Developing a healthy habit doesn’t happen overnight. Experts estimate it can take anywhere between 18 to 254 days to form a new habit and implement that habit into your daily behavior. In terms of developing healthy financial habits, that 18-254 day timeframe could mean the difference between savings hundreds and saving thousands.
Improving your financial health can sometimes feel more arduous than improving your physical health, as resources are not always as easily available, like a sudden bonus or incremental raise. However, there are steps you can take to establish and maintain good financial habits and convert them into daily practices. Below we uncover 7 steps to developing healthy financial habits.
- Plan a Monthly “Finance Night”
The first step in developing healthy financial habits is understanding what you’re bringing in and what you’re giving out, meaning how much income are you bringing in monthly and how much are you paying out in bills, donations, etc. Tracking your spending in categories, such as groceries, food & entertainment, home expenses, etc., can help you understand where the bulk of your monthly income goes and whether you can cut down on any unnecessary spending.
A good way to stay on top of this is to dedicate one night (or afternoon!) to evaluate your personal finances. Pick a tracking method that works for you, like an excel spreadsheet or an app like Mint or YNAB, and track each incoming and outgoing dollar. By the end of your session you’ll know where your finances stand and whether you need to scale back on spending the next month or you’re on pace to increase savings contributions.
- Commit to Paying On Time
This seems like a no brainer, but roughly 1 in 4 Americans don’t pay their bills on time, resulting in late payment fees and interest rate penalties. Not paying your bills on time is a good way to throw your hard earned money out the door – or directly into the pockets of major banks.
Instead, take the time to set up recurring automated payments whenever possible, like for a fixed car or mortgage payment. If a charge often fluctuates, i.e. cable or a credit card, make it a point to pay your invoice as soon as you receive it in the mail.
Paying your bills on time not only protects you from unnecessary fees, it also plays a significant role in your credit score. So, hop on your bank’s website and set up those automatic payments or commit to paying the invoice upon receipt.
- Pay Over the Monthly Payment
It may not always be possible, but paying even slightly over your monthly payment can significantly reduce your interest payments over the life of the loan. This is where the monthly financial planning meeting can give you keen insight into what’s paid, what’s outstanding and what wiggle room you have to put dollars toward other expenses.
Let’s say at month end you have $500 left over after bills and savings. Consider taking a portion (or the entirety) of the leftover money and putting it towards a loan, like your mortgage, credit card, or car payment. Paying off the loan faster won’t result in lesser principal payments, but it will reduce the life of the loan, meaning you’ll have less payments overall.
How will you know which loan to pay off first? Look to either the high-interest rate loans or the loan with the lowest balance that is closest to being paid off. Another consideration is to double your payment for the month. This not only helps you pay the loan off faster, but it positively impacts your credit score.
- Set Financial Goals
Now that you know where your money is going, how much you’re taking in, and working hard to pay off your loans faster, it’s a good time to set some financial goals. Financial goals are completely unique and specific to the individual and what life goals they have for themselves. A married couple in their 30s may have the financial goal of retiring at 55 and buying a second home, while a single college student may have a financial goal of paying off their student loans within 5 years of graduation.
For some, financial goals are clear and attainable, while others may be unsure of where or how to get started. Partnering with a financial advisor with a holistic approach to financial planning can help you distinguish what goals are feasible and worth your commitment.
Don’t wait until the new year to start goal setting, part of developing healthy financial habits is the intention of starting today. Your goals can be as simple or complex as you want, but they should be SMART – specific, measurable, attainable, relevant, and time-bound. Otherwise, you’re simply creating a path to nowhere.
- Be Hyper Focused on Retirement Savings
If you’ve determined which retirement account was right for you, now begins the journey of finding the right monthly contribution. Experts recommend contributing between 10-15% of your income each year. Because retirement accounts come in all shapes and sizes, minimums and maximums, there are a lot of nuances. Instead of providing hard and fast guidance, here are some recommendations that can also be made into healthy habits:
- Review your retirement account statement monthly to assess your investments and return
- Consider upping your contribution after any salary raise or investing your yearly bonus
- Diversify your investments, like contributing to before and after tax accounts
- If offered by your employer, contribute the maximum amount that they will match (free money!)
- Don’t cash out early, no matter how many important things you need to pay for
- Consider risk and proximity to your retirement stage
- Stash Away a Nest Egg
Nest egg, safety net, whatever you want to call it , it’s a key piece in developing healthy financial habits. Emergency funds should cover at least three to six months worth of expenses, from mortgage payments to groceries, so the target amount is completely specific to you. When creating an emergency fund, analyze your monthly expenses and set a goal on the ideal amount you feel comfortable storing away. You may find that the three to six month rule feels low and if that’s the case you can up the goal to something that feels more secure.
So, how do you start savings for an emergency fund? Although the mention of “emergency” might feel like it’s an urgent need, there’s no need to allocate all of your monthly overage to the fund, although it can’t hurt either.
Step one is starting a fund. That can be in the form of a savings account at your local bank, certificate of deposit (CD), or a money market fund. Wherever you plan to store your money, it’s important that it can easily and quickly become liquid in the event of an emergency.
Next consider how you’re funding it. You can set up recurring automatic withdrawals or manually transfer money from your checking to your emergency fund at the end of each month – the choice is yours. Just be sure this healthy habit is factored into your monthly expenses or your consciously working towards building up the fund through other avenues.
- Give a Little Back
This may seem counterintuitive, but it’s important to nurture a habit of giving. It can be to your church, a charity, or even your favorite cause. It can be by donating time, money or resources. Giving provides purpose and research has shown that doing so can increase your health, longevity, and happiness.
You don’t need to donate your entire nest egg, but sacrificing your hard earned money for the sake of others promotes generosity and good will. If that wasn’t enough, you can deduct up to 60% of your adjusted gross income via charitable donations.
There you have it, 7 ways to start developing healthy financial habits that can help move the needle. There are plenty of healthy habits that you can implement into your daily, monthly, or yearly routine that can help you reach your financial goals, but the key is to start slow and analyze progress continuously.
Starting something new with the goal of making it a ritual can feel overwhelming. An experienced financial advisor, like Prudent Investors, can help you kick off your journey by providing personalized financial guidance and peace of mind. Get started with an advisor who provides advice and investment decisions based on what is best for you and your financial needs by scheduling a meeting today.
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