Four Mental Shifts For Better Money Management

As Licensed Insolvency Trustees, we often see the worst-case scenario when it comes to personal finances. Most people are at the end of their rope by the time they reach my office – having struggled with every possible fix for their debt situations and seeing no other alternative than to file for Bankruptcy or a Consumer Proposal.

At MNP, we understand better than most that life happens. Nobody sets out to have their lives turned upside down, get into debt or deal with the unimaginable stress it causes. But that doesn’t mean most of these situations aren’t preventable. In fact, through years of experience helping hundreds of clients turn their finances around, we have identified four critical mental shifts which can help turn the most hopeless situations into incredible success stories.

None of these are necessarily easy. They take long-term practice and commitment. But almost everyone we work with reports immediate benefits – including feeling less stressed about their money, having more fun and more frequently achieving their financial goals.

Save for Emergencies

It may be cliché, but the golden rule in personal finance is to expect the unexpected. Cars break down, water mains rupture, layoffs happen. And while there’s nothing wrong with hoping for the best, the wealthiest people even prepare for the worst. 

An emergency fund is, without question, the most important financial tool you have at your disposal. Setting aside three to nine months living expenses will help you weather almost any financial storm that comes your way – while avoiding added debt and punitive interest payments. It also offers comfort and peace of mind when things are going well. Rather than worrying about every potential scenario where things could go wrong, you can be prepared for any financial curveballs that come your way.

Though building up your fund may seem daunting at first, you can make the process easier by setting regular and progressively more ambitious goals – like saving $250 in the next month, $2,000 over six months, $5,000 within the year and so on.

Give Every Dollar a Job

You need your income to perform a wide range of tasks – from feeding, clothing and sheltering yourself to paying down your debts, having fun and giving back to the community. Without a plan for where it all goes (and when), it can be difficult to afford it all – much less save anything.

Some people dismiss budgeting as being too restrictive, but we disagree. With the right approach, writing and sticking to a budget can be one of the most financially liberating things you can do for yourself. It helps identify your financial priorities (like paying off debt, building an emergency fund, enjoying more leisure time), along with any leaks in the boat (such as unsustainable debt, subscriptions you pay for but never use or overspending at restaurants or retail establishments).

This process need not be complicated or time consuming either. Begin every month by writing down your expected income, fixed monthly expenses and estimated variable expenses. Subtract your expenses from your income and what you have left over is for things like savings and leisure. Next, decide how much you would like to save and what you’d like to set aside as ‘fun money’. And there you have your budget.

You’re meeting your needs, paying down debt, preparing for the future and you still get to spend some of your earnings guilt free. Of course, if your budget produces a negative number, you’ll need to do some tweaking – whether that means reducing your expenses, increasing your income or meeting with a Licensed Insolvency Trustee to discuss options to reduce your debt.

Calculate the Opportunity Cost

Productivity guru David Allen famously mused that, “[we] can do [or have] anything, but not everything.” And that is perhaps the most straightforward definition of opportunity cost I’ve ever heard. With the exception of monks and billionaires, it’s safe to assume most people’s wants far out weigh their means – so, it’s important to prioritize.

From a practical standpoint, opportunity cost says that every dollar you spend on one thing is a dollar you can never spend on something else. For example, if you purchase a new smartphone for $500, you cannot use that same $500 to purchase a flight to Hawaii. Therefore, you can measure the true price of your phone not only in its cash value, but also the value you placed on taking a vacation. Whether that’s a worthwhile trade off is up to you.

We must learn to spend our limited income wisely. This will mean different things to different people, but it boils down to making purchases that will add the most value to our lives.

On one hand, calculating the opportunity cost can help us make trade offs that move us closer to getting the things we really want (e.g. a vacation, new home, etc.). On the other hand, thinking more intentionally about our spending habits can also help us save money (the opportunity for financial security vs. the opportunity to have many things or experiences) and stay out of debt (the opportunity for less stress vs. the opportunity to have many things or experiences).

Make Friends with Your Future Self

In this world of one click shopping and free two-day shipping, instant gratification is easier than ever. But what makes you feel good now can leave a bitter taste in your mouth in the months and years to come.

Studies reveal we tend to look at our future selves as different, distinct and separate from our current selves. We think of that person as more akin to a stranger whom we bear no duty or relation to. And though our current spending habits have a direct impact on that person’s life, we struggle to align our spending thoughts and actions to that fact.

Ironically, this causes us to act and make decisions that impact our future selves in ways we would never wish upon our friends and loved ones – or even ourselves assuming we would feel the negative effects immediately. Which, as most of us know from experience, can leave us cleaning up the mess of irresponsible decisions by our past selves for months and even years after the fact.

Whenever you’re uncertain about a medium- to large-sized purchase, it’s often helpful to visualize your life two, five, ten and even 20 years down the road. Will you still be using or benefitting from that product or service? If you’re using credit – will you still be paying for it (and the associated interest costs)? What opportunities might you have to sacrifice? Will you regret it?

Put yourself in that person’s shoes. Imagine their hopes, aspirations, challenges and goals. Treat them as compassionately and kindly as you would your mom, dad, sibling or best friend. Remember the golden rule – do unto others as you’d have them do unto you – because in this case, that’s exactly what is happening.

Life-Changing Debt Solutions

If you’re struggling with unmanageable and worsening debt, you don’t have to face it alone. You may qualify for a Life-Changing Debt Solution such as a Consumer Proposal or Bankruptcy, which can help you erase your debt with manageable fixed monthly payments or by selling of some of your assets. Your trustee may also help you find other alternatives – such as debt consolidation or budgeting assistance – to help you regain control of your money. Whatever your means and goals, they will help you weigh the benefits of every path to debt freedom and help you choose the one that’s best for you and your family – helping you on the road to a financial fresh start.