Anyway, if you’ve tried and tried to get your finances sorted but keep sliding back down that slippery slope to nowhere, it’s time to take action. In rehab, addicts are given a variety of techniques to ‘loosen’ up their routines and get them into a mindset that makes then open to change and creating new (positive) habits. These techniques include everything from brushing their teeth with the other hand to putting their clothes on in a different order. Minor stuff, but it all adds up.

So, how can you apply this sort of technique to ensure you get – and most importantly stay – on the right path? Here are some ideas:

• Look for opportunities when you’re already having a bit of a new start – these can be things as big as starting a new job, moving in with a partner, moving house generally or having children, as well as smaller things like moving desks at work, getting  a new boss or changing your fitness regime. If you’re already in the mindset to be starting afresh, pairing financial responsibility alongside it can prove very powerful.
• Think of ways to shake up your life a little and get your body and subconcious thinking you’re doing something new. Stuff like going to work via a different route and moving your furniture around in your home are great examples, but ordering something new at your favourite restaurant and changing the ringtone on your mobile can be good triggers too.
• Tell your friends and family – like addicts have to tell those closest to them that they’re addicted and committed to change, you can do the same too. You don’t have to tell people that you’re in a lot of debt or whatever your burden, but you can be as vague as “I’m watching what I spend” or “I’m saving right now”. Support and a watchful eye from those around you can help keep you on the path to success.
• Be mindful of your language. There’s a world of difference between a former smoker saying “I’m trying to quit” and “I don’t smoke”. The former tells your subconcious that there’s an opportunity for failure, the latter reinforces your new way of life as a current status. So, “I’m trying to save” will tell your brain that you only need to put in a token effort. “I’m saving” will reinforce your goal. As Yoda put it, “do or do not, there is no try”.

Even if you’ve never tried to get financially healthy, employing techniques such as this will give you the best chance for success. If you just can’t seem to save, stick to your budget or get out of debt, getting your head into the right place to make it happen might just be the change you need.

Good luck!

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It seems to me that the same can be said for debt, savings and budgeting. Indeed, it’s pretty rare that just one decision puts you in substantial consumer debt. Equally, it’s not just one decision that sees you end the month with your budget in tatters. Certainly it’s not just one decision that results in retirement with no savings.

Unhappily, often we fool ourselves about the substantial cumulative impact of these little decisions. I can speak for many a dieter in my office who tells themselves that “oh, one piece of cake won’t matter”. When I look back on my debt-laden years, I absolutely failed to recognise the impact of such choices too, often convincing myself that another few hundred dollars on my credit card wouldn’t make much difference.

The fact is, lots of little decisions are what makes a habit. The good news is, you can change your habit for the better and to help you achieve what you want most in life just by making good little decisions. The even better news is that if you slip up along the way, that’s okay – if you recognise your little decisions for what they are.

So how can you use your little decisions to improve your financial situation? Here are some ideas:

• Grab a notebook or the ‘note’ function on your mobile (cell) phone and jot down every time you spend less than $10 on something for a week. At the end, take a look back and add up how much you spent. Multiply it by 52 and you have the grand total of a year’s worth of your frittering. Have another look at the list and see what you could have done without. Perhaps a bottle of water you could have waited ’til you got home for, or a magazine you could have surfed the web for similar information.
• Take a look at your bank or credit card statement from last month. Highlight all the transactions on it that were under $100. Were they all really necessary? Can you even remember every transaction occuring?
• Examine your passion – we all have one! Often we develop selective memory when it comes to our biggest source of delight. My big passion / vice involves my wardrobe. This year, I’ve started the habit of noting the source of every fashion-based expense in my budget. Why? Put simply I found that I was purchasing things I didn’t end up getting the use out of. I could absolutely have done without the two dresses, the shirt and the knit top I bought at that warehouse sale last year. No, I didn’t go into debt for it, but the money could have been used for something I truly loved at the very least.
• Get a piggy bank. I’m the exception to this rule, but many people don’t track cash. Start the habit of putting all your coins at the end of the day or week into the piggy bank. You probably won’t notice the difference, but taking a full piggy to the bank and making a payment on a debt or into a savings account will feel great.
• Create a micro-payment toward whatever it is you’re working towards. If you’re paying off a credit card, your mortgage, a car loan or creating a savings stash, set up an automated micropayment toward your goal. Even if it’s as small as a dollar a day, you won’t notice the difference today or tomorrow, but over time you will.

Remember – the point of being aware of your little decisions is to tweak your habits to make them work in your favour. You shouldn’t feel overwhelmed or like you’re trying to discipline yourself, but rather that you’re just being nudged in the right direction.

