Getting started with smart money management can be tough. It can be frustrating. For one, you have to discard so many old habits. Plus you have to develop new habits. And, toughest of all, you have to deal with the constant small (and large) mistakes you make as you're getting the hang of saving and investing. In a lot of ways, learning to be smart with money can be like learning to ride a bike. At first, the ride can be wobbly. Sometimes you might even fall.
That's the issue Carly is wrestling with. She makes financial mistakes and doesn't know how to recover from them. Plus, she'd like to know how to prevent them from happening in the first place. She writes:
Over the past two years, I've begun the process of budgeting, clearing my debt, and becoming a financially responsible person. Most of the time I do a great job of this and manage to put a good chunk of my fortnightly pay against my debt snowball. There have been times, however, where a situation has triggered a spending spree. On a couple of occasions, it was a fight with my boyfriend. At other times, it was just a case of the blues.
After a particularly troublesome fight with my boyfriend a few months ago, for example, I somehow managed to blow $500 over the course of a weekend! I was wondering if you had any advice for how to recover from these kids of “relapses” should they occur and also how to prepare yourself for future upsets so they don't result in financial irresponsibility.
This is a great question, and something all of us wrestle with from time to time. We're all human; we all make mistakes. And, naturally enough, we all make mistakes with money. Even those who have mastered the basics of personal finance and are well on the way to Financial Independence do dumb things with dollars once in a while.
Carly has two questions: How to recover from these money mistakes, and how to keep them from occurring. Let's tackle the last question first.
Avoiding Financial Failures
Avoiding financial failures is largely a matter of preparation. It's especially a matter of knowing yourself and your personal psychology.
When I'm feeling blue, for instance, I have a tendency to buy books and comics or to place an order at Amazon. Because I know this about myself, I've learned to recognize the urge when it occurs. If I find myself wanting to browse Amazon just for the sake of shopping, I walk away from the computer. And I avoid bookstores.
For me, this is one of those areas where money management is similar to dieting. Many people find themselves making poor food choices when under stress. I'm one of these people. Left to my own devices, I'll chow down on cheeseburgers and chocolate when things go wrong. But I've learned to make healthier choices. I always have handful of fruit around, for example, so that I can eat that instead of junk. (And, of course, I try not to have junk in the house.)
With money, a similar principle applies. When you feel tempted to splurge or you sense you're about to make a financial mistake, remove yourself from the situation. Leave. Go someplace where you cannot spend or where the temptation to make the mistake is much less.
The bottom line is that avoiding money mistakes is a matter of self awareness. You have to train yourself to avoid them.
Recovering from Financial Failures
Even if you're prepared, you'll make mistakes now and then. How do you pick up the pieces when this happens? Here are some of my top tips:
- Don't panic. When you make a mistake, try to relax. Don't freak out. Take some time to calmly think about the situation. Sleep on the problem. It's amazing how a little time can grant perspective.
- If possible, undo it. You can reverse some mistakes. Say you just blew a bunch of money on new clothes or are feeling buyer's remorse over your new digital camera. Return the items, if you can. If that's not an option, sell them to recoup some of your loss.
- Evaluate your options. Some mistakes aren't reversible. If there's no way to undo the damage, make the best of the situation. Focus on your long-term goals, and make a list of the options available to you. Don't make any rash decisions. Be smart.
- Don't get depressed. When things go wrong, it can be tempting to ease the pain by spending even more money. We buy things to make ourselves feel better, but this spending just has the opposite effect. We create a snowball of suffering. Fight the urge to administer “retail therapy”. Avoid compulsive spending.
- Don't dig a deeper hole. Money spent is money spent. Just because you've already sunk $200 into a gym membership you'll never use doesn't mean you should keep spending money on it. Cut your losses by getting out as soon as possible.
- Keep your goals in mind. Most of all, remember your plans for the future. These little financial failures are just temporary speed bumps on the road to brighter future. Keep the entire journey in mind. Make peace with the past and resolve to do better in the months to come.
Failure is okay. Everyone makes mistakes — even billionaires like Warren Buffett. Don't let one slip-up drag you down. One key difference between those who succeed and those who don't is the ability to recover from a setback and keep marching toward a goal. Use failures to learn what not to do next time.
Advice from the Trenches
That's my advice for dealing with money mistakes — but it's all very dry and theoretical. I think Carly could use some practical suggestions, advice based on real life.
What sorts of financial mistakes have you made in the past? How did you deal with them? And what have you done to prevent splurges and setbacks in the future? Do you have any techniques for turning lemons into lemonade? What can you tell Carly about recovering from her financial “relapses”?
Author: J.D. Roth
In 2006, J.D. founded Get Rich Slowly to document his quest to get out of debt. Over time, he learned how to save and how to invest. Today, he's managed to reach early retirement! He wants to help you master your money — and your life. No scams. No gimmicks. Just smart money advice to help you reach your goals.