Getting your financial act together isn’t an overnight project, but instead takes years (even decades) of good habits and discipline. This week, we discuss the 7 habits that financially savvy people develop early on – these habits make financial mastery easy and even obvious once fully developed and can help you correct the course or get started on the right foot when it comes to money.
- They spend within their means
No matter how much money an individual makes or has access to, spending more than their earnings will always result in financial failure. While not everyone needs a zero-dollar based budget, it’s important to know how much money you have coming in any given month and what your ongoing monthly expenses are. It also helps to write down your monthly savings goals as part of your obligations and bills. There are a variety of apps and spreadsheet templates that can help you stay on track.
A person who is trying to develop good financial habits should also take some time to reflect on their spending, not simply track it. For example, just because you can afford the latest phone or gadget every year and easily budget for it, doesn’t mean that you have to. The same goes for purchasing a house. Just because you qualify for a higher loan does not mean that you are obligated to use the full amount. Try finding a mortgage level that allows you to continue saving for future goals while still giving you space. Taking a step back and questioning your motives for spending money will lead to a lifetime habit of spending within your means.
Once you have the answers to these questions in an easy-to-track, quantifiable format, you’re on your way to spending and investing wisely.
- They invest
The secret to long term financial success is simply to invest. Looking at the billions of dollars that wealthy people have access to might feel discouraging, but it’s not difficult to get started with whatever you can spare. In fact, it takes only 10-15 minutes to sign up for a robo-advisor or investment platform. With most providers offering fractional shares and direct deposits, it can be beneficial to set up automated deposits even 5-10% of your take home pay to begin with.
Other opportunities include a 401(k). If you have the opportunity to contribute to a 401(k) through your employer, you should always take advantage of company matching funds. Another retirement tool is a Roth IRA. These retirement accounts differ slightly in the technical details but overall provide tax-free growth and qualified withdrawals.
Most beginners are intimidated by the stock market and its wild fluctuations. However, the stock market has historically delivered an annual 7% return on investment. If you follow dollar cost averaging by investing a little bit every time per paycheck, you will smooth out the ups and downs.
Other asset classes to consider investing in are:
- Real estate, which provides consistent cash flow. REITs are a good way to diversify
- Bitcoin, which provides a different risk profile and return characteristics
- Commodities like gold and oil
- They plan long term
Very few people are able to build themselves up financially without being intentional about the process. They plan long term and start saving for goals like buying a house and retirement as early as their first ‘real’ job. Trust us — it’s exciting to plan for big life goals even if you’re not 100% certain what they might look like. Enjoy the design and planning (and dreaming!) portion of saving and you’ll start to see results.
- They know their money triggers
Most people grow up learning about money from their family or peers, but may unconsciously pick up biases or triggers during the process. For example, people who grow up in poverty or low class may experience more difficulty in obtaining a college education or even finding a good job post-graduation. Even if they do find a good job, their learned attitude towards money may lead to hoarding or overspending tendencies. A 2015 report from the Urban Institute found that 23 percent of children who spent at least half their childhood in poverty enrolled in postsecondary education by age 25, compared to 70 percent of children who were never poor. While roughly 37 percent of children who were never poor completed college by age 25, only 3 percent of children from persistently poor backgrounds were able to do the same.
It takes a long time, self-reflection, or therapy to consciously unlearn these triggers. If you are mindful about your spending, you may have already identified a few triggers of your own. With this knowledge, you can consciously impact your spending choices and save better for your future.
- They’re smart about debt
In the early 2000’s, many college freshmen were simply handed a credit card and as a result fell deep in the hole of consumerism and credit card debt. You may know that your credit score will impact your interest rate when applying for a mortgage, apartment, or car. But in order to be debt-savvy, you can check your credit reports each year for errors. If there are mistakes, alert the agency to correct your report. This data is used to generate your credit score, and the higher the score, the better the rates available to you.
- They stay away from lifestyle inflation
When you receive a raise, bonus, or tax refund, do you see it as an opportunity to treat yourself to things and experiences you see your peers enjoying? Research suggests, however, that new and better things don’t really make us happy in the long term. Our needs and wants don’t disappear – they only get bigger and bigger if left unchecked. And spending more money eventually stops giving us the same level of enjoyment.
Financially savvy people know that to avoid lifestyle inflation, the only category that should increase proportionally to your income is ‘savings’.
- They teach themselves personal finance
Financially savvy people weren’t necessarily taught finance basics growing up, but they took the responsibility to work on their knowledge and financial skills. If you’re interested in building your personal finance knowledge, start by reading classics like the ones we review here (link to article on personal finance books). Remember, these should be readily available in your local library!