The first step towards a secure financial future starts with some practicing some better money habits. If you wish to retire rich you have to take note of your money habits like saving small amounts every month, curbing unnecessary expenses and so on.
With a little foresight on your part, you can save better, have enough for your future as well as be prepared for any unforeseen emergency.
Like forming all good habits, saving money is also about training your mind about the importance of budgeting, creating small financial goals and so on. In this blog post I will share 18 such practical tips and tricks to train your mind and develop better money habits.
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18 ways to develop Better Money Habits
These tips here will guide you to handle your money better and gain clarity when you undertake any important financial decision.
As someone who became debt-free recently, I understand how difficult it can be when you are struggling financially but have no clue of getting out of a financial funk.
There are so many little ways you can save up by making small changes in your lifestyle. This post will shed light on the importance of financial discipline for your mental peace. So let’s get going!
Start With Setting Some Saving Goals
When we speak of better money habits, it starts with setting some smart financial goals. If you don’t know where to begin ask yourself if you have any financial liabilities, for example, paying off that student loan.
Follow these 5 quick tips:
Setting Financial goals: Ask yourself what the materialistic things you want in life are and how much money you would need to accomplish that. Like buying a car, buying a house, getting married, traveling the world and so on.
Categorize your financial goals into as short-term, mid-term and long-term goals. Like short-term financial goals can be for six months to five years while mid-term goals can be from five to 10 years and finally long-term financial goals can be more than 10 years.
Have a specific time-frame for each goal which would help you in being clear about your objectives, like if you want to purchase a house within 2 years which would require you to make a down payment of $15000, you can divide this amount into 24 months which comes to $625 per month.
Understand the difference between Needs and Wants
The concept of needs and wants is the basic foundation for creating better money habits. When you understand the difference between these two you will have a better grasp at managing money.
Needs are defined as those requirements which are necessary for your survival, like food or shelter while wants are those requirements which you create and these are mostly unnecessary expenses, like dining out or entertainment etc.
Most time we purchase things only because we want them but don’t actually need them. Like while buying for your groceries in a mall you come across a very expensive variety of wine, logically you know you don’t need it, but still you go ahead and buy it.
I am not saying it’s wrong. We all love to give into our little indulgences once in a while but it becomes a problem when that ‘once in a while’ becomes frequent and we go overboard or fall into the trap of impulsive shopping.
The best way to curb your unnecessary needs is by creating a monthly budget and tracking your expenses.
Create a Monthly Budget
A monthly budget is a necessary financial tool that helps you to track your monthly expenses and savings as well as note your spending habits. Here are some quick tips you can follow while making your monthly budget.
Note your monthly income
How much do you earn in a month? Do you have a fixed job where you taxes are deducted? In that case take into account your take home salary only.
If you are self-employed determine how much you make on an average in a month. If there are additional incomes in form of a part-time job, social security or child support include those as well.
Calculate your monthly expenses
Make a list of your monthly expenses like
- child care
- utility bills
Find your credit card and bank statements as well as any other receipts from the previous month to determine how much you spend monthly.
Determine your fixed and variable income
Fixed expenses are those expenses that you incur each month and their amount stays the same each month like rent, childcare, internet service, any set credit card payments, mortgage and any other expenses whose monthly amount remains the same.
Variable expenses are those which tend to fluctuate on a monthly basis like,
- Dining out
- Buying Gifts
- Any unforeseen expenditure
Since your fixed expenses are likely to remain the same each month, you need to allot the amount from your income towards your fixed expenses.
Likewise assign an estimated amount for your variable expenses. If you aren’t sure how much money you should allot go through your bank and credit card statements to have a rough estimate.
Along with this I highly recommend you to use my monthly budget planner from my free resource library to track your finances better.
Along with this budget planner you can also lay hands on related planners like meal planner, daily and weekly planner, a debt repayment tracker to be better equipped to manage your money.
Start saving early
To retire rich you have to start saving early, it’s not a prerequisite but it helps if you start saving and investing money early in life. In my post about money saving tips for millennials I have spoken about the magic of compound interest when you invest your money.
In layman terms your money increases exponentially due to compound interest so if you start investing from an early age you will have a huge advantage in wealth accumulation when you retire.
You’re making a huge mistake if you believe you don’t earn enough to start investing today. You’re wasting precious time if you wait for that better job or pay raise or that huge bonus before beginning to invest.
Also it’s never too late to begin planning for your future. If you didn’t start investing early, know that most retirement accounts do allow for additional contributions to accumulate more for your retirement.
Some Book Recommendations
If you are eager to learn about investments and personal finance I really recommend reading David Bach’s The Automatic Millionaire.
If you wish to strengthen the foundations of personal finance and start saving more money then this is the best book to get started and understand the basic concepts on how to be better at managing your money.
The main thing that this books stress on is that you should save at least 1/8th of your total income (before taxes). If you have debt (other than a house), pay that off and then stock your money in:
- your 401k
- Roth IRA
- SEP IRA
- and taxable accounts
Use automation to save money.
When it comes to savings and investments most of us easily tend to procrastinate so the best strategy is to use automation. Automatically transferring money each month to an investment account from your salary will instill in you a much needed financial discipline.
Automated investments can keep you money habits in check and manage it wisely. This is why retirement plans like a 401k work, because it is deducted from your salary automatically.