After all, Rome wasn’t built in a day.

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Back in the days when I was sitting atop my mound of nearly $40,000 in consumer debt, I often thought being debt free, but for many years, didn’t take any lasting, committed action. My fundamental reasoning was that there was something around the corner that would give me the means to change my circumstances. A new job or promotion with a higher salary, a great bonus at the end of the year or an unexpected windfall of some kind.

The fact is, even when some of those things came (a little raise here or there, a small bonus), I didn’t use the money effectively.

Part of me turning my life around and climbing out of the debt hole I was in was about realising that to change my circumstances I needed to be the source of the change. Not tomorrow, not next month, not next year. Today. Now.

Worst of all, it seems I wasn’t alone in my former way of thinking. In The Age last month was an article about baby boomers facing retirement saddled with debt. The author of the article suggests this is due to “home upgrades, renovations, stay-at-home children and aging parents” – but all this sounds like to me is excuses. This is in fact the modern-day case of sacrificing your future for today in practice.

Few of us require home upgrades or renovations… or for that matter, a holiday house, a second car, international trips and so forth. Sure, some of these things are what makes life fun – but if they’re the difference between living your life and retiring laden with debt, are they really worth having?

Recently too, I’ve been posting a fair bit about following your dreams and doing what you love with your life. Sure, it’s a scary prospect and not without its risks… but who wants to get to the end of their life having never realised a fundamental dream?

We can all think of excuses and reasons not to do something. It’s an inherent part of being human. As the saying goes though, tomorrow never comes.

So, if not now, when?

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Sadly, we often see people getting very passionate about the changes they want to make, and going a bit overboard in their attempt to make it happen and kick start things as quickly as possible.  Whilst enthusiasum is great, often once the novelty of change and promise of better things becomes the norm, motivation dwindles and those huge targets you set yourself and all the paraphenalia you bought to help (yes, I’m looking at you, hardly used gym gear in the bottom draw) starts collecting dust.

How can this be prevented? My motto: Underachieve Your Way To Succcess. What does this mean, exactly?

Here’s my five step plan for guaranteed success in any change you want to make in your life:

Step One: Work out what success looks like, and give yourself a time frame. This can be as general or detailed as you like. For example, you might want to lose 5 kgs in the next 6 weeks. Since this is a money blog though, let’s assume you want to get your finances in order! You’ll need to jot down some things that equate to order for you though. For some people this will mean something as simple as not needing to worry if you’ve got paid each month or ’save $5k this year’. For others it will mean writing a budget and sticking to it, reviewing insurance coverage, consolidating superannuation, etc.

Step Two: Remember that timeframe you set yourself? Add 20%. Why? This is because most people, in their enthusiasm set themselves budgets that are too strict, diets that are too harsh and bars that are too high. If you can’t adjust your timeframe for some reason, give yourself a buffer in some other aspect of your goal.

Step Three: Break your goal down into manageable chunks. If you decided to run a marathon, but you’re a couch potato you wouldn’t wake up on Saturday morning, get dressed and set out to do it, would you? No. You’d spend months training and reading and devising the right diet and so on to work yourself up to your ultimate goal and put yourself in the best position for success. Achieving any other goal should be the same.

Step Four: Make micro-changes to form new habits and ease yourself into a different way of life. If you want to start saving $100 a month, consider working yourself up to it rather than starting out with your end goal on day one. Take a look at your cash flow now and see how much you could put aside without even noticing… even if it’s only $20. Then have a think about your current spending habits. What tiny thing could you change to find a bit more money to increase that? Don’t go crazy here – we’re looking for little incremental alterations to your life. Perhaps you could have coffee one day less a week? There’s an extra $12 a month! Or bring your lunch from home one day a week? $40 a month! Buy your train/bus/whatever ticket in bulk? It all adds up!

Step Five: Reward yourself for your victories, no matter how small. Just try not to think of a reward that undoes your efforts… if you’re working on losing weight, don’t go rewarding yourself with a weekend of gastronomic debauchery! I find it works well to come up with a reward that is in proportion to the size of your success.

And a hot tip for good measure…
Don’t go jumping ahead of yourself and undoing your incremental achievements. The idea here is to be consistent and small, after all. You’ll actually find that your successes will keep you on the bandwagon, driving motivation and keeping you on target. It’s a good thing if you’re itching to make things harder on yourself, and looking forward to when that day comes (on your schedule!). And there’s nothing like being addicted to your own accomplishments!

That’s all there is to it! If you’re thinking it sounds pretty easy, that’s because it is. If you can force yourself to be content with continual improvements rather than attempting overnight success, you’ll find victory more often that not. Or, as the story of the Tortise and the Hare goes – slow and steady always wins the race.

