Part of living simply is getting a hold of your finances, and simplifying them. Like a ship at sea needing to know its current location, and the coordinates of where it is supposed to go; you need to know where you currently are financially, and where you would like to be (your goals). It helps to define your goals, not just follow saving money tips with no real direction. Once you have defined your goals and see where you currently are, you can take more knowledgeable steps to reach your goals.

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1. First, Define Your Goals

Grab a pen and paper, and write down your financial goals, however far off they may seem – get very specific. Want to be out of debt? Write down in your goals having the mortgage, car, credit cards, etc. paid off. Whatever your financial dream is, write it down. Like the ship at sea needs to know where it is going, so do you. Keep this paper, as this is your map and compass for the next steps. You can also use it as a reminder where you want to go when you catch yourself trying to spend money on things you do not really need (I do this a lot as it helps me stay focused on my financial goals).

2. Define Where you are Currently

This step is to help you define exactly where you are today, not to discourage you. Write down any debt you have, your current income, and your current expenses. See what it all adds up to. Remember, this is not to discourage you, as these numbers will change. These numbers were not these current numbers your whole life, they are just the current numbers right now.

3. Look for Excess Expenses

Look back at your current expenses and see if there are any obvious areas where you can cut back or cut out an expense. Dining out, fast food, coffee out, fun shopping, TV subscriptions, online shopping, etc. Make a conscious decision that you will stop these for now, knowing you can add them back later. Remember that the more frugal you are now, the faster you will be able to pay off debt and reach your financial goals. It is also important to live on less than you make because that extra money will help you get out of debt, and allow you to reach your goals debt-free. Even with the rising cost of everything, this is still important. We all have to make sacrifices somewhere, even if we don’t talk about it to live debt free and reach our goals. Write down what you want to cut out from the budget or cross it off your list, and stick to not buying the excess expenses anymore. The sacrifices now will pay off in the end as debt does catch up with you.

4. Paying Off Debt

Now that you have looked and hopefully found some excess expenses, the next step is to stop those expenses. Take that extra money from the expenses you stopped and put it towards your debt. Paying off debt ASAP is essential, as the longer it sits there, the more of your hard-earned money you have lost to it. For example, say I take a $30,000 loan out for a car and the interest rate is 4.99% over five years. I would end up paying an extra $3,959.97 (about $4,000) just for that loan over the five years. If I pay it off in three years, it would only cost me $2,368.57 in interest. The goal is to get out of the debt ASAP so you are not losing more of your hard-earned money.

Taking that extra money from the excess expenses and paying off your debt faster will not only save you money, it will help you reach your financial goals from step one sooner. Dave Ramsey suggests starting with paying off the smallest debt first, which makes sense as it gives you the momentum and confidence you need to get going. See more about paying off the debt snowball at: ramseysolutions.com/debt/how-the-debt-snowball-method-works.

Ask your bank if they have a free financial advisor. They may also have a few ideas on cutting back your expenses so you can pay off your expenses faster. Do not get into another loan or anything that you need to pay more money for though. Just take advice, not sales pitches.

5. Spend Money Where You Really Want To

Once you are out of debt, instead of going back to all of the old habits that may have even put you in debt, keep building off of the new habits. It does not mean that you cannot ever treat yourself, just not everyday to a bunch of different things. I personally have a once a month rule, I can treat myself once a month to a ‘new’ sweater, or coffee out, or something that is nice and not too extravagant.

Keep working towards your financial goals by using that extra money to build your savings and investing. Have your spouse of a trusted friend hold you accountable. This personally helps me not fall back into old habits and go shopping when I do not need to.

Conclusion:

You can achieve your financial dreams and goals, you just have to stick to them and be willing to make some lifestyle changes that can go a long ways. It is worth it in the end as you will have reached your goals, and it will allow you to learn about a lot more than just basic financial principles.