Focus On Your Financial Habits, In Order to Reach Your Financial Goals
Today is the first day of the rest of your life. What are you going to do with it?
Your answer probably has a lot to do with the goals you have. Separate from your answer, the actions you will take today are less about your goals and more about the habits you’ve developed.
At Bills.com, we write about consumer finance issues. We aim to help you improve your financial health. Therefore, it’s natural to narrow the focus from general goals and habits, to your financial goals and financial habits.
There is nothing wrong with having financial goals in mind and a financial plan in place to reach them. In fact, it is good to have a plan. Without a plan, it is hard to have a concrete direction, and it’s difficult to measure if you are succeeding. However, where the rubber hits the road is the daily habits you develop and maintain. Without small, habitual, basic steps in place, your goals are likely to remain unachievable.
“We don’t rise to the level of our goals, we fall to the level of our systems.” This James Clear quote was shared with me by a mid-20’s man, the son of one of the farmers at a local farmer’s market. He stressed the importance of habits over goals. I started thinking about what he said in terms of improving financial health.
When it comes to building good financial health, you may know exactly what you need to do:
- Control your spending
- Borrow intelligently
- Save for the future
- Plan so you are protected from unexpected expenses or loss of income
Having Good Financial Habits Doesn't Guarantee Financial Success
Let's say that you have good financial habits, that you are taking the right steps, but are not satisfied with how things are going. You are frustrated that you are struggling even though you are the most frugal shopper who never buys anything you don’t need, pay all your bills on time, use credit wisely so you don’t carry any debt, maintain an excellent credit score, and have built a small emergency fund built by putting a small amount away over an extended period of time. Anyone looking at you would say that you have good financial habits. But each month could still be a struggle to get through. The fact is, the effect of taking these steps is heavily dependent on your income.
You look for advice and read about the “50-30-20” rule. Good financial health, it says, is taking your after tax income and devoting 50% to needs, 30% to wants, and 20% to savings. Seems like great advice, IF you can afford it. But spending 30% of your income for wants is a cruel joke if you have trimmed all your wants from your budget and still struggle to get by.
Success is Moving One Step Forward
A key decision is not measuring your success against others, but taking an accurate snapshot of where you are and figