Spending is up, costs are up, interest rates are up. Incomes are … well it depends on what industry or where you work to determine whether your income is up or not. Long story short, life is a lot more expensive than it was just a couple of years ago and after you throw in the recent Christmas spending blow out, for most of us it’s time to tighten our financial belts.
As you can expect when times get tougher it becomes a lot harder to make ends meet. This has seen a rise of frugal bloggers and budget experts who offer programs or tips to help counter these cost of living rises and to help stretch your dollar further. The worse your financial situation you are in, the more desperate your search for a solution.
What is a money diet?
As is implied with the word diet, it involves a restriction of some form, in this case how you spend your money. Like with its close relative the food diet, a money diet usually involves various shortcuts to become financially better off, though in most cases you don’t end up better off and can even end up in a worse position than when you started.
What diets don’t tend to address is the underlying issues that led you to the position you are currently in at the moment and the money diet is no different. Diets are usually seen as “temporary fixes” and can work well in the short term but have a higher longer term failure rate as the practice undertakes are usually unsustainable in the long term.
Should I use a money diet?
It depends. If a short sharp money diet leads to the path of making substantial financial changes, then yes it can be of benefit. For some people looking to lose weight undertaking some form of diet can help them move towards making healthier longer term changes, this may also work financially.
If you are looking to have all your financial issues solved by undertaking a money diet then no this isn’t going to be successful long term. A CNBC article goes into more detail why a money diet can only cause additional financial problems.
If you are going to try a money diet, treat it as a short term option only while working on sustainable changes to help you with your long term financial success.
What is an alternative to a money diet?
If you are serious about changing your financial life around you will do some serious work to address why you are in the financial situation that you are in and you will do the work to put a plan in place to work towards long term financial success.
Some financial success steps we suggest you undertake include:
Review your current financial situation and try to determine why your financial situation isn’t where it should be
For some people in a financial pickle there can be a tendency to pretend that everything is fine and ignore the issues. Unfortunately this will likely make the financial situation worse or won’t do anything to sort out your issues.
Go through everything financially, no matter how painful this is. You want to find that starting point for your new financial journey no matter how ugly it may look. We’ve discussed undertaking a personal financial audit in detail here however at a minimum get a list of all your debts, your monthly repayments and (if possible) a list of your expenses of the last 6 – 12 months.
From this you can create repayment, savings and eventually investment plans all the while improving your financial position. The quicker you begin this process the quicker you will get back on track.
Set financial goals and regularly review these
Now that you know where you are, where do you want to be financially speaking? When setting financial goals try to use an abundant mindset or at least a different mindset to the one that helped get you into your current financial situation.
Just because you are currently struggling financially at the moment doesn’t mean that this will be the case in the future. The further along you travel on this new journey the more knowledge you will be accumulating. You’ll be picking up more tips, ideas, and knowledge that will continually push you to higher highs financially so don’t be afraid to set big goals.
Where possible set one or two larger financial goals, i.e. financial independence goals and break these larger goals down into smaller easily achievable goals that are aligned to the larger goal. For example a goal may be financial independence however your path to financial independence may start with initial building an emergency fund of 3 months worth of your current lifestyle expenses
Don’t forget to check in every couple of months to see if your goals are on track or if changes need to be made. A financial goal you set might be to initially save $250 per month however with pay rises and savvy budgeting you might be able to blow this out of the water by easily saving $1,000 a month.
Also if possible find people who have achieved something similar to what you wish to achieve (and from a similar starting point to you) and reach out to them or look for tips that helped with their success. Don’t be afraid to ask, they can only say no.
Find your minimum lifestyle spend and set your budget
What is the minimum amount per month that you need to live? These should involve the basics such as shelter, food, phone, transport, etc with a small amount allocated towards personal activities or entertainment. This new budget should be quite lean (particularly if your financial position is more dire).
Once you’ve done this, calculate your surplus (or deficit) by subtracting your monthly expenses from your net monthly income, including all monthly debt repayments. When reviewing your expenses there may be ways to find reductions in some areas by looking for a better deal. This could include finding a cheaper phone plan, cheaper energy or utility provider or if your credit score is in good shape, shopping your loans and credit cards to find a cheaper rate.
We touch on ways to utilize your surplus below however If there is no monthly surplus you need to find a way to improve your income. We touch on this a little later in this article however we have gone into more detail with income ideas here.
Automate your personal financial system and build an emergency fund
To improve your financial situation and move away from living paycheck to paycheck, improved savings (then investments) is the focus. There are many ways to go about this however the method we use is to set up your personal automated financial hub.
This method entails setting up a bank account that will act as your financial centrepoint, where all income and expenses are transacted. All direct debits are set up (including eventual savings and investments) with your first goal to get on top of your financial commitments.
Once this has occurred your next step is to save up an emergency fund. This can range from one month to more than 12 months worth however we suggest you aim for a minimum of 3 months.
Speeding this up can be done through a boost to your income. Ways to boost your income can include getting a pay rise, changing jobs or even taking on a 2nd job? Do you have a talent that you can capitalize on to make money? You could be very crafty and sell your creative wares to make a nice secondary income. You could even use your talents to build a business that can be scaled.
Start investing and build your income streams to eventually replace your income
Once you’re back on track financially and starting to save some money, it’s time to allocate a portion of these savings towards building an investment portfolio. The aim is to build a mixture of growth and income producing assets that will hopefully replace your current income in the long term.
Start small with your investing and know all the risks. Never invest more than you are and make sure that all subsequent investments you make stand alone and can’t affect any of your previous investment if it doesn’t work out.
Where possible look to diversify your investments and don’t be scared to venture into areas or industries that you don’t know that much about. If you aren’t knowledgeable then roll up your sleeves and put in the research. Reach out to successful investors in this area and see what tips they have for success in this style of investment.
Remember all successful investors started as beginners!
Financial success doesn’t need to be exclusive to only a privileged few, this can be for anyone willing to put in the work and the long term dedication. The first step to do this is to take action. Whilst the above scenario is possible for most, the process won’t happen overnight and will take years of dedication to your new financial ways.
For those expecting a speedy solution will likely go the way of those who jump on these diet bandwagons and expect long lasting changes. Change takes time however the sooner you start and keep investing in yourself the more likely your success will be sustained and stay with you for the long term.