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Step One: Take out all the bills and receipts and de-dupe them. That is, if you took cash out of the atm and have receipts for things you paid for in cash, remove the receipts and just keep the ATM receipt. If you have bills and a receipt for paying them, remove the receipt (but be sure to mark the bill as paid).

Step Two: Go through all the bills and receipts you have left, and sort them into categories. Here are some rough ones that I suggest, but put them into whatever piles suit you best.

• Charity (including regular & ad-hoc donations – this is particularly good as a category for your tax return!)
• Clothing / Shoes / etc. (including cleaning, repairs & purchases – you can subcategorise these later if you want)
• Food (groceries & eating out)
• Health (insurance, scripts, vitamins & professionals – eg. doctor, dentist)
• Household (insurance, mortgage, rates, purchases (eg. furniture / maintenance), housekeeper, utility bills can also be included here)
• Personal (grooming – eg. hairdressers, makeup products, etc. hobbies, career expenses (also good to have for your tax return), recreation & entertainment)
• Transport (car insurance, registration, maintenance, servicing, fuel, parking, taxis & public transport)
• Utilities (if you didn’t include them under household)

Hot tip: if a receipt fits into two categories, you need to rethink your categories. They should be broad enough that more than one receipt fits into them, but specific enough that there’s never two camps for one receipt.

Step Three: Have a think about other bills you pay or things you buy which might not happen every month, but more like every quarter or year. For example, insurance, rates, some bills like water or electricity can often be billed like this too. If you can, dig out the last one of them that you paid, add 5% and then divide it by the number of months between bills. For example, a $100 bill you get every quarter, you’d add 5% to make it $105 then divide it by three to get $35 per month. If you can’t find the last bill, make your best guess but add 10% and do the same.

Step Four: Write down or otherwise record all the ways you regularly get money. This includes things like your salary, board and rental income, dividends, babysitting money and anything else you get on a regular basis. If it’s stuff you’ve sold on eBay or money you found in the street though, don’t worry about it here – it’s irregular and we can’t budget with it.

Step Five: Add up all your income sources for a calendar month. It doesn’t matter if you get paid weekly, fortnightly or monthly, you’re going to budget per calendar month.

Step Six: Add up all your monthly expenses per category – including those you noted that you don’t pay every month, but you’ve calculated how much they would be each month if you paid them like that (this was in step three).

Here’s the big question. Are you spending more than you earn? If so, you’re going to need to stop that quick smart, so start looking for fat in your expenses – ie. where you can cut back. I’ve written a post before that might help you come up with some ideas – read it here. If you’re not and you have some left over – congratulations! You’re on your way financial success. If you haven’t already, read my post on working out your goals.

Step Seven:In your budgeting software, record all the different types of regular income you have, as individual items. eg. if you earn a salary, record that figure separately from, say, rental income. Next, enter all the categories of expenses you have that you identified when you were sorting your bills and receipts in step two. Finally, record the amount you spent last month, plus 5% in each of these categories (you should have these numbers already from step six).

This now forms the basis of your budget.

So, if you’ve read part 2 of this getting started series you’ll know what your goals are and how much you need to put aside to achieve them. I’m currently working on smartening up my Mandarin skills (I’ve been learning for some time), and I know this costs me $130 a month. I’m also saving for my wedding in January. This means I’ve been putting away a certain amount each month pretty much since we got engaged 18 months ago so I’ll be able to pay for it in cash.

The next question you need to answer is… is there enough of a (positive) difference between my income and expenses that I can put aside enough each month to fund my goals? If not, what would I be willing to change to free up the necessary cash? Add another category to your list to cover your goals. If there’s an actual expense every month associated with achieving your goal, like my Mandarin classes then you’ll probably add it as a subcategory under ‘personal’ or whatever you chose. If it’s something you won’t be spending the money on for a while, you can probably add a category like Savings and then have subcategories (emergency fund, travel, wedding, etc.).

Step Eight: Maintaining the budget. Now, anyone can work their way through the first seven steps listed here. The trick to going from amateur to pro in the budgeting world is knowing how to maintain it. So, you’re going to keep that shoebox or folder or whatever it was you used before and keep sticking receipts and bills in it. Preferably every week (it’s waaaaay easier if you do it this often) you’re going to record all your expenses into your budget. You’re doing this for a number of reasons:

1. Doing it every week means that you can see if you’re going off track and correct it before the month is up.
2. Being this involved with your money will help you to understand where it goes and will also act as a subconcious incentive to stay on target
3. Doing it every week is a lot quicker and less painful than doing it every fortnight or month.

