People need to go on a financial diet for the same reasons they need to go on one for their eating habits. Your finances are vital to you overall well-being and should be kept under control. It doesn’t matter if you have to cut back a little bit, or are in need of a total overhaul, a financial diet will get you to a better place.
The concept of a financial diet is gaining a lot of popularity. In fact, there’s a website and book called The Financial Diet that provides loads of helpful advice to people in all sorts of situations. Here are a few of the most important things to consider when planning your own financial diet.
Learn the Differences Between Good and Bad Debt
Debt is one of the biggest factors in determining your financial health. All forms of debt can be potentially disastrous if you let them get out of control. However, it’s important to understand how various kinds of debt affect you in vastly different ways.
Many financial experts like to vaguely distinguish between “good” and “bad” debt. What does this mean? Good debt is generally considered a loan with low, fixed interest for something that will retain, or ideally, increase in value. A mortgage is the perfect example of this. Credit card debt can typically be considered bad debt. This kind of loan comes with high interest and is usually for purchases that don’t grow in value.
Set Short- and Long-Term Goals
A lot of people set diet goals at the New Year. And resolve to learn a skill. And read more. And quit smoking. Pretty soon, they’re trying to completely change everything about their lives at an arbitrary starting point. If totally overhauling your life were easy, people would be far more successful with their New Year’s resolutions.
It’s important you don’t try to do too much right away when you’re setting a financial diet for yourself. Financial expert Andrew Housser, co-CEO of Freedom Financial Network, suggests people set one-, three-, and five-year goals for themselves. Your actions today will shape your future. However, no one succeeds when they try to do too much at once. But if you can gain momentum over time, you’ll eventually be able to accomplish increasingly substantial goals.
Budget and Track All Income and Expenses
Counting calories is a popular approach to dieting. This allows people to keep track of exactly how much is going into their bodies, and then accordingly regulate intake. Creating a budget is essentially the equivalent of counting calories for your financial diet. Here’s what you need to effectively budget your money:
- Total up all your income. You will want to find your take-home pay as opposed to pre-tax income, as this will be a better representation of your actual financial situation.
- Total up your expenses. This will definitely include things like rent or mortgage payments, car payments, and utilities. But you also need to add your subscriptions, such as streaming services or gym memberships—plus how much you spend each month on one-time expenses like eating out.
- Differentiate between necessary and unnecessary expenses. This will determine what things you can work to cut out of your monthly budget in order to save more money.
Create a Savings Plan
Once you’ve figured out your budget, you should then come up with savings plan. About 70 percent of people in the U.S. have $1,000 or less in a savings account. This leaves little wiggle room in the event of a catastrophe. Creating a savings plan can give you a cushion if something unexpected happens to you or a family member. This is by no means an easy endeavor. With a bit of planning, however, many people will be able to find ways to cut back on their expenses.
Just like with any other diet, your financial diet won’t be successful if you don’t change your mindset. This isn’t an overnight solution. It’s going to require dedication, and sometimes making tough decisions. But if you stick to your guns, you’re going to end up in a much better place financially—as well as mentally and emotionally.
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