If you've been following my columns about mindful spending, you know that this is the last week of the 30-day Financial Cleanse. For the past three weeks, each of my columns has focused on a single theme. Week 1 was about getting on top of day-to-day spending; Week 2 focused on creating a realistic monthly budget; Week 3 had you exploring your top three financial goals.
Whether or not you've participated in the Financial Cleanse, I think you'll find some value in the topic for this fourth and final week: How to turn mindful spending into an ongoing commitment.
Putting the pieces together
In general, each week of the Financial Cleanse is designed to help you zero in on your own spending habits--both good and bad--and discover where you can make changes that will help you reach your financial goals.
For instance, committing to cash and tracking your out-of-pocket expenses for 30 days increases your awareness of small things you may unconsciously spend money on. Taking a close look at your monthly budget and comparing it to your take-home pay helps you see more clearly where you may need to make changes. Focusing on your top three goals and figuring out how much you need to save to meet them is a powerful motivator to spend more mindfully.
With these pieces in place, you can then ask yourself two all-important questions: Is my spending supporting my most important priorities? Am I really putting my money to its best use?
Here's how to get to the answers.
Review your spending patterns in light of your goals
When you track your spending--both day-to-day incidentals as well as more substantial monthly obligations--you learn a lot about where your money is going. Focusing on your goals tells you where you want that money to go. Looking at both together helps you see if there are any obvious places where you might direct money from spending to savings.
Of course, not everything is within your control. For instance, you may feel you're paying too much for things like rent or childcare. In that case, you may need to make some fundamental changes. But before you contemplate a major shift, focus on things that would be easier to adjust. This might be as simple as eating out less often, spending less on that health club you rarely use, or relying more on public transportation. Or for those of you who tend to scrimp and save too much, it might involve making a conscious effort to spend more on the things that truly bring you joy.
Your adjustments don't have to be huge. One of my colleagues calculated that if she brings her lunch one day a week (saving $10/week) and cuts her cable bill by $40/month, she'll save $1000/year, which she figured could grow to $46,000 in 20 years, assuming a 6% return per year. An extra $150 a month added to your 401(k) earning that same 6% annually could grow to just over $100,000 in 25 years. In other words, small changes can add up to a big payoff over time.*
Project your budget for an entire year
Creating a monthly budget is a good first step. It gives you a realistic sense of where your money goes every month, and helps you plan changes you want to make. Expanding and refining that budget to cover an entire year gives you even greater insight. Be sure to include everything--from things like property taxes or insurance premiums that come up once or twice a year to payroll taxes and other expenses that get automatically deducted from your paycheck. And don't forget to add in all the everyday incidentals.
Once you have all the numbers plugged in, compare your annual expenses to your annual income. Hopefully, you're in the black! If not, this is an opportunity to think bigger and make changes that could affect your long-term as well as day-to-day finances. Keep adjusting the numbers until they're in balance. You might find it useful to run different scenarios on a budget planner, spending more or less on specific categories.
Commit to staying on track
When it comes to learning something new, practice makes perfect--and mindful spending is no different. In fact, I think of building financial skills in the same way that I think of building physical skills. If you're trying to perfect your backhand in tennis, you repeat your swing thousands of times. An accomplished dancer will practice spins for hours. And an astute money manager will continue to practice techniques for mindful spending until they become second nature.
So once you're on the road to mindful spending, commit to it for the long term. Here are some ways to stay on track:
- Share what you're doing with your family or a trusted friend. If you're tempted to blow a month's savings on a new pair of designer shoes or the latest tech gadget, talk it out before you spend.
- Periodically refer back to your written goals. Don't lose sight of what it will take to reach them.
- If you're slipping off course, go back to your cash-only diet for all your incidentals. Dealing in cold hard cash is a powerful wakeup!
I hope reading about the Financial Cleanse has motivated you to get on board. If you want to participate, you can download a Financial Cleanse Quick Start Guide. And if you're curious about what current participants are doing and learning, check my Carrie Schwab-Pomerantz LinkedIn page or join @CarrieSchwab Twitter followers by using the #Financial Cleanse hashtag. Remember, it's all about your own financial health!
* This scenario is based on hypothetical assumptions and cannot predict or project the return of any actual investment. Your results will vary.
Looking for answers to your retirement questions? Check out Carrie's new book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."
This article originally appeared on Schwab.com. You can e-mail Carrie at email@example.com, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Asset allocation and diversification cannot ensure a profit or eliminate the risk of investment losses. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager. Diversification cannot ensure a profit or eliminate the risk of investment losses.
The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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