In an earlier post I promised to show you how to radically change your financial life this Christmas. This post is a big long, but I think it is worth reading! Leave me some feedback in the comments. Have I missed a step, or is this article spot on?
Today I’m going to show you the framework needed to start making these radical changes in your life.
Radical is a strong word. How strong? Let’s look at the definition:
radical – adj.; thoroughgoing or extreme, esp. as regards change from accepted or traditional forms: “a radical change in the policy of a company.”
We’re not talking minor financial change. We’re talking extreme and a departure from your norm.
If you follow the steps outlined below I can almost guarantee your financial life will be changed for the better. But know this:
- …it won’t be easy
- …it won’t be fun
- …your friends/family may judge/dislike/not understand your actions
- …it will be worth it!
For the bravehearts out there that are tired of living paycheck to paycheck, tired of having credit card debt, and tired of maintaining a bunch of stuff around the house, read on.
Step One: Assess Your Financial Situation
You need to gather honest information. This is no time to hide. No time to ignore some of those smaller issues in the corner. Get everything out on the table. You can’t make smart decisions with bad information.
Ignoring the situation is ignorant. Period.
The only way to make your financial situation worse is to ignore it.
Think about that. When was the last time you heard of a problem, financial or otherwise, that was made better by simply acting like it didn’t exist? It doesn’t happen.
You’ve got to have the mentality to face this head on. If you can’t manage at least that then you are sunk from the beginning. Give up now. Stop reading.
Got the right mentality? Here is a brief list of things you will need to truly assess your financial situation:
- all bank and financial institution statements: checking, savings, and retirement account statements
- all debt-based statements: credit card, student loan, and mortgage statements
- a list of stuff you own: cars, homes, things of value like iPods, TVs, and clothes
This may not encompass every single aspect of your financial life, but it hits on the major sections. Analyzing this information will help you truly asses your financial situation.
How to Analyze Your Financial Data with a Net Worth Statement
You need to know how bad the damage is. It’s time to build a net worth statement.
“Net worth” is a term coined to compare your assets to your liabilities (debts). You subtract the liabilities from the assets… and what is left is your net worth.
A positive net worth is a good thing – you have more assets than liabilities.
A negative net worth is a bad thing – you have more debt than stuff you could sell to pay off that debt.
Building a net worth statement is pretty basic:
- grab a piece of paper and draw a line down the middle to divide it into two columns
- on the left, write out all of your assets (cash, checking accounts, retirement accounts, value of your home, etc.)
- on the right, write out all of your liabilities (credit card debt, mortgage amount, etc.)
When you’re done subtract the right from the left and see what you come up with. You may not like the result.
But at this point in the game… positive or negative doesn’t matter much. Positive is obviously better, but this is just a starting point. This is where you are starting from. You won’t finish here.
If You Have Debt
Most of us have debt of some sort. I’m a personal finance blogger and we still have two mortgages to pay off. Debt is almost inescapable in our society.
You need to target that debt. (More in that in just one second.)
For now all you need to do is list out your debt in the following manner:
- list out the name of the person or company you owe money to
- next to the name list out the total amount of debt you owe
- next to the amount list out the interest rate of the debt
- next to the interest rate list out the monthly payment
You might come up with something that looks like this:
Name of Debt Holder Amount of Debt Interest Rate Payment
ABC Mortgage Company 175,000 5.75% 1,021.25
XYZ Credit Card Company 25,000 17.99% 1,000.00
ZYX Student Loan Company 10,000 6.80% 115.08
Note: Mortgage payment assumes a 30-year term; Credit card assumes a 4.0% minimum payment; Student loan assumes a 10-year term
Step Two: Identify a Plan of Action
Action. Action. Action.
Not: Ponder. Think. Consider. Wait. Reconsider.
You’ve got your information and it is time to get going. There are countless resources online to help you tackle your individual situation including this blog.
You need to develop a radical plan of action. Action is the key word and you must maintain that mentality as you figure things out.
