Life can be busy and complicated, especially as we head into 2021.
If you’re looking for ways to streamline your life and finances as we head into the New Year, then you’re going to love these four easy steps for simplifying your financial life.
1. Consolidate
Consolidation is the process of combining lots of little things into one larger, more effective thing. In the case of your finances, consolidation can be used to simplify bank accounts, credit cards, and other debt.
Some simple ways to begin the consolidation process include:
- Consolidate your bank accounts. Unless you’re running a business, you probably don’t require multiple bank accounts. Having one checking account and one high-interest savings account will make it easier to keep track of your money.
- Eliminate credit cards you don’t need. If you’ve lost count of the number of credit cards in your wallet then you have too many. The fewer credit cards you have, the easier it is to control your spending and prevent credit card debt. If you’ve already racked up a few credit cards then you may want to consider consolidating all of your balances onto a single low-interest credit card.
- Consider a debt consolidation loan. If you’re feeling overwhelmed by your debt, consider combining all of it onto a single consolidation loan. If your loan is at a lower interest rate, your debt could disappear faster. Plus, because you have a set payback schedule, it may help reduce your overall debt. Now instead of having 3 or 5 or 10 debtors to pay, you simply have one. But, be careful not to run your credit cards back up and make things worse!
2. Automate
Now that you’ve cleaned your financial house by consolidating, it’s time to simplify things even further. Automating your finances may take some initial effort, but it will afford you more time and money in the long term.
Some simple ways to automate your finances include:
- Direct deposit. If you haven’t already, then sign up to have your paycheck directly deposited into your checking account. This will save you the hassle of having to go to the bank to deposit your paycheck.
- Automate savings. As soon as your paycheck is directly deposited into your checking account, you want to automate it so that a portion of your paycheck goes directly into an emergency savings account as well as your retirement savings account. By automating this process, you take away all of the barriers that can prevent us from making smart financial decisions like a lack of motivation or effort.
- Automate bill payments. If you have recurring bills then you can also automate these payments. This can help you to avoid missing bill payments and getting hit with late fees. You can set up auto-payments for your mortgage or rent payments, utilities, and any memberships.
- Automate investments. The last thing to automate is your investments. Not only does this simplify the investment process but it will also stop you from trying to time the market.
3. Use cash (and one credit card)
Have you ever noticed that it’s much harder to part with a crisp twenty-dollar bill than it is to swipe a credit card?
There’s something about the tangible feeling of money leaving your fingers that makes even the most seasoned shopper think twice about their impending purchase! When you use cash it’s easy to recognize when you’re running low. All you have to do is look in your wallet. You feel the immediate effects of your spending. The same is not true with a credit card.
A classic study of behavioral economics by MIT professors, Drazen Prelec and Duncan Simester, found that people are willing to spend up to 100% more when using their credit card as opposed to cash. Other studies have found that people make larger purchases when visiting a department store and leave larger tips at restaurants when paying with their credit card.
Credit cards make spending too easy and they remove a lot of the emotion. When shopping with a credit card there are no immediate consequences; you often won’t see any evidence of overspending until you receive your credit card bill.
All this being said, it is 2020 and the world is largely going cashless. There are still many times when you may need a credit card. So, keep one on hand and get rid of the rest.
4. Create a “things I didn’t buy list”
Now that you’ve consolidated, automated, and started using cash, you’ve set yourself up for success. There’s one last tip to simplifying your finances. It’s time to create a “things I didn’t buy list.”
When you feel the urge to spend money on something you really want but you don’t need, then you simply write it down on your, “things I didn’t buy list.” Simply record the item and the cost. For instance, “Striped sweater – $70.”
The goal is to do this for a month. At the end of the month, you go through your list and tally up everything you didn’t buy. The total tally might shock you, and you’ll probably feel very happy and proud that you didn’t spend the money.
Now you can take all of the money that you saved by not buying little things that you don’t need and you can put it towards a bigger goal. Perhaps you invest the money, create an emergency savings fund, or start saving for a dream vacation. The point is, when you stop buying all of the little, unnecessary things, you can save more for the big, important things.
If you want to take this a step farther you can also record how you felt when you wanted the thing that you didn’t buy. Were you happy, sad or stressed? How did it feel to say no? All of this extra information can reveal some interesting trends. Maybe you learn that you find it extra hard to say no when you’re feeling overwhelmed at work. You can use this information to change your behavior in the future. When you start to feel overwhelmed, you can head to the gym or go for a hike instead of visiting the mall.
Are you ready to simplify your financial life?
Getting your finances in order can seem like an uphill battle that you don’t want to fight. But it doesn’t have to be a struggle. With these four steps, you can begin to create a simplified financial system that largely takes care of itself. You can focus your attention on growing your savings account by shopping with cash and continuously updating your “things I didn’t buy list.”