Build A New Life In Four Weeks!

Believe it or not, you can turn money from your master into your servant in a single month. Here's how it's done.

Being a weak-willed person, I find making major changes to my behaviour and habits very tough indeed. For example, I've tried to give up smoking many times. What gets me is what I call the 'three-day hump' -- a physical and psychological craving that kicks in once I've stopped smoking. After I pass this tipping point, the urge recedes, but I'd bite the head off a kitten for a cigarette by day three!

Still, one thing that I've done very successfully in recent years is to redefine my relationship with money. In my bad old days (the Eighties and Nineties), I would spend recklessly, borrow vast sums and be constantly overdrawn, fail to save a single penny, and generally live well beyond my means. Nowadays, life is very different -- in fact, my financial habits today are just about the exact opposite of my previous bad behaviours.

According to behavioural psychologists, with just four weeks of effort, it's possible to completely replace one behaviour pattern with another. So, in one month, you could ditch your bad financial behaviour and introduce a whole new set of healthier habits. However, your relationship with money is entirely personal (although it may have been influenced by your family background, education and profession). Hence, what works for one person won't work for another. Nevertheless, you could try making the following alterations over the next month and into 2007:

(To make this task easier, you could try the 'carrot and stick' approach, with rewards for 'good' behaviour and forfeits for 'bad' behaviour. This is entirely up to you, but reinforcing the good and punishing the bad is a powerful tool to keep you on the straight and narrow during your financial evolution!)

1. From spendthrift to budgeter

As I mentioned above, I used to be a complete wastrel. If I wanted something, I would buy it, giving no thought as to whether I could honestly afford it. Slicing my spending and getting rid of my 'Champagne tastes' was perhaps the hardest lesson that I had to learn at the start of my personal financial epiphany.

To begin with, I used a spending diary (in the form of a little red notebook) to monitor all of my outgoings, whether by cash, cheque, plastic card or whatever. At first, I just recorded my expenditure, rather than trying to control my spending. What shocked me was just how much I frittered away on fripperies: trivial, inconsequential and non-essential purchases.

Naturally, I took a knife to this unnecessary spending (what US author David Bach calls one's 'latte factor' in his book The Automatic Millionaire). I now think twice before making casual purchases, usually by asking myself whether I really need this, as compared to merely wanting it. Also, if I need to tighten my belt for a while, I give myself a set sum of money to live on each week -- and once it's gone, it's gone.

Lastly, I practise self-denial with an occasional spell of extreme budgeting, when I try to spend as little as I can for an entire month. During my latest financial detox, I ran up discretionary spending of just £3.32 in thirty days, as I explained in How I Lived On 10p A Day. Beat that if you can!

2. From borrower to saver

At the peak of my borrowing binge, I owed almost £50,000 across a string of credit cards and loans, plus my mortgage. After getting my 'squanderlust' under control, the next step was to begin cutting my debt mountain down to size. Rather than take out yet another loan to consolidate (merge) all of my debts, I decided to kill off my debts one by one, starting with the most expensive.

This method, which we call snowballing, is the simplest and easiest way to dynamite your debts. By concentrating on paying off the most expensive debt first (probably an overdraft, credit or store card with an interest rate of perhaps 30% a year), you pay less interest and, therefore, release more money to throw at your remaining debts.

To be honest, killing off my debts was one of the most rewarding things that I've ever done. You can learn how to turn your back on borrowing by visiting our Get Out Of Debt centre.

Naturally, after I became debt-free, I found myself with a much larger disposable income to play with. At this point, I did the sensible thing by starting to save for the first time in my adult life. Let me tell you, it felt terrific to go from paying interest to earning it!

Initially, my savings went into a cash mini-ISA, which is a savings account which pays tax-free interest, usually at market-beating rates. Once I'd used up my annual cash ISA allowance of £3,000, I saved the remainder into a Best Buy high-interest savings account. Many years later, much of this cash is still there, acting as my emergency fund/rainy-day money, to be dipped into only when absolutely necessary.

3. From saver to investor

Although moving from spendthrift to saver was a big step in the right direction, the best was yet to come. With a comfortable income and a cash cushion to support me during hard times, I felt more confident about long-term investing in the stock market to build greater wealth.

For the record, I don't save even a penny of my disposable income anymore -- all of my spare cash gets invested in shares. When I can spare the time, I research, pick and buy shares in individual companies (you can see which companies I part-own here).

When I can't find the time (or can't be bothered) to do my own research, I invest in low-cost index trackers, which are funds which track a particular stock-market index, such as the blue-chip FTSE 100 Index or the wider FTSE All-Share Index. Also, I like buying into cheap Exchange Traded Funds -- tracker funds which behave like shares.

My approach to investing is simplicity itself: invest as much as I can spare; don't waste money on needless switching between shares; reinvest all of my dividends (the income paid by shares); make use of tax-free ISA shelters; and wait, say, twenty years. Time and the power of compounding will do all of the hard work for me!

4. From risk-taker to risk-regulator

So far, so good, but one final step is needed to properly round things off: controlling the financial impact of unexpected events. In other words, this is about buying insurance to ward off the worst that luck can throw at you. Incidents such as unemployment, serious illness or death can devastate your family finances, throw all of your plans out of the window, and even leave you with lifelong financial worries.

Naturally, a decent-sized cash cushion will help you to weather mid-sized financial storms, but only insurance will protect you against a full-blown hurricane of whatever variety. So, protect your life, health and income with life insurance, critical illness insurance and income protection insurance respectively. Also, shop around for quality quotes for car, home and travel insurance at renewal times.

Finally, if you have a spouse/partner and/or children, make a Will so that your assets are distributed according to your wishes (rather than the State's) when you die. In addition, an Enduring Power of Attorney (EPA) will allow your spouse, partner or someone you trust to handle your financial affairs if you cannot, thanks to a serious physical or mental impairment. My wife and I sleep much easier these days knowing that we have up-to-date Wills and EPAs!

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