financial goal, which is due in next 3 years should be termed as short term goal. Any longer duration goals are to be classified as long term goals. This bifurcation of goals into short term vs long term will help in choosing the right investment instrument to achieve them.

More on this later when we talk about how to achieve financial goals.

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5. To Each to His Own

The journey of setting financial goals is an individualistic affair i.e. your goals are your own goals and are determined by your want to achieve them. A lot of times we get on the bandwagon of goal setting only to realize later on that it was not meant for us.

It is important that your goals are actually your goals and not inspired by someone else. Take a hard look at this step at all the goals you’ve set for after this step, you will be on the way to achieve them.

By now, you would be ready with your financial goals, now it’s time to go all out and achieve them.

11 Ways to Achieve Your Financial Goals

Whenever we talk about chasing any financial goal, it is usually a 2 step process –

  • Ensuring healthy savings
  • Making smart investments

You will need to save enough; and invest those savings wisely so that they grow over a period of time to help you achieve goals. So let’s get down to ensuring healthy savings.

Ensuring Healthy Savings

Self realization is the best form of realisation and unless you decide what your current financial position is, you aren’t heading anywhere.

This is the focal point from where you start your journey of achieving financial goals.

1. Track Expenses

The first and the foremost thing to be done is to track your monthly expenses. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you would be surprised to see how small expenses add up to a sizeable amount.

Also categorize those expenses into different bucket so that you know which bucket is eating the most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pump up your savings rate.

2. Pay Yourself First

Generally, savings come after all the expenses have been taken care of. This is a classical mistake which almost everyone of us do. We pay ourselves last!

Ideally, this should be planned upside down. We should be paying ourselves first and then to the world i.e. we should be taking out the planned saving amount first and then manage all the expenses from the rest.

The best way to actually implement is to put the savings on automatic mode i.e. money flowing automatically into different financial instruments (for example – mutual funds, retirement corpus etc) every month.

Taking the automatic route will make us lose control of our money and hence will compel us to manage in what’s left with us thereby increasing the savings rate.

3. Make a Plan and Vow to Stick with It

Budgeting is the best to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be made.

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Nowadays, several money management apps and wallets can help you do this automatically. It’s easy and who knows, you may just end up doing what people fail to do.

At first, you may not be able to stick to your plans completely but don’t let that become a reason why you stop budgeting entirely.

Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

4. Rise Again Even If You Fall

Let’s be realistic. It’s not like the world will come to an end if you made one mistake. This isn’t called leniency but discipline.

If you fail to meet your budget for a month, don’t give up the entire effort just like that. Instead, start again.

Remember that flexible plans are the most realistic plans. So go forward and try to follow your financial goals as planned but if for some reason, the plan gets out of hand for you, do not give up on it just yet. This has a lot to do with your psychology rather than any material commitment.

All you have to do is to stay on the road and vow to stay on it, no matter how much you fall down.

5. Make Savings a Habit and Not a Goal

In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

Make Savings a habit rather than a goal. While it might seem to be counter intuitive to many but there are some deft ways of doing it. For example:

Always eat out (if at all) during weekdays rather than weekends. Usually weekends are expensive. Make it a habit and you would in turn be saving a great deal.

If you are travelling buff, try to travel during off season. Your outlay will be much less.

If you go out for shopping, always look out for coupons and see where can you get the best deal.

So the key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice which will be harder to sustain over a period of time.

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6. Talk About It

Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission. And it would be rather easy to lose the grip over your discipline.

Therefore in order to stay the course, it is advisable that you keep yourself surrounded with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

7. Maintain a Journal

For some people, writing helps a great deal in making sure that they achieve what they plan.

So if you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

Use this journal to write down all essential points such as your short term, mid term and long term goals, your current sources of income, your regular expenses which you are aware of and any committed expenses which are of recurring nature.

When you have a written commitment on paper, you are going to feel more energised to follow the plan and stick to it. Moreover, it is going to be a lot more easier for you to follow you and track your progress.

At this point, you should be ready with your financial goals and would be doing brilliantly with savings; now it’s time to talk about the big daddy – Investments.

Making Smart Investments

Savings by themselves don’t take anyone too far. However savings when invested wisely can do wonders and we are at that stage where we will talk about making smart investments.

8. Consult a Financial Advisor

Investments doesn’t come naturally to most of us therefore rather than dabbling with it ourselves, it is wise to consult a financial advisor.

Talk to him/her about your financial goals and savings and then seek advice for the best investment instruments to achieve your goals.

9. Choose Your Investment Instrument Wisely

Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about them.

Just like “no one is born a criminal”, no investment instrument is bad or good. It is the application of that instrument that makes all the difference.

Do you remember we talked about bifurcating financial goals in short term and long term?

It is here where that classification will help.

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So as a general rule, for all your short term financial goals, choose an investment instrument that has debt nature for example fixed deposits, debt mutual funds etc. The reason for going for debt instruments is that chances of capital loss is less as compared to equity instruments.

10. Compounding Is the Eighth Wonder

Einstein once remarked about compounding,

Compound Interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.

So make friends with this wonder kid. And sooner you become friends with it, quicker you will reach closer to your financial goals.

Start investing early so that time is on your side to help you bear the fruits of compounding.

11. Measure, Measure, Measure

All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments; taking stock of how our investments are doing.

If there is one single step where everything (so far) can go wrong, it is at this step – Measuring the Progress.

If we don’t measure the progress timely, then we would be shooting in the dark. We wouldn’t know if our saving rate is appropriate or not; whether financial advisor is doing a decent job; whether we are moving closer to our target or not.

Do measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

The Bottom Line

This completes the list of tips for you to set financial goals and actually achieve them with not so great difficulty.

As you can see, all it requires is discipline. But guess that’s the most difficult part!

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