The first step toward a secure financial future starts with adopting better money habits. If you want to retire rich, save a small amount each month, limit unnecessary spending, and so on, you need to pay attention to your money habits.
With a little foresight, you can save enough for your future and be prepared for any emergency.
Like all good habit formation, saving money involves educating your mind about the importance of budgeting, creating small financial goals, and more.
In this blog post, I’ll share 18 practical tips to train your mind and develop better money habits.
What are better money habits?
Developing better money habits involves adopting practical lifestyle changes and activities so that you can achieve your financial goals and develop a healthier relationship with money. It will also improve your overall financial well-being and reduce stress related to money.
Start by identifying any bad money habits. For example, eliminate impulse purchases and replace them with positive habits such as buying only when there is a genuine need.
The tips in this article will help you manage your money better and make clear decisions when faced with important choices.
18 Better money habits to start right now
1. Start by setting financial goals
When it comes to better money habits, it starts with setting some smart financial goals. If you don’t know where to start, ask yourself if you have any financial debt, such as student loans or mortgages.
Follow these easy tips:
Focus on your financial goals.
What are your financial goals and how much money do you need to achieve them? Some common examples might be:
– Buying a car
– Buying a house
– Getting married
– Traveling the world, etc.
Set aside specific time for your goals.
When you have time-defined goals, you are more focused on achieving them. So, categorize your goals as:
– Short-term financial goals: 6 months to 5 years
– Medium-term goals: 5-10 years
– Long-term financial goals: more than 10 years.
Make goals easy to achieve.
This will help you communicate your goals clearly. So, if you want to buy a home in 2 years, which would require you to make a down payment of $15,000, you can divide that amount over 625 months, which comes to $24 per month.
2. Creating a monthly budget
A good money habit you can start is to create a monthly budget to help you track your monthly expenses, savings, and spending habits.
Tips for creating a monthly budget:
Consider your monthly income.
– How much do you earn in a month? Do you have a steady job where taxes are deductible? In that case, consider only your take-home pay.
– If you are self-employed, determine how much you earn on average in a month. If additional income is earned in the form of part-time work, social security, or child support, include it in this income.
Pay attention to your monthly expenses.
Find your credit card and bank statements, as well as other documents from the previous month, to determine how much you spend each month.
Make a list of your monthly expenses:
– Food products
– Child care
– Disposal costs
Determine your fixed and variable costs.
Fixed expenses are the ones you incur each month, such as rent, childcare, internet service, any fixed credit card payments, mortgage, and other expenses that remain the same each month.
Variable costs tend to fluctuate from month to month. These include entertainment, gasoline, food, gifts, and any unforeseen expenses.
Since your fixed expenses remain the same every month, allocate this amount to your fixed expenses as soon as you receive your salary.
Similarly, estimate your expenses if you don’t know exactly how much you should deduct from your bank and credit card statements.
3. Pay yourself first
When discussing better money habits, the concept of paying yourself is almost always mentioned. After meeting all your financial obligations, many times you are left with insufficient savings in your bank account.
So set aside a certain amount each month that can go towards your retirement fund, emergency fund, or other investments. Before setting a budget, allocate a certain amount for yourself each month.
4. Know where you should invest
Invest in a tax-advantaged account, such as a 401k or 403b. As a self-employed individual, you have options like a solo 401k, IRA, SEP-IRA, or SIMPLE IRA.
You can also use a Roth 401k or Roth IRA. In these accounts, contributions are taxed upfront, but withdrawals are completely tax-free.
Additionally, you can save money with a 529 savings plan. If you use these funds to pay for relevant educational expenses, your earnings can help you avoid taxes.
A health savings account (HSA) also offers great tax savings. If you have a high-deductible health plan, you can pay for eligible medical expenses completely tax-free.
5. Start saving early
Although this is a requirement, it helps if you start saving and investing at an early age.
In layman’s terms, your money grows exponentially due to compound interest. Therefore, starting to invest from an early age gives you a huge advantage in accumulating wealth for retirement.
But it’s never too late to start planning your future. If you haven’t started investing early, be aware that most retirement accounts allow you to make additional contributions to accumulate more for retirement.
6. Invest based on your retirement age
Let’s say you are 40 years old and plan to retire at age 70.
The longer your time horizon, the more aggressive you can be with your investments. For example, stocks, although generally subject to a lot of risk, offer the highest returns, while bonds, being less risky, provide stable returns at lower rates.
Here is a simple calculation to help you allocate your income wisely for maximum return. If you are 30 years old, subtract your age from 100, and you will get 70. Use this as a guideline to invest in stocks. The remaining amount can be invested in debt or money market funds that offer low but safe returns.
7. Know the hidden charges in investments
A smart money habit is to carefully read about fees, maintenance costs, or any hidden costs when opening a bank account or making any investment.
Not all of us are financial experts, so employees of financial institutions should explain their terms and conditions to you. If you don’t understand something, make sure to ask for clarification.
