Have you ever been slapped hard in the face? Better yet, do you wish that you could slap your younger self in the face? Chances are, you would love to stop your younger self from making certain bad financial decisions. You would also love to tell your younger self to save more.
The reality is that you make a deal with your future self almost daily. If you save money today, you give money to your future self. If you spend money today, you take money away from your future self. Your brain is in a constant fight—your rational brain has to fight with your emotional brain to make saving a reality. You may be exhausted with kids, with your job, with your significant other, and you might tell yourself, “I’ve worked hard—I deserve this” or “I’ve got to enjoy my life now.” Most American know they should save more, but only 41% of adults have enough saved to cover an unexpected expense of $500 or $1,000 (per a recent report by Bankrate).
If you are in your 40s, you are at the point in life where the voice of your future self should be getting louder and louder. You probably need to break some poor habits. Because it is easy to justify bad habits, you need to put yourself in your future self’s shoes, and have an open and honest conversation. The number one way to go broke is to not talk to your future self.
If you get in the habit of talking to yourself, you’ll end up taking care of your future self. The following are some tips to help with that conversation.
1. Start the Conversation
First, you need to just start the conversation. You need to ask yourself, “is this thing worth it?” and “Do I know where I stand financially?” If you ignore talking about finances, or if you only complain about your finances, you will fall into a hole you might not be able to dig your way out of any time soon.
Ask yourself, “What would my future self be annoyed with about my finances right now?” If you are not constructively talking about your money, then you will regret it. You’re an adult, and as an adult you need to know if you have too much credit card debt. You need to know what would happen if you lost your job tomorrow. You need to scare yourself a little.
There is a reason that money is the main cause of stress in relationships. People hate to talk about money. People point fingers and blame one another about financial missteps. That is not productive. Instead, just start slow and ask yourself where are you today and where do you want to be tomorrow. When you start the conversation with your future self, you start to trigger your long term planning part of your brain.
We are impatient when we make decisions in the present, but we are more patient when we make decisions about our future. The trick is making your inner dialogue loud enough to make you think about long term consequences of current behavior. The trick is to just start the conversation.
2. Be Well-Informed
Second, your conversation with your future self needs to be well-informed. You started the conversation and decided where you want to be tomorrow. To get where you want to be tomorrow, you need to understand your credit profile. This is where your future self would say, “If you only did x, y, and z, you would have improved your credit score.” Once you have a good credit score, you have a better chance to have a good financial future.
Your credit score is a tricky beast, and the more you know about how creditors view you, the better. A credit score is simply a number (that ranges from 300 to 850) that creditors use to get a good picture of your creditworthiness. That is, creditors use your credit score to decide if you qualify for a loan, and if you do qualify for a loan what the terms of that loan should be. If you have a low credit score (300 to 550), a creditor views you as a higher risk of default. With the higher risk of default, you will be charged more interest and the creditor will lend you less money (if any at all).
If you understand your credit score, you can work to increase it. If you increase your credit score, you will pay less interest, you will have more credit options, and you will avoid other ways bad credit affects you. For example, if you have a bad credit score, you can be denied credit when you really need it. You may have to pay more fees. In fact, a bad credit score will hurt your chance to buy a home or a car.
It can even impact your job chances (employers may do a background check that includes a review of your credit). If you cause your future self to lose a job, wow he/she will be annoyed. Somewhat similarly, if your future self does the math and learns that you’ve paid thousands of dollars more than you should have because of fees and higher interest rates –look out.
Also, when you know your credit score, you can intelligently track it. If your credit score takes an unexpected dive, you can look at your credit report and see if there is a mistake on it. Or worst yet, you can see if someone has stolen your identity and opened up accounts on your behalf (shockingly, they’ll default on your loan and destroy your credit). You can go to annualcreditreport.com and receive a free credit report from each of the 3 main credit reporting bureaus (Equifax, Experian, and TransUnion). If there is an incorrect entry, you can easily dispute it online. The bureau needs to investigate your dispute (the bureau would immediately contact the disputed creditor), and if the debt truly is not yours, it gets removed. You can also put a fraud alert on your account, so if someone did steal your identity any creditor that pulls your credit report will see there is a dispute and need to actually call you before the creditor makes any offer.
Nearly 50% of Americans do not know their credit score, and nearly 100% of Americans can benefit from knowing their credit score. Also, 100% of people benefit from intelligently talking about money. You can talk about your financial future intelligently if you know your credit score.
3. Do Something
Finally, you need to come up with a plan. Once you talk to yourself and you understand where you are financially, you should come up with a plan. You have two realities in front of you: One, your future self is happy about the money decisions you make today. Two, your future self would love to slap you for the dumb decisions you make today.
Your plan should include paying yourself first. That is, before you pay your bills, before you buy groceries, before you lease that sweet sports car, you should pay yourself. You should give yourself money. Ideally, you have a 401(k) account and you can automatically pay yourself before any money is deposited into your checking account. Even if you don’t have a 401(k) account, you should open some special savings account to squirrel away a portion of your paycheck. The more automatic you can make paying yourself the better.
By paying yourself, you also start a habit. This habit has many benefits. You can reach your goals sooner rather than later, and you show yourself how easy it is to put away a relatively small amount of money that slowly grows over time.
This habit also gives you security. If you lose your job, or your car falls apart, or some other unforeseen life event happens, you have some wiggle room. Most importantly, you can choose to save money today to pay yourself in the future, so that you benefit from all of your hard work. Additionally, when you force yourself to save a portion of your paycheck, you start the habit of spending less than you make. This habit will bring into focus those items you want versus those items you need.
You can then actually list out your household cash flow – where is your money coming from and where is it going. When you see where your money is going, you need to step back and separate your wants from needs.
When you’ve separated your wants from needs, you might see that you spend too much on wants. You may see some items on the list and say, “I’ve worked hard—I deserve this.” Your future self will say, “Dude, I deserve early retirement.” “I deserve to not stress about paying my bills.” “I deserve to be able to help my kids afford college.” Your future self has a good point.
Again, the most important thing you can do about your future finances is to start talking to yourself. When you ignore your finances, you set yourself up to let your future self down. If you make a deal with your future self to be responsible with your finances, your future self will want to give you a hug rather than a slap across the face (a good visual reminder to think about before you spend).