With a very unpredictable 2020 finally behind us, it might seem futile to attempt to draft a 2021 financial plan. How can we possibly predict what’s going to happen? Isn’t this a waste of time?
While plans can and will change, starting the year with a vision for what we want to happen in our financial lives can make all the difference. It’s also always worthwhile to gain awareness of and clarity on how we’re spending and allocating our money.
If we’re being honest, most of us have no idea where our money is going.
Many of us don’t want to look because we’re afraid of what we might find. When I first started keeping a money journal, I found out that I spent $200 per month on frozen yogurt. I was shocked. That was $200 per month and $2,400 per year that I’d much rather be allocating somewhere else.
Most of us know the feeling - we make a purchase we regret and it sends our spending in a tailspin for a week, month, or even years. Next thing we know, we don’t want to look at our credit card statements, our account balances are decreasing, and our stress is on the rise. How do we stop the bleeding?
One of the most effective ways to get our spending back on track is with a regroup. We need to give ourselves a chance to get our money mindset back where we want it.
One of the things I discovered very early on in my money journey is that being good with our money isn’t just about the numbers. Yes, I didn’t know what I was supposed to do with my money but even once I did learn and decide what would work best for me, I wasn’t taking action that aligned with that plan. And it’s not like it was too complicated or confusing.
I wanted to spend less money than I was earning (and at the time I had a steady paycheck) and have some money leftover to save. That’s it.
Why didn’t it work? How we interact and behave with money (aka our relationship with money) has a lot to do with our emotions and beliefs.
How we traditionally try to save money doesn’t work. We get our paycheck, then we pay our bills, live our lives, and even get people gifts. We wait and hope that there will be money leftover to save for ourselves. There’s not.
Then we think, if we earned more money, we’d finally start saving. We get the raise, earn our higher paycheck, then we pay our bills and life our lives. We hope there will be money leftover to save. There’s still not.
Money is tough for so many reasons: we aren’t taught about it, it’s taboo to talk about, and we derive a lot of our self-worth from our financial status. And that’s just if you’re a white man.
Women and even more so, BIPOC, have infinitely more working against them when it comes to their money. There are pay gaps, investing gaps, accessibility gaps, discrimination - and the list goes on and on.
The tool I use over and over again in my own financial life and with my clients is a budgeting template. Most of us believe budgeting will be limiting and restrictive, but I’ve actually found the opposite to be true both for myself and for the thousands of people I’ve helped with their money.
When we know what we want to be happening with our money (having a spending plan) and then track where our money is going (following through with that plan), it’s actually hugely liberating.
How important is our mindset? It turns out, mindset impacts almost every aspect of our lives, from finance to education to equality to corporate culture (and beyond). As a strong believer in the power of mindset, I’m a huge fan of Carol Dweck and her work. Dweck is a professor of psychology at Stanford and a leading researcher in the field of motivation. She’s also the best-selling author of Mindset: The New Psychology of Success.
In her book, Dweck identifies two core mindsets:
A fixed mindset, the belief that one’s abilities were carved in stone and predetermined at birth.
A growth mindset, the belief that one’s skills and qualities could be cultivated through effort and perseverance.
A lot of times we’re doing so many things right in our personal finances, but we’re still not seeing the progress we want. We’ve taken the time to set up a weekly or monthly budget (we may even be using a great budgeting spreadsheet). Everything runs smoothly for a little while, until a larger irregular expense comes up.
I’ve found that sinking funds are an easy and straightforward solution to getting rid of the ups and downs and money stress that come with these types of expenses.
There are expenses in life we can’t plan for and that’s why we have a rainy-day fund. But there are also many expenses that we can plan for and just don’t. The holidays are a perfect example. They come around every year and yet almost half of us get stressed out about money around the holidays. We don’t set up or stick with a holiday budget.
We spend more than we plan or expect. Cash ends up feeling tight, we have to pull money from savings, or we put the extra expenses on a credit card that we have to deal with later. It takes away from this joyful time and ends up causing us a lot of stress.
