January is the time of the year when we make resolutions and vow to be a better person, while getting rid of all (or at least most of) our bad habits. One way involves taking stock of our finances and the best way to do this is by going on a money diet.
What is a ‘Money Diet’?
Just as how you’d go on a diet to cut out all the ‘harmful’ food from your meals, a money diet gets rid of all the ‘bad’ spending that you’ve been doing. Call it a financial cleanse of sorts, where you eliminate all unnecessary spending and end up saving more money. It won’t help if you’re a compulsive spender but it will do you good if all you want to do is tighten the belt after spending too much over the festive period.
How to do it…
Make a plan
Start by giving yourself a time frame, so you can evaluate how you’ve done at the end of it, by looking at your expenses and savings. It’s also good to set a target for the end of this time frame, say, to save $1,000 by the end of it. This gives you more motivation, just as an ‘ideal weight’ does when you’re on a diet.
Cut non-essential items
It’s fabulous to check out a new posh restaurant every month or meet the girls for martinis every fortnight but is this really necessary? It could be as simple as forgoing the coffees you have every day from that nice cafe next to your office; a hot beverage from your office pantry is a better option here. One unplanned advantage is that you might realise you’re perfectly happy without these things and actually enjoy staying in and cooking up a storm instead of going out to eat all the time. Or that you really enjoy staying in with a good book (from the library, of course) instead of going out partying.
Your family and friends will most likely be supportive of your money diet so tell them you’re on it and you’ll find it easier to cope. It also means that they’ll be willing to spend time with you while doing inexpensive activities so you won’t have to hibernate for the duration of your money diet.
Everybody, needs some amount of emergency cash savings in case their expenses rise unexpectedly in any given month.
How big depends on how variable your income is and how much you spend.
If you spend only 20% of your average monthly income, which only varies slightly, you’ll need a much smaller emergency fund proportion-wise than, say, someone who can go months without closing a case, and who spends 60% of his average monthly income.
For instance, a tutor who earns an average of $5,000 a month may actually make between $2,000 and $7,000 each month-$7,000 during exam time when students ask for extra lessons, and $2,000 during the school holidays.
For this tutor, the ideal situation would be to keep his monthly spending to below $2,000. That way, he knows that even in the lean months when he doesn’t have much work, he’ll be able to comfortably cover his monthly costs. He can then feel free to save and invest the balance, after putting some cash aside in his emergency fund.
I hope these tips help your dieting.
Happy new year.