If you have an iPhone, there are apps that will help you with this step.

I can’t stress enough the importance of step eight. If you’re not willing to do this, you deserve to be in a poor financial position and you deserve to be bad with money. If you just can’t do this for some reason, you can use an automated tool like Mint, Wesabe or ANZ’s MoneyManager (the links are in the toolbar on the side of this page) – it will categorise your transactions and add them up for you. I really recommend doing it yourself though – even if only for a few months. What you learn will be invaluable.

Good luck! Budgeting successfully really is easy… and whilst it might not seem like it at first, it really is a type of enjoyable when you have complete financial peace of mind.

Questions? Comments? Feel free totweet or email me!

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I’ll be perfectly honest, I subscribe to a system down the more detailed end of the spectrum. This is for the same reason recovering alcoholics don’t have ‘just one drink’ with their workmates on a Friday evening (or any other time for that matter). Put simply, if you can’t manage it you need to be strict with yourself until you can. Over time, as you work out a system that works for you, there’s the opportunity to become less detailed and more high level. If you’re in a place though where you feel like you don’t have enough money, you’re in a serious amount of debt or living payday to payday… then it’s time you started being strict with yourself.

Why Most People Fail
I talk to a lot of people about budgeting… between that and my own experience, I can tell you that these are the biggest reasons people mess up their budgets. I’m telling you now so you can understand them and be aware of them when starting out on your own journey to do this thing right:

• Lack of interest, discipline and motivation. Whilst Tim Ferris / Ramit Sethi have a point(not nearly enough people automate their savings / bill payments) the idea that putting money in some savings account somewhere by direct debit each payday is going to magically turn you into a savings guru is complete well… nonsense. Anyone who’s been there will tell you that this doesn’t stop you from overspending on your credit card or prevent you from pulling the money OUT of your savings account a week before pay day because you can’t afford your groceries.
• Subscribing to the school of “set and forget”. This was possibly my biggest downfall – since the day I moved out of home I’ve “budgeted” but it’s only in the last two years I’ve managed to do it with success. People who ’set and forget’ write up a budget saying how much they’re going to spend on each category (eg. groceries, bills, clothes, etc.) then save it somewhere and never refer to it again until three months later when they wonder why they’re still running out of cash a week before payday and their credit card bill for last month is so huge.
• Not getting stakeholders involved. If you live with anyone, even your cat… you have stakeholders. These people *need* to know that you’re writing a budget because the last thing you want is your spouse racking up purchases on the credit card or your flatmate buying takeaway and telling you you’re in for half.
• The ‘I’m Depriving Myself’ mindset. I’ve said it before and I’ll say it again. Being on a budget, saving for things and preventing yourself from accumulating consumer debt is NOT depriving yourself. Failing to optimise the use of your money by blowing it in an unorchestrated fashion most certainly IS depriving yourself – it’s depriving you of being able to do the stuff you want, meet the goals you have, and preventing you from achieving financial freedom.
• Going too ‘gung ho’ and burning out too quickly. Been there, done that. This doesn’t work for money the same way it doesn’t work for diets or fitness kicks.
• It didn’t work last month so I give up. This is tied to the first item in this list, and I did it far too many times to count. Guess what… the first month or two of this new budget I’m going to show you how to write won’t be perfect either. It might take us a few months, but you’re going to end up with a fully workable budget that you can stick to.  

One Simple Step To Get You On The Way To A Great Budget

To prevent items 1, 2, 5 and 6 on the above list, I’m not going to write you out steps for creating a full budget right here. That will come. The reason this post is marked as 3a is because you need to now go away and do some legwork so you’ve got all the information necessary to create a kick-ass budget.

The single step involved in this part of writing a budget is to get a shoebox or other container of some sort and keep every single receipt you get for the next month. This INCLUDES: regular receipts for things like groceries, bills (the exception being credit card bills) and ATM receipts.

In part 3b of this series I’ll show you how to create a budget that will get you on the path to where you want to be.

If you’ve got any questions, please feel free to email or tweet me!

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The problem I think that most people have is that they try to set themself financial goals rather than personal ones. In doing this, they’ll come up with arbitrary figures that have no real meaning to them, making them incredibly difficult to achieve, not only from a motivation perspective but worse, from an actual numerical perspective. Be honest, how many times have you (even in passing) set yourself a goal like “I’m going to save more this year!”. Really – what the heck is that? How are you going to know you achieved it without a real figure attached to it? And why would you even want to beyond some sort of vague moral ‘because I should’ type of thinking?

