This post is part two of a series that is meant to serve as a quickstart guide to finances I am calling Spending Less. My goal is to post it as quickly as possible to hopefully begin helping people, so I may revise it after initial publication.

You can find part one here.

Step Four – Track your spending

At this point, you should know (or at least have a solid idea) what your goals and priorities are. You may even have something resembling a budget! Disgusting, I know.

Find a way to track your spending for one month. Nowadays there are plenty of tools that will do this for you online for free. I would recommend Personal Capital (we will each receive $20 if you register through my link) or Mint for free options or YNAB (we will each receive a free month if you register through my link) if you think you might use it. I will be posting reviews of each of these products on my blog soon, although you can find excellent reviews and summaries all over the web. If you absolutely can’t fathom handing over passwords to provide them read-only access, you can review your bank and/or credit card statement manually, although I don’t recommend this (I did this for years – trust me you don’t want to do this).

Don’t stress too much about trying to make big changes in your habits just yet, as we’re really just trying to get a baseline, and big sudden changes aren’t sustainable in the long run for most people, anyway.

That being said, I definitely recommend being mindful of where, how, when, on what, and with who you spend money during this period, with an eye toward whether it is truly serving you and your happiness and where you might be able to make cuts in the future, if needed (hint: probably needed). Don’t forget to consider long-term/non-monthly expenses such as annual or semi-annual insurance. For our purposes here you should “month-ify” these expenses by dividing the total by the number of months until they’ll be due.

Step Five – Compare spending vs priorities, adjust, reiterate

Now that you have some data to work with, take an honest look at where you’re spending your money versus where you’d like to be (aka your priorities). Likely there are some glaring discrepancies. I’m spending how much on going out/food/miscellaneous who-knows-what?!!

Don’t panic!

It’s okay. We’ve all been there. You’re going to be fine.

Start making small, sustainable changes. Start cooking your own food. Have your friends over instead of going out. Stop buying candy in the checkout aisle (Dear God, you still eat sugar?!!). These are just examples, but it’s important to realize small decisions over time (Starbucks every day?) compound to produce a large effect. Be kind with yourself.

If you’re way off course, you may need or have room to make some more drastic changes. Avoid automatic recurring charges for non-necessities like the plague! (I’m looking at you, YouTube Red!) Treat debt like an emergency, and attack it ruthlessly.

Each month, at a minimum, review where you’re at versus your priorities and see where and whether further adjustment is needed. Rinse and repeat.

Step Six – Build up a rainy day fund for security and flexibility

So you’ve been reviewing your expenses and making changes. You’ve managed to free up some cash flow, maybe even save a little money.

Is it time to buy a new wardrobe for Fall? No!! Haha just kidding, I know you would never do something that silly to me.

The next step is to build up a bit of a rainy day fund to provide yourself some security and flexibility. If you’re living paycheck to paycheck, you are going to be waylaid every time an unexpected expense pops up, which they will with startling regularity (we should start planning for this or something, right?).

By building a small rainy day fund, you insulate yourself from being completely wiped out by that semiannual insurance bill you forgot and give yourself a little breathing room. If you get fired, you can survive for at least a few months without having to run back to Mom and Dad.

This is an incredibly important milestone. Congratulations!

When you are struggling to make ends meet week to week or paycheck to paycheck, you are likely operating on the sympathetic nervous system, which is your body’s “fight-or-flight” mechanism. You’re constantly under stress, your body is riddled with cortisol (one of your body’s stress hormones), and you’re likely not thinking very clearly.

Having some funds saved up gives you some breathing room and flexibility. Hey, maybe it’s even time to go look for a better job to ease things on the income side of the equation. Who knows.

Unexpected expenses are a minor setback. Hey – I’ve got money in the bank; I planned for this.

Many people would recommend you tackle debt before building up a rainy day fund, especially if your debt is at a higher interest rate (it is). This technically makes sense and in the end every situation is different, but I think it’s easy to overlook the psychological aspect of this.

Giving yourself breathing room will literally help you to breathe and think more easily. Furthermore, if you use all of your cash flow to tackle debt (especially if there’s a mountain of it), when you get hit by an unexpected expense or lose your job, you are screwed. Back to square zero. Let’s get some breathing room installed first.

To recap: building up a rainy day fund (generally of ~3 months) will give you some room to breathe and allow you to deal with the ups and downs of life more easily as you continue to move forward.

Step Seven – Go Gangbusters on your Debt

First off, congratulations yet again! If you’ve gotten this far, you really do love me, and you’ve at least thought about saving up a rainy day fund. Phew! Finally I can breathe a little easier.

I’m just going to leave this here… You may have noticed this is the second time I’ve linked to this. This is by no means an accident. Pete (aka Mr. Money Mustache – my introduction to FI/RE) does a great job explaining the proper mindset with which to approach debt.

Your debt truly is an emergency! If you don’t tackle it with all the financial willpower you have, you can quite literally ruin your financial life. Sure, maybe you can eventually “recover”, but how are you ever going to do that if you don’t start making the necessary changes now? At a minimum, debt can add YEARS to your working life if you don’t tackle it immediately and aggressively. Don’t fall for the golden shackles.

Now, you probably don’t wake up in the morning and think “you know what? I’m super glad I’m chest-deep in debt!” So while it’s easy to say we need to get rid of debt, how do we accomplish this?

Long-term, getting rid of debt (and avoiding more of it) boils down to the same basic strategies we discussed in the first seven steps. We can summarize the overarching theme quite simply: be mindful of your spending and live within your means. If you can do this, you are far and away ahead of the crowd and have built a solid financial foundation that will support the rest of your life, at least in terms of your habits and relationship to money.

At this point, you’re probably thinking, “Okay, Wallet, that sounds all fine and dandy and I love the tinting on your rose colored glasses, but I haven’t built that solid foundation you’re waxing poetic about yet. And anyway, didn’t you say my debt was an emergency? How can I get out of debt now?”

Right you are, Johnny boy, right you are. In the short-term, you should be taking much more radical action as soon as possible to knock out your debt. Pretend you’re in college and cut every expense to the bone. Live off ramen and sunshine. Imagine every dollar of your debt is owed to the Russian Mafia, and if you don’t pay up, fast, they’re going to extract the rest of the money from your body in the form of fingers and broken bones.

Okay, this might be a slight exaggeration, but not by much. If you adopt this mentality, mercilessly slashing expenses and pouring every dollar toward paying off your debt, you’ll be surprised by how quickly you’re free and you’ll have the habits in place to quickly build wealth.

Love,
(Your) Wallet

PS – Want more? Head over to part three, here!