How to Change Your Mindset to Get Out of Debt
One of the biggest factors in getting out of debt and staying out of debt is changing your mindset.
When I got myself out of debt I realised that I had a problem keeping out of debt. My thinking was trained to for instant gratification. This meant that I was seeing things that I wanted and immediately trying to buy them, and if I did not have the money available right then, I would immediately think about borrowing the money, whether on a credit card of from a friend or family member. Admittedly following my bankruptcy this was only when I found items that had a time sensitive element to the purchase, things like tickets to a seminar, event or show; or products that are only available for a short time and would not be available once they are all sold. But the big problem was that I did not have savings or a plan to get savings. I was not contributing to a pension and I was not thinking ahead. So debt was the only flexibility in my life. Debt is like an addiction, once you give in a take a little debt, you start to slowly slide further and further into debt again.
Having spoken to a lot of people in debt I discovered that this was a common theme amongst most of them. They do not plan for the future by saving on a regular basis and living on less that they earn. I know that many people say “but I don’t earn enough to save”, but the truth is that just about everyone can save something on a regular basis. It is all about a decision to build a better future.
However, the first priority must always be to get rid of the debts, but the discipline needed for saving will be a vital part of the process of getting out of debt.
If you have debts there are a number of ways to get rid of them, and which one is right for you depends on the debts and your personal circumstances, but the principle of saving is what will stop you from falling back into old ways. However, even saving will not work for you unless you have a rewards scheme in place to ensure you are able to celebrate your successes. It is through rewarding yourself for good money habits that your mindset to money will change. As you see (and more importantly feel) the benefits of good financial management, you will build stronger and stronger positive financial habits.
No matter how much or how little you earn, take a fixed percentage of your income and put it aside for saving, you should aim for a minimum of 10%, but if that is not achievable initially then start with whatever you can afford. In fact you really want 3 savings accounts, not just one, into which you put equal amounts of money each month. Each savings account has a specific purpose:
1. Saving to spend on luxuries
2. Saving to spend on capital assets and high growth investments
3. Saving for old age
It is important to explain each of these. Luxuries refers to things like furniture, a car, holidays, special clothes, new TV, jewellery, a luxury spa weekend, etc. – anything that you like. These are your rewards for doing such a great job at building your long term future. Capital assets and high growth investments refer to things like property, stock market and other investments. The property you invest in is designed to be property you then rent out, but if you have a mortgage on you own home, then this money could be used to pay off your mortgage even more quickly. This money can also be used to buy investments such as stock market shares or bonds etc. The single criterion for this pot of money is that it should only be spent on items that will generally go up in value, though some risk is always present. It is not to be used for items that will decline in value such as a car. Even jewellery, when bought at retail prices is not a good investment as it is not easy to realise the value of the item if you have to sell it. Any returns from the high growth investments should be shared equally across all three saving accounts, that way you get some of the benefit now, reinvest some in the same funds and put some aside for your future. Saving for old age includes things like a pension, low risk investment properties, low risk investment unit trusts, government bonds etc. Things that are generally a safe bet that they will grow most of the time and return a continuous flow of dividends. Also until you retire, all dividends and cash receipts must be recycled back into this fund to help it grow even faster. In time the compound interest will out strip the amount you are continuing to put into this fund on a monthly basis.
The net result of all this is that your mindset will (slowly and frustratingly at first) start to shift from one of spending to one of saving. You will find that you are massively satisfied when you have saved enough money for a major item that you have wanted for a long time. You will also be surprised to find that some of the items you really thought you could not do without, seem unimportant when you have finished saving the money for them. That factor alone will save you a lot of money.
Also whenever you want to buy ANYTHING, no matter how small, always, always ask yourself, do I really need this, will it enhance my life as much as saving the money? More often than not the answer will be – no.
Also saving does not just refer to money, it also refers to the way you spend your money. Do you waste electricity by leaving lights on and your TV plugged in? Does your microwave or other appliances have a clock? Do you waste food or buy more expensive food than you need? Do you over eat and waste money that way? Changing your mindset means that you start to value your money and you respect its power to build a better life or lead you into debt and misery. Choose the better life!
Getting out of debt is vital for the personal future of everyone, but it will be short lived if you do not plan carefully to build a better future – debt free.
by Chris Ball
