Radically Change Your Financial Life in Four Steps

by Kevin on December 18, 2009

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 HolderAmount of DebtInterest RatePayment
ABC Mortgage Company175,0005.75%1,021.25
XYZ Credit Card Company25,00017.99%1,000.00
ZYX Student Loan Company10,0006.80%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.

{ 4 trackbacks }

Carnival of Personal Finance: Parts-of-speech abuse edition | Mighty Bargain Hunter
December 21, 2009 at 1:16 am
Link Round Up – The Gift That Gives Edition | Do You Dave Ramsey?
December 22, 2009 at 5:02 am
Fantasy Football: 2009 Personal Finance League Results | PT Money
January 2, 2010 at 3:51 pm
Friday Finds | Out of Debt Again
February 12, 2010 at 9:47 am

{ 12 comments… read them below or add one }

George December 18, 2009 at 3:10 pm

Great post! I would add just one thing, at the beginning, actually.

Step 0. Decide where you want to go. Set a goal of a certain financial situation by a certain date. It could be increasing income by a 50%, it could be becoming debt free, or even achieving financial freedom.

Reply

Megan December 21, 2009 at 8:54 am

Excellent point. If you are making these extreme changes in your lifestyle, you need to have a purpose. Otherwise, what’s the point of picking up a second job or working extra hours or selling the crap you no longer need if you don’t have an end goal in sight?

Reply

Bucksome December 18, 2009 at 10:39 pm

Kevin, very good article. I liked your illustration of how to track debts and understand the starting point.

Reply

Oscar - freestyle mind December 20, 2009 at 8:11 am

I agree with George on the importance of deciding where you want to go. I also agree with the philosophy behind step three: make change now.

Reply

SailboatFamily December 20, 2009 at 9:12 am

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.

Great advice …. but the third option is more radical, and should strongly be considered…. change out your friends, co-workers, and even family. Radical? Yes, Crazy? No.

For many, their approach in life, including choices of friends, co-workers, and which family members are associated with, have created a situation that has allowed a person to come to a point where they need radical action. A person cannot change anyone but themselves … so no need to even try to explain what you’re doing to anyone, just tell them as suggested, and change yourself. Move on in life. Identify and create situations where health financial living is not only possible, but a natural way of life.

If someone were a crack addict, and all their friends, co-workers, and family members near were crack addicts, would anyone be surprised if the crack addict failed to break the habit? No. Same goes for poor financial health. Reading the DEA’s consequence list of using drugs, one can’t distinguish between poor money management and drugs.

Reply

Megan December 21, 2009 at 8:53 am

I disagree with changing out your family and friends. Sure, you can distance yourself from them, but I think cutting off all contact with your siblings just because they racked up a lot of credit card debt is too extreme. (Although, I can see where this cut-off could come naturally. If you no longer go out for the expensive meals with your friends/relatives, or you can’t go to on nice trips with them, or you always decline invitations to events because you don’t have the cash, they’ll probably stop calling, anyway.)

And while your family and friends might make poor financial decisions, it is ultimately *your* responsibility to make *your own* financial choices.

Reply

SailboatFamily December 26, 2009 at 8:51 pm

“it is ultimately *your* responsibility to make *your own* financial choices.” – Megan

I totally, totally, totally agree. EVERYTHING is your choice and your responsibility. Who you surround yourself with will make all the difference in the world. It is your responsibility to change the situation.

The topic is radical change. Radical.

Reply

NCN December 21, 2009 at 5:19 am

Wow, what a great article! It’s so important that we understand “what we are getting ourselves into” when we make changes. I, for one, was shocked (in a very positive way) by the responses of many of my friends. In fact, many, when they heard that I was working to get out of debt, jumped on board! :)

Reply

Ken December 21, 2009 at 5:54 am

Good post! You said ignoring a financial plan just makes it worse..so true. Crazy thing…I posted on Net Worth today…a much simpler form than yours…..I plan on doing this by 1/1/2010.

Reply

Kerri December 21, 2009 at 8:15 pm

Great post, thanks. I’d like to suggest a site for basic financial understanding, a Web-based solution that lets you input income, expenses and debt to see in red or black. It’s called DebtSpark, http://www.debtspark.com.
This is where you begin–get your quick snapshot with an easier-than-a -spreadsheet tool.

Reply

Roshawn @ Watson Inc December 23, 2009 at 12:48 am

I agree. I believe you almost have to make a conscious decision to get out of debt if you are to achieve it within a reasonable time frame.

Reply

Jun Orquillas February 23, 2012 at 2:14 pm

Great information! but you can also suggest ways to save and invest what they saved like mutual funds!

Reply

Leave a Comment