My recommendation when starting to set financial goals is to think about where you want to be personally. What does your dream life look like? Depending upon your age and where you live, for you this can be as short term as ‘this year’ or as long term as ‘when I retire’. (Although just as an aside, it’s a very good idea to start contributing to your retirement fund the day you get your first job… it’s never going to be something you regret.)

Thinking about the things you want to achieve over your life (and even writing them down) will help shape your financial goals and in turn your budget and will also assist when it comes to working out where you need to cut back in order to achieve them. The things you want to achieve and do might be as big as ‘buy a house’, as (financially) small as ‘learn Spanish’ or as daunting as ‘be debt free’. 

Once you’ve written down some goals for yourself you can break these down into more manageable chunks. For instance, if you want to buy a house in three years’ time, you can start thinking about how much you want to spend, how much you’ll need as a deposit and then work out how much you need to put aside each pay day to get there. Working out some rough goals for a longer time away has the added benefit of giving you peace of mind now that you’re saving enough. For example, you don’t have to worry or feel guilty when making a frivolous purchase like a new TV, because as long as you’re putting aside the amounts you determined you need, you’ll achieve the things you want.

Don’t make this too overwhelming a task by getting too specific too far in advance. Anything more than five years out for specific goals is probably a bit far. Beyond that you can write down rough goals like ‘buy investment property’ or ‘enrol in MBA’. Again, this means you don’t have to feel like you’re not saving enough now to achieve things down the road because you know you’ll do them, they’re just not your shorter term goals. Once you’ve saved enough to achieve the first goals on your list, you can move onto the next.

The important thing about these goals is that they should be SMART – Specific, Measurable, Achievable, Relevant and Timely. So, a goal that meets the SMART criteria might look like this:

Save $60,000 for a deposit to buy a 2 bedroom house by June 2012

Determining whether your goals are achievable might be a bit difficult at this time. In my next post I’ll look at how to examine your incomings and outgoings to improve your understanding of your overall current financial situation and start to write a budget

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Starting out can be tough; simultaneously overwhelming and scary. This is particularly true if you have consumer debt in several places, major goals that need to be reached in the short term or have recently suffered a significant financial setback (like losing your job).

With this in mind, working out your situation – your starting point – isn’t something to be tackled by the fainthearted. That said, it won’t get any better the longer you put it off!

So, here’s the recipe for getting an understanding as to your current financial situation.

Step One: Add up all your debts. This includes obvious things like your credit card(s), mortgage(s), car loan(s) and personal loan(s). Lots of people tend to forget stuff like zero or low interest finance plans (for say, a TV), rental agreements for electrical equipment (like laptops) and mobile / cell phone plans where you’re paying off the phone (if you got it for free less than 24 months ago, chances are you have one of these). What you’re adding up here is the total amount owing, not your periodic payments. So, if you owe $200,000 on your house, that’s what you put down.

Step Two: Add up all your assets. Again, some of this is obvious – things like your house and car are assets. With the glorious advent of sites like eBay, more and more of the items around your house can be considered liquid assets. With this in mind, chances are it’s not practicable for you to sell literally everything in your house and we’re not adding this up for insurance purposes. Considering this, include only the items of major value. These might be items like artworks, antique furniture or particularly valuable wine. For me, I include my handbag collection! The distinction here is things you could either do without, or replace for a cheaper item.

The difference between these two figures will give a net overall indication as to your financial situation.
If your debts are greater than your assets (something we’re seeing more and more at the moment, with house prices plummeting and some unfortunate folks being caught with their mortgages worth more than their house) you have a negative net worth. This means that even if you sold all your assets to pay off your debts, you’d actually still owe money. It sounds horrible, but it’s easy to do when people get into consumer debt (for example, shopping up a storm on credit card, or paying bills on credit). I’ll be honest, I’ve been here and it’s not good. 

If your assets are greater than your debts, you have a positive net worth. The good news is, this means if you sold all your assets you’d be able to cover your debts in full. Don’t start celebrating just yet though, the bad news is that depending upon the ratio of assets to debt, that is, how big the difference between the two numbers is, you could end up with a negative net worth pretty easily. For example, if you had a large unexpected expense like your car needed major repairs or a big medical bill came about that wasn’t fully covered by insurance. Alternatively, if you were to lose your job. Without a buffer in place you could be in trouble pretty quick.

The other thing to consider is that this formula doesn’t account for your incomings and outgoings. That is, income from your job or investment income from things like dividends and rent on investment properties, as well as required expenses – stuff like utility bills, payments on your debts and basic food. Once these are incorporated you can get a more accurate assessment of your financial situation and start to budget for your future accordingly. 

Part Two in the Getting Started series will look at determining where you want to be so that you can set yourself some goals for your future.

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