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6 steps to financial detox
Detoxing can be applied to many areas of our lives. Juice cleanses after New Years, spring-cleaning with Marie Kondo and escaping toxic relationships. But what about detoxing in the one area that affects all aspects of your life – your finances? Detoxing your finances, or learning how to spend money wisely, can create greater success, balance and joy in your life.
So how do you step away from negative financial habits and learn to spend wisely? Use this list as your action guide or playbook. We have gone in depth regarding these topics in other articles, but have you executed your plan yet? Now is the time. Not another day, not another hour; now is the time to align your finances with your values and your goals. Don’t put it off or feel overwhelmed by the prospect of overhauling your finances – just take it step by step.
1. Create a spending plan
If you caught our post directed towards new graduates, this action item may look familiar to you. Unfortunately, creating a spending plan is something that many adults were either never taught or have failed to implement, and yet it is essential to your financial freedom – and peace of mind.
Although spending plans are most commonly referred to as a budget, this term can make some people feel restricted. A spending plan is something that you devise (with your spouse if you’re married, or with a financial advisor if you feel so inclined) that allocates where your income is going to go before the bills arrive in order to cover basic needs and get you to your goals faster. When you implement a new spending plan, it may take a few months before you get into the groove and anticipate all your expenditures, but stick with it until you see incremental changes.
There are tons of options of free templates online that you can download, or apps that will help you track your spending based on your goals. Mint offers both, and gives you an idea of how to get started if you’ve never created a spending plan before. Knowing where your money is going each month takes the stress off when the bills come and allows you to spend money without guilt because you’ve already determined the amount you need to have in the bank in order to feel secure.
2. Determine your PYF percentage
PYF stands for Pay Yourself First, because this is the amount of money you are going to set aside for your future before you do anything else. Often this percentage will be invested through your employer or your company, through things like 401(k)s, IRAs or retirement accounts, making it tax efficient and removing any temptation to spend it.
3. Find a fiduciary partner
As you probably know by now, a fiduciary is legally required to put your needs above their own – unlike brokers and wealth advisors who are only required to give you “suitable” advice. (If you didn’t know that, see here.) Registered investment advisors (RIAs) MUST give you transparent advice and investment solutions that protect you from marketing “noise.” Working with someone who knows what it takes to meet your short- and long-term financial goals is an excellent way to start spending money wisely.
4. Sell your crappy mutual funds
Now that you have a partner who is looking out for your financial best interests, you’ll want to tell him or her that you want to sell any mutual funds that aren’t benefiting your portfolio, a.k.a. funds with high fees and low returns. The research is clear: Over the long run, active management just isn’t worth the expense for these types of investments. Instead, look for low-cost index funds that allow you to own the market and diversify your portfolio across risk so you’re ready no matter what happens in the markets.
5. Know your risk tolerance
Speaking of risk, know what your personal risk factor is – it varies with each individual. Be honest with yourself: How much variation can your portfolio tolerate? Find an asset allocation that will grow your personal wealth and allow you to sleep well at night.
6. Live abundantly
One of the clearest indicators that someone has an abundant mindset is that they give freely. When we live in a tight-fisted, hoarding manner, it’s clear that we are giving into our fear and living with a scarcity mindset. The secret to living is giving. And giving can literally change the world. Work with your financial advisor or independently go over your spending plan to determine how much you can regularly give to worthy causes.