Saving Money: Why A Financial Crash Diet Could be Bad for your Wallet
Every now and again the media goes crazy when a new fad diet arrives onto the scene and regardless of whether it is the Atkins Diet, the Scarsdale Diet or the South Beach Diet, each one seems to represent a desperate attempt to very quickly lose weight and obtain the ideal body.
Unfortunately the effects of these diets are often very negative and fad dieters tend to lose enthusiasm as the initial weight loss caused by the extreme diet begins to level out and the cravings for decent food settle in.
Disappointed with the results, most fad dieters return to their old eating habits and often end up putting on more weight than when they started.
Now I am sure you are asking what all this has to do with personal finance? Well, in the same way that extreme dieting can hurt your health, extreme saving can have an equally negative impact on the health of your finances.
To me, extreme saving is the financial equivalent of a crash diet and extreme savers will do anything they can to cut out every non-essential cost from their monthly spending, even if it means living a miserly existence.
This means eating the cheapest of cheap foods, not socialising with their friends, wearing their clothes until they are threadbare and giving up on any other little luxuries or hobbies.
The main problem with extreme saving is that it is very difficult to sustain this way of life over a long period of time. Monotony and boredom can easily niggle away at the best intentions of any extreme saver and drive them back to their old spending habits, in the same way that a fad dieter will go back to eating their favourite treats with a vengeance.
Create a Healthy, Balanced Savings Diet
Rather than following fad diets, most health experts advocate that the best approach to weight loss is a healthy and balanced diet, combined with plenty of exercise, and those same principles apply to successful saving.
Letâ€™s face it, eating beans on toast for dinner every day may be cheap, but it is going to make you miserable. So too will staying in all month whilst your friends are out partying and having a good time.
The best approach then is to create a healthy, balanced savings diet where you review your spending, identify areas of high expenditure and find ways to make savings, without necessarily having to cut back completely on everything. This might mean just going out with your friends twice a month, rather than every week or supplementing some expensive dinners with cheaper dinners in your weekly shopping.
By balancing your savings against your spending, you do not then deprive yourself completely, making it much easier to continue saving in the long-term.
Creating a Sustainable Savings Plan That Will Grow Your Wealth
Whilst the secret to weight loss is to consume less calories than you burn, the secret to wealth building is to spend less money than you earn. You can maximise the amount you save by following these three steps:
Decide on your savings objectives â€“ For example are you saving to get out of debt, to buy a new home, to go on holiday, to pay for a wedding or to pay for your childrenâ€™s education?
Understand your current situation â€“ Create a budget to show how much money you earn, how much you have in savings, how much you owe, how much you spend and where you spend it.
Identify savings â€“ Review your spending and earnings to see where you can make cut backs and try to identify any opportunities to increase your income.
If your objective is to save Â£10,000 for a deposit on a new home, you can begin to break that down to identify a monthly savings target. So Â£10,000 divided by 36 months will give you a monthly savings target of Â£277.
By finding cheaper alternatives for essential spending and reducing your non-essential spending, you can ensure that you are able to pay Â£277 into your savings account each month. And because you are not completely cutting out all fun spending items and know that you will be able to meet your goal of buying a house in three years time, it makes saving much less painful.
Monitor Your Progress
One of the biggest problems that dieters have is staying on track, so many people weigh themselves on a regular basis to monitor their progress. If they have slipped, then they can increase the amount of exercise or decrease the size of their food portions to try and get back on track.
The same approach needs to be taken with your spending to ensure you are not over-spending and missing your monthly savings target. Ideally you should review your bank balance and spending at least twice a month, if not more, and if it looks like you have overspent in one area then you will see that you need to cut back in other areas.
Sustainable Vs Fad
So whether you are slimming or saving (or maybe both!), selecting a sustainable and balanced approach should help you become much more successful in meeting your goal.