The plan of action will depend on your situation…
- …if you are covered up in debt you will need a plan to pay off that debt quickly
- …if you aren’t saving for retirement you will need to weigh your options, do your research, and start investing ASAP
- …if you don’t have a budget, make one today
- …if you aren’t saving for specific goals, create them right now
Do adequate amounts of research, but don’t spend a month coming up with the perfect system. You can adjust on the fly and getting started NOW is better than delaying for another month.
Action Cannot Be Meek
I will hit on this more in my next article, but your action must be bold. It must be significant. It must be radical.
Changing one little thing in your financial life isn’t going to save the ship. Adjusting your course one degree won’t save you from the iceberg. You’re still going to plow right into it.
You need change that completely stops the ship, has a flight of helicopters come in, picks the ship out of water, turns it around, and points it in the other direction.
That sounds crazy, right? Exactly my point. You need this kind of change moving forward.
Step Three: Make Change Now
Stop sitting around. It’s time for action!
You must have a sense of urgency.
Let me help light the fire under you:
- Implement your plan before it gets stale and you lose motivation.
- At some point you have to stop gathering information and move to action.
- Remember the only way your financial situation can get worse is for you to ignore it.
- If you don’t do it today you probably never will.
Mistakes Are Okay!
Let’s say you decide to start paying off your debt and follow Dave Ramsey’s advice to pay off the smallest balance first. Mathematically that is incorrect as it would be better to pay off the debt with the highest interest rate first. (This is one of my beef’s with Ramsey’s system.)
But paying off debt mathematically incorrect is better than not paying off debt at all! I would much rather you get started and learn how to fine tune your financial plan as you go.
You’ve been sitting on the sidelines for far too long. You’ve left your financial situation get out of control. You’ve ignored your growing debt. Get up. Get off your rear, and start working a plan to get out of debt!
Step Four: The Consequences of Radical Financial Change
There are serious consequences to making radical change to your financial life.
First, you may feel very uncomfortable or trapped by the new limitations you are placing on your spending and saving.
I think this is one of the main reasons budgets are not popular. To many people budgets feel restrictive. I think that is odd — the budget is of your own making. It’s your plan. It is comprised of your decisions to get you to your goals. If you don’t like it… change it. Pretty simple fix, eh?
Making radical change in your spending habits will take time to get used to. If you are currently spending every last cent you have (and then taking on debt) then stopping that spending is going to hurt.
Trust me, the pain is good. The pain is worth it.
Second, your family, friends, and co-workers may not understand.
They are all used to you spending lots of time with them whether that is going out to eat, taking trips, or surrounding them with lavish gifts.
All of these activities have cost you dearly. Your finances are a wreck.
You have two options. You can tell them about the radical change you are going through, or you can hope they will get over it.
Make a decision and move on.
Third, there will be hard choices to make.
Being swallowed up by debt is terrifying and stressful. You’ve let the situation get this bad so there isn’t anyone else to blame.
If you are in this situation you may find yourself with some difficult, painful choices. Here are a few examples.
- You bought a luxury car from the dealership that you can’t afford the monthly payments. You could sell it for what it is worth, but you don’t have the money to pay cash for an old, reliable car. What do you do?
- Your friends invite you to go on the annual weekend trip to the mountains. It’s only $250 for the weekend. What do you do?
- Your boss wants to send you to a new sales territory, but you will need to front the first two weeks cost and get reimbursed. You obviously cannot afford this. What do you do?
- Your family lives on the other side of the country and wants you to come visit for Thanksgiving. You haven’t told them of your financial troubles, and can’t afford the plane tickets. What do you do?
- You live in a 2,500 square foot home. There are two of you. What do you do?
Get Started Today
Don’t delay another day. Start gathering your information today, and come up with your plan this weekend.
Looking for more information? I’ve written the No Debt Plan. It is still a work in process (and I really need to update and lengthen some of the steps).
The No Debt Plan is a list of nine articles to help you get started on this process. The plan talks about setting goals, setting up a budget, saving for an emergency fund, and continuing on the path to wealth.
My next article will share some truly radical ideas you could do to change your financial life. Until then thanks for reading — and subscribe to my blog so you won’t miss the next update.