Some people are natural-born savers, while others are natural-born spenders. If you fall into the latter category, it will most likely require more effort for you to develop good financial habits, like building your savings. Not to worry, though! Below I am sharing with you 5 tips for improving your money habits.
1) Live Below Your Means
I find this is a common theme in many of my blog posts, but it really is so important. Most rich people live below their means, which is how they remain rich. Living a modest lifestyle compared to your income ensures that you will have a successful financial future.
Many people like to follow the 50/20/30 rule as a guideline. This means 50% of your income goes towards fixed costs, such as mortgage, car payment and utilities; 20% of your income goes towards savings; and 30% of your income covers your variable costs, such as groceries, clothing, dining out, etc. This guideline is a good starting place for living within or below your means.
2) Budget
Most people hate budgets. I get that. I used to hate budgets, too, until I realized how helpful they are. I used to think having a budget meant no flexibility and that I had a predetermined amount to spend on everything and I couldn’t ever change that. FYI- that’s not how budgets work.
To create a budget for yourself determine what your income is, then using the guideline above, set aside 50% for your fixed costs, 30% for your variable costs and 20% for savings. This gives you 3 very broad categories for more flexibility. If you want to be able to trace your specific spending habits, create a more detailed budget creating lines for each category of expenses you have. Budgets are really supposed to just serve as a base for you to compare to each month to see if you are meeting your goals.
3) Save, Save, Save
It’s very easy to allocate all of your income to your fixed and variable costs and forget about savings, but that does not lead to good financial habits. To get into the habit of saving, start with putting money into a savings account once a month or more. It’s best to have a savings account that is not linked to your checking account to ensure that you are not using your savings to cover expenses. I am a huge fan of online savings accounts because they tend to offer higher interest yields than commercial accounts and since it’s online, you can’t just drive to a branch or ATM and take out the money instantly.
Another option if you’re a bit more trained with your savings is putting your money in a CD or certificate of deposit. Although the rates are far from what they used to be a few years back, they still provide a better yield than your typical or online savings account. Additionally, the money is locked for a longer term, meaning you are penalized for early withdrawal. This makes it easier to make sure the money is not spent.
4) Want versus Need
Determine a dollar amount for how much you are willing to spend on things that you want each month. Keep in mind your wants fit into the 30% of variable costs each month. Every time you buy something, ask yourself the question, “do I want this or do I need this?” If you only want it, you should do a cost-benefit analysis comparing how much you will spending with how much happiness it will bring you. If you think it is worth it and it fits into your budget, go for it.
Never giving into your desires will make you miserable; however, on the opposite end of the spectrum, giving into all your desires will make you broke. Find your happy-medium and practice saying no.
5) Avoid Debt
Good money habits mean keeping your debt to a minimum. If you’re trying to develop good money habits, I’d go as far as saying avoid debt altogether. If you already have some debt, make sure to account your debt payments in your “fixed costs” each month.
Only charge things you plan to pay off in full when your credit card bill is due and if you struggle with this, avoid charging anything at all until you form the habit of only buying what you can afford to pay for the same month. Being able to afford to pay for something means that you shouldn’t have to sacrifice your savings or fixed cost amounts to pay for it.
These tips are great starting points for improving your financial habits. Keep up with these habits until it becomes second nature. When you start doing these things in a frequent basis, you will notice you will start making good choices without even thinking about it. Once you’re comfortable saving your money, you can start investing it (outside of your retirement plans through work, which you should already be contributing to no matter what your financial habits are).
