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I’ve recently been re-listening to the audiobook, “The Power of Habit: Why We Do What We Do in Life and Business” by Charles Duhigg and started thinking about what personal finance habits would most benefit those looking to get ahead financial.
In oversimplified terms, habits are programmed routines that we’ve learned over time, are set off by a trigger or cue, and ultimately guide a large portion of our lives. If you haven’t read it, I highly recommend it.
While listening, I thought it might be helpful to identify what I think are the best personal finance habits you can start now to get ahead. To truly turn these into habits, you need to either setup a cue or use an existing cue to trigger the activity (i.e. when you pay the bills at the end of month may also be a good time to update your budget or pay down debt at each paycheck) and have a reward at the end to help reinforce the habits (maybe a special treat or updating a visual representation of your progress towards an ultimate goal). It will take time to build these habits, but once ingrained, it will keep you from having to use your limited willpower on common financial decisions.
Create a Budget and Follow It
This should come as no surprise to most that read this blog, but my top financial habit is to create a household budget and follow it. It’s hard to win the financial game when you don’t know the score.
Think about anything else you do in life. Would you just jump in your vehicle and go on a vacation on a spur? I know some people might, but the majority of us would plan and make sure everything was ready before we left like having a destination in mind, making sure the vehicle is tuned up and ready to go, reserving hotels and possibly excursions ahead of time, and having a little extra spending money to best enjoy the trip. Why would you do any different with your financial planning?
When taking control of your finances and creating a budget you first start off with the destination in mind. What do I ultimately hope to achieve in life? Then you start planning in smaller increments to get there. Each month you determine how much of your hard-earned money should go to wants, needs, and savings for the future.
The more you make and follow a budget, the easier it gets; the more it becomes ingrained as a habit.
Making a budget can be as simple as laying out where each earned dollar will be spent in a notebook to a more elaborate software like You Need a Budget (YNAB) or Mint.
To learn more about creating a budget, please visit, “How to Create a Simply, Monthly Household Budget”
Pay Down Debt (and Avoid it Like the Plague)
In some ways, debt is necessary (arguably; think buying your first car or house), but it can also be a great burden. When you take a step back and think about what debt really represents, it is a set of financial handcuffs and a big burden to your future self. Until you’re able to pay off that debt, you have lost some of your financial freedom to your lender.
Wouldn’t it be better to have full control over your finances?
The only way to successfully do this is to get out of and stay out of debt. To do this, you have to consistently say no to debt. Over time it will become a habit and mindset. Just the thought of using debt will make you cringe because you’ll know just what that debt symbolizes.
Worried about not saving enough while paying off debt? Please visit, “Is It Best to Pay Off Debt or Save?”
Automate Savings
This is one that hits home with me as I’ve often struggled with putting enough away for the future. If we waited to disperse money to savings, we would often not have the full amount we had originally budget for savings to send to the account. We’ve found, at least for us, it’s better if you pay yourself first.
I know this is an article on habits, but sometimes its just better to take the decision out of your hands to free up time and willpower for other things (like work, school, and managing the household).
To make saving as simple and automatic as possible, setup your paycheck to direct deposit the amount you’ve earmarked in your household budget straight to a savings or investment account.
Build and Maintain an Adequate Emergency Fund
This is probably less of a habit and more of a way of thinking, but in order to get ahead financially, you need an emergency fund to even out those unforeseen expenses that arise at the most inopportune times.
Everyone’s had a financial emergency; they include car accidents, medical expenses, house damage, etc. If you don’t have a little cushion to pay for these emergencies, they can quickly cause your financial situation to spiral out of control. Not to mention, the added stress and anxiety that these types of situations can present could also affect your performance at work and home.
By understanding the importance of an emergency fund and always maintaining one to a certain level, you will be developing a way of thinking and living that is conducive to healthy personal finances and wealth building.
To learn more about emergency funds, please visit, “Emergency Fund Guide: What, Why & How Much Money to Save”
Automate Bill Paying
Again, this isn’t necessarily a habit, but it is a good way to put your personal finances on autopilot.
Have you come home from work, get the mail from the mailbox, and leave it on the counter for days only to find out later you were late on a bill payment?
Or better yet, sign up for paperless billing, see the bill during work or some other activity, only to forget about it once you got home. Then when you’re paying other bills, realize you were late on that bill payment?
Why use that mental bandwidth on paying bills when it would be better served spending time with your family or getting ahead at work?
Many utilities, credit cards, mortgage companies, etc. give you the option to set up recurring payments each month. To start, I would recommend setting up the utilities that are fairly consistent from month to month, then slowly start adding other bills to the mix.
Also, I would continue checking the bills at least once a month to ensure there’s no funny business and that you don’t miss any issues that may be causing a higher bill. A few examples may include a higher phone bill (kids or spouse may be using more data or speaking more than the limit) or water bill (there may be a leak somewhere on your property or even in your house).
Practice Mindful Spending
The act of mindful spending is just being intentional with your spending decisions. For example, do you go shopping for fun or do you have a product in mind to fulfill a particular purpose at home.
With mindful spending, you take time to consider the following:
- Do you actually need the product or service?
- Will you use the product or service more than once (i.e. would it be better to rent?)
- Does it represent or is it compatible with your core values?
- Can you afford it at this time?
- Is there a more affordable option (i.e. cheaper place to buy it; different product that fulfills the same need)?
If you continue to do this with all of your purchases (or at least the big ones), you’ll find that you make better decisions. The more you approach purchasing this way, the more likely it will become ingrained as a habit.
The learn more about mindful spending, please visit, “How to Save Money Guilt Free with Mindful Spending”
Make a Shopping List
This is another way to be more intentional with your purchases. By making a shopping list ahead of going to the store, it causes you to think about what you need without all of the temptations and distractions you’ll find in store. A shopping list combats the selling tricks that retailers use to get you to buy more, by making those decisions ahead of time.
To learn more about using shopping lists for groceries, please visit, “How to Shop for Groceries on a Budget”
To learn more about the tricks retailers use to make you spend more, please visit, “20 Tricks Supermarkets Use to Get You to Spend More”
Stay on Top of Maintenance (vehicle, house, etc.)
Nothing lasts forever and most problems don’t get better by ignoring them. To get the most out of your home, yard, vehicle, etc. and prevent small financial expenses from escalating to an often-times very large expense, you need to keep up with maintenance.
For a real-life example, I had a buddy in high school that wasn’t aware you needed to change the oil in his SUV. ~20,000 miles after his parents purchased the vehicle, he was leaving high school one day when the engine started overheating. Unfortunately, what would have normally been a $160 ($40 x 4) price tag ballooned to the price of replacing an engine ($1000s).
To get started, you’ll need to have some idea what maintenance needs to be performed and when. Most vehicles come with a recommended maintenance schedule. You can find a simple home maintenance schedule on websites like Better Homes and Gardens or Art of Manliness.
Don’t Beat Yourself Up and Let Mistakes Compound
This one isn’t necessarily a habit, but a state of mind. When you beat yourself up over a mistake, you have a tendency to make more mistakes like paying more than you otherwise would have for repairs because you feel guilty or make another mistake because you’re distracted.
People make mistakes. The best thing you can do is accept that it was a mistake, fix it, learn from it, and move past it.
I find that the best way to embrace this state of mind is to have an emergency fund that keeps a small mistake from being a life changing one, and to step back and really think about how this small mistake falls into the grand scheme of things.
For example, let’s say you’re on your way to work and don’t see the vehicle three vehicles ahead of you slamming on their brakes and before you know it, you’ve run into the back of the vehicle in front of you. Nobody ends up hurt, but your car is totaled. In this example, you made a mistake, but in the grand scheme of things, the vehicles are replaceable and, as long as you have insurance, you’ll receive money for a new vehicle. Maybe you learned not to follow so closely or maybe it was a freak accident and there was little you could have done to prevent it. The worst thing you can do is let this accident cause you to make other mistakes liking buying a new car (go into more debt) or let it adversely affect other areas of your life.
Conclusion
Building positive habits is a great way to change your life for the better. One positive habit tends to lead to others, so the sooner you get started, the better. The personal finance habits listed above will help you get on track financially and hopefully allow you to do it on autopilot.
To learn more about habits, I recommend reading, “The Power of Habit: Why We Do What We Do in Life and Business” by Charles Duhigg