In fact, before opening an account, do some research on which banks offer the best interest rates or have good investment schemes.
8. Maintain a good credit score
Maintaining a good credit score is certainly one of the best money habits you can develop.
A good credit score can get you favorable interest rates on loans, lower interest rates on credit cards and finance charges, as well as better rates on insurance coverage.
By using your credit card wisely, paying your bills in full and on time, and putting recurring expenses on your credit card, you can gradually improve your credit score while earning rewards and cashbacks.
9. Manage money better with the 50/30/20 rule
Follow the 50/30/20 rule to better manage your money. In fact, this is a simple way to allocate your financial resources.
Allocate 50% of your income to necessities such as rent, debt payments, etc., according to your needs. Additionally, allocate 30% of your salary to discretionary expenses like entertainment, food, etc., to fulfill your desires. Finally, invest 20% of the remaining amount.
If your needs and wants exceed the 50% and 30% benchmarks, you need to adjust your spending.
10. Gain financial literacy
Learning about money can help you better understand how to improve and increase your financial literacy. These resources can be of great help if you want to develop better money habits:
11. Use automation to save money
A better money habit when it comes to saving and investing is to use automation. Automatically transferring money from your paycheck to an investment account each month will instill much-needed financial discipline.
Automated investing can help you take control of your money habits and manage it wisely. That’s why retirement plans like a 401k work because they are automatically deducted from your paycheck.
12. Identify the causes of impulsive spending
Are there certain types of products that trigger your impulse buying instincts? Do you tend to spend emotionally when you are stressed or sad?
Whatever the reason, it is important to identify and limit it. This includes not carrying your credit cards with you at all times or deleting those multiple shopping apps.
If you have the urge to make a spur-of-the-moment purchase, wait a few days after reviewing your monthly budget.
Another helpful tip is to start reading your bank statements, as this is the best way to track your spending.
13. Have an emergency fund
Sudden emergencies can arise at any time. Therefore, create an emergency fund and allocate a portion of your earnings to this fund every month.
It is also very important to have enough life insurance to cover your living expenses, your children’s education, mortgage, and other secured loans for up to 10 years.
14. Get & stay insured
In addition to the buffer fund, insurance should also be taken into account. Insurance is an important form of protection that can shield you from bankruptcy in the event of a major emergency. Make sure you have the following types of insurance if they apply to you:
– Health insurance
– Dental nsurance
– Car insurance
– Homeowners insurance or renters insurance
– Pet insurance
– Guaranteed auto protection insurance
Stay current on all policies to ensure that you and your family never face a lapse in coverage when you need it the most.
15. Plan your debt repayments wisely
Debt is terrible, so don’t let it pile up. If you have credit card debt, ask your lender if they can lower your APR (interest rate).
If you can refinance your home loan at a lower interest rate than your current loan, then go for it.
Track your debt repayment goals with a timeline and imagine how great it will be when you are finally debt-free. Plan to pay off your debt so you can focus on your goals.
16. Live within your means
We usually buy things because we want them, but we don’t really need them.
For example, when you come across a very expensive type of wine at the mall for your groceries, you logically know you don’t need it, but you go ahead and buy it anyway.
It’s okay to indulge in our little pleasures once in a while, but that “once in a while” becomes a problem when we exceed our spending limit.
17. Find a responsible accountability partner
Find an accountability partner who will help you focus on your financial goals by telling you some uncomfortable truths. This can be your close friend, spouse, or partner.
18. Good money habits for everyday life
Better money management can be easily achieved in your daily life with a few checks and balances. Follow these money-saving tips:
Cooking at home can easily save you $100 or more per month. Planning your meals and groceries for each week will save you the extra money you would spend on a food delivery service or eating out.
Pay in cash whenever possible
Use your credit card for big expenses, such as travel tickets or monthly groceries, and carry your debit card or cash for shopping.
You may reconsider making a purchase when you physically pay or see a charge from your account.
Make coffee at home
You can save more than $1 a year by making coffee at home instead of buying it at Starbucks every day.
Wash your car at home
Washing your car at home instead of using a professional car wash can save you $200-$360 a year. If your area has good public transit, consider taking the bus, subway, or carpooling to save on gas costs. Taking a trip every week also allows you to save on fuel costs.
Save on utility bills
Evaluate your utility costs and explore ways to reduce them by implementing practices promoting water and energy conservation. Additionally, if possible, consider negotiating medical expenses to reduce costs.
Cancel endless subscriptions
If you feel like you’re spending too much on entertainment, explore inexpensive activities that the whole family can enjoy. Also, unsubscribe from frequently used subscription services.
Since higher-quality items last longer, focus on buying quality rather than lower-priced items. Check prices online before making in-store purchases, and use coupon codes when shopping online. Shop at thrift stores and consignment stores for good bargains.
Final thoughts on better money habits
The hardest part of building better money habits is figuring out how to get started. By gradually incorporating some of these suggestions, you can regulate your spending and saving habits, create a budgeting system, pay off debt, and pave the way for a stable financial future.