Have you ever found yourself putting off something that you know you should do? Oftentimes, once you get around to finishing that work, you realize it only took a few minutes. And then you may wonder why you waited so long. The same can be said for adopting the following financial habits.
While these smart money behaviors are simple, easy to acquire, and oftentimes lead to amazing results in the long run, so many people ignore them, even though they require very little time to implement. Here we’ll take a look at the 7 best financial habits you should start today. And maybe this article will inspire you to adopt at least some of them.
1. Spend Less Than You Make
Spending less than you make is a behavior that could be considered Personal Finance 101. It is always true that if you have more money going out than coming in, you will never move ahead financially. Even worse, ignoring this crucial financial habit will gradually deteriorate your financial situation. As unpaid bills and debt pile up, you will find it increasingly difficult to escape this downward spiral.
However, the good news is that you can work on this habit in two ways: focus on increasing your income while also managing your spending to live within your means. Since most people find it easier to decrease their expenses than to increase their income, the second financial behavior you should adopt is tracking where your money goes.
2. Track Your Money and Create a Budget
In order to get a better picture of your financial situation you should know how much money you’re making and how much money you’re spending. Therefore, it’s smart to create a system for tracking your money transactions. Whether you prefer pen and paper to balance your bank accounts, a spreadsheet on your computer, or personal finance apps like Mint, is really just a matter of convenience and personal preference.
Tracking your spending can help you discover problem areas where you can improve your buying habits and track your progress over time. On a personal note, creating an Excel spreadsheet to track my income and expenses has really helped me become a lot more frugal after only a short period of time. The disciplinary effect of seeing where your money goes is undeniable and for me this has truly been one of the best financial habits I have acquired and maintained over the years.
Write down and categorize everything you’ve spent money on in the last month. If you can, you should even go back farther and look up transaction records. Rank each category in order of importance to you. Your rent or mortgage payment should probably be prioritized at the very top, because having a roof over your head is quite essential. Your car payment should be second, and so on.
In addition to tracking your money flows you should budget for any purchases you make on a regular basis. Whether it’s purchasing a coffee twice a week, eating out on weekends, or buying gifts for friends and family, seemingly insignificant costs can add up and drain your budget if you don’t plan for them. Setting sensible spending limits for these little luxuries can help you maintain control of your finances and improve your financial situation rather quickly.
A smart way to reduce your spending is to set up spending limits for your top three nonessential line items, such as $100 per month for date nights or $20 per month for your favorite hobby. For everything else, focus on reducing your spending behaviors or finding less expensive alternatives, such as making your coffee at home.
3. Build an Emergency Fund
Almost every personal finance expert thinks that having an emergency fund is essential for your financial well-being. Building and maintaining a financial reserve can help you avoid debt in case of unexpected expenses, such as a broken car or a medical emergency. It can also help you stay on track with your financial goals, even when life throws you curveballs.
Begin by saving at least one month’s worth of your living expenses and gradually build up to a bigger emergency fund. Having several months’ worth of expenses saved up might safeguard you from financial problems when a job loss or medical catastrophe occurs. Most personal finance experts recommend saving up to six months’ worth of your living expenses and keeping that money in a high-yield savings account that you can access at any time. Any savings beyond that amount should go towards your investments.
4. Automate Your Bill Payments, Savings, and Investments
Another excellent financial habit that you can establish in a matter of minutes is to have your bills paid automatically. The first reason you should automate this process is that late fees and interest on missing payments can have a significant impact on your budget. It is critical to avoid these fees and interest charges. The second argument is that it frees up your time to pursue other interests. Especially for people who struggle with organizing their life, putting their money flows on autopilot is one of the best financial habits they should adopt immediately.
Another money stream to automate is your savings. Paying yourself first is a great way to ensure that your finances are in excellent shape. It means that instead of putting whatever money is left over at the end of the month into a savings account, you should set aside a certain amount of your income at the start of the month. When you save at the end of the month, it never seems like there is any money left over.
Setting up an automated savings routine every time you get paid is the best way to quickly save a lot of money. Find a high-yield savings account and set up a monthly transfer from your checking account. It is essential that you maintain a separate savings account, as this makes withdrawing money more difficult unless there is a real emergency.
The last money flow to automate are your recurring investments. Trying to time the stock market is a common rookie investing mistake. Instead, set up a recurring transfer from your checking account to your investment account. This is known as dollar-cost averaging, and it is a fantastic strategy to reduce the risk of investing all of your money at the peak of the market.
Automating all three mentioned money streams is one of the best financial habits for people to adopt. If you don’t want to be burdened with remembering all the various transactions all the time and prefer to have more free time, set up your automated payments today!
5. Set up Account Alerts
Before you set up automatic payments for your recurring bills, make sure that you have enough money for the transactions to go through. Keeping a little extra money in your checking account, as well as having an emergency fund, can help you avoid overdraft fees. Account alerts are an excellent way to ensure that you don’t experience additional unnecessary expenses.
Account notifications come in a variety of forms. You should set them up on all of your bank accounts, credit cards, and other financial accounts. You can get notified if your balance falls below a specific threshold, when your statement is due, a payment is made, or your account experiences any unusual activity. You may also choose whether to get notified through email, app notification, or text message. Configure your account notifications in the most effective way for you and read through them once a day.
6. Compare Prices for Everything
In order to spend your money wisely, it is essential that you are able to determine if the value you are receiving is appropriate to justify the price of an item or service. Make evaluating product pricing a habit and also consider the value you are receiving in return.
Some personal finance experts suggest that you should compare your hourly salary to the cost of the item you wish to purchase. Putting prices into perspective to the time you’ve worked for the money can help you decide, whether that new phone you feel you can’t live without any longer is truly worth a week or more of your work. In addition, always compare the cost and value of the product you want to the cost of other things you could do with the money, such as paying off a high-interest loan.
Finally, compare the product you want to others of its kind. Is there a less expensive option that provides the same utility? Can you buy a better version that lasts twice as long for a little extra money? Weighing these alternatives can prevent you from buying junk, help reduce waste, and direct you towards products and services that provide actual value and superior quality.
7. Consistently Learn About Improving Your Personal Finances
If you want to achieve financial health and wealth, you first need to educate yourself on the topic of personal finance. After all, you can’t make the smartest money decisions if you don’t know what your alternatives are or how each decision will affect your life and finances in the long run. Begin by reading a few personal finance books and spending a few minutes every day reading personal finance articles (just like you are right now).
When exploring the various options, be sure to consider the pros and cons of each possibility before you make a decision. Whether you’re looking for a car loan or a mortgage, a financial planner or investment vehicles, you’ll be able to make better-informed and more confident decisions, if you’ve learnt everything you can about the subject.
Over the years of researching personal finance topics, I have found the before-mentioned 7 best financial habits to be essential in improving and optimizing my financial situation. If you’ve known about these behaviors but have been putting off adopting them, now is the time to start. According to the old saying, “The best time to plant a tree was 20 years ago. The second-best time is now.” Don’t waste any more time ensuring that your financial situation is the best it can be!