Know where to invest
Invest money is under the tax-advantaged account, like a 401k or 403b. As a self-employed person you have options such as a Solo 401k, an IRA, SEP-IRA, or a SIMPLE IRA. You can also use the Roth 401k or Roth IRA, where tax on contributions is paid up front, but withdrawals are completely tax-free.
Additionally you can also save money with a 529 savings plan, which helps your earnings to be tax-free if you use the funds to pay for qualified education expenses. A health savings account or HSA also offers huge tax savings, if you have a high deductible health plan, you can pay for qualified medical expenses totally tax-free.
Invest based on your retirement age.
Suppose you are 40 and you plan to retire by 70 you have a time-horizon of 30 years to keep investing.
The longer your horizon the more aggressive you can be with investments, if you wish. Like stocks are generally very risk but these give the highest returns while bonds are less risky but they offer fixed returns with lower rates.
Here is a simple calculation to invest your income wisely to get maximum returns. Like if you are 30 years old, subtract your age from 100 and you’ll get 70, use this as percentage to invest in stocks, and the remaining can be invested in bonds or money market funds which gives you low but safe returns.
Know The Hidden Charges In Investments
When you open a bank account or make any investment read carefully their charges and maintenance costs, any hidden costs, the rate of interest offered, investment schemes available, the expected returns.
If you don’t understand something ASK. Not all of us are financial nerds so the employees of financial institutions are bound to explain their terms and conditions to you. In fact before opening an account do some research as to which bank is best suited for you.
Manage Money better with the 50/30/20 rule
To manage your money better follow the 50/30/20 rule, it is actually quite a simple method of allocating your monetary resources.
Allocate 50% of your income towards your needs like rent, debt payment etc., while 30% of your salary should go towards your wants like entertainment, dining out etc. and 20% of the remaining amount should go into investments.
If your needs and wants go over this 50% and 30% mark, you need to make adjustment in your expenses.
The 52-week challenge of Saving Money
This is a really cool concept of being creative with your money saving strategies. In the 52-week challenge you start by saving $1 in the first week, $2 next week, $3 in third week.
As each week passes by you keep increasing the amount by a dollar each until by last or 52nd week you gain a total of $1368! How awesome is that!
You can take this challenge individually or as a family. Also you don’t have to be in the US to take this challenge, you can literally live anywhere are do this. You may also modify this challenge as per your convenience.
Pay Yourself First
The concept of pay yourself is necessary since most times after you are done with all your financial obligations you are left with inadequate savings in your bank account.
So each month set aside a particular amount which can go to your retirement fund, emergency fund or travelling or investing further. Before you set your budget, set a particular amount each month for yourself. Make this non-negotiable commitment to yourself.
Identify Triggers Of Impulsive Spending
If you are an impulsive buyer you must identify your trigger points. Are there certain types of product which trigger any impulsive shopping instinct?
Is the sale season heavenly bliss for you or online shopping is your safe den? Whatever triggers you to spend more or rather recklessly identify and curb it.
Every bank provides bank statement to its customers every month. Make it a habit to read bank statements every month. You can find out your spending behavior best by reading your bank statements.
Pay Your Debts As Soon As Possible
Debts are terrible so don’t let it accumulate. If have credit card debt ask if your creditors can lower your APR (interest rate). If you can refinance your home-loan at a lower interest rate than the current one then go for it. Track your debt-payoff goals with a timeline and visualize how good it will be when you are finally debt-free.
How To Manage Money Better In Daily Life
Better money management can be done easily in your daily life with a few checks and balances in place and once you see that pile of cash growing you will be wiser in handling your money. Follow these quick money saving tips money.
Cooking meals at home can easily save you $100 or more per month. Planning your meal and grocery for every week will save an extra buck; you would spend on a food delivery service or visit to the grocery store. To help you my resource library has a free meal planner you can use.
Pay with Cash Whenever You Can
Use your credit card for big expenses, like buying travel tickets, or buying monthly groceries and for shopping purposes carry your debit card or cash. When you hand out hard cold cash or when the amount gets automatically deducted from your account you will be inclined to control you urge to shop impulsively.
Prepare coffee at home.
You can save over $1,000 a year, by brewing coffee at home instead of buying it from Starbucks every day.
Wash your car at home.
Washing your car at home in your driveway instead of getting professional car wash can save you $200 to $360 a year. If your area has good public transit, commute on the bus or subway, to save on fuel costs consider carpooling. Also running your errands into one trip every week allows you to save on fuel costs.
Turn off lights and gas
Be a good Samaritan and save these scare resources when you are not using these. Remember to switch off lights, turn off water tap when not in use.
Cancel endless subscriptions
How many do subscriptions do you need? Gym, yoga, Pilates, Netflix, Amazon, endless magazines and newspaper subscriptions, you don’t need it!
Be wise with your shopping
Focus on purchasing higher-quality items as they actually cost less per use than lower-priced items, because they last much longer. Check prices online before purchasing something at a store and use coupon codes when shopping online. Also if possible shop at thrift stores and second hand shops to drive a good bargain.
Note Money Habits of Rich People
The best money habits can be learnt from the wealthy people. Most of them live extremely modest lives where they don’t make a display of their wealth; they live frugally and invest wisely. Like for example, Facebook CEO Mark Zuckerberg and US investor Warren Buffet have a fairly simple lifestyle.
Final Thoughts on Better Money Habits
The singular most important factor in saving money is to make an effort and it starts with you. So those were some of my tips on cultivating better money habits, hope you found the post useful. Don’t forget to your free budget planner and meal planner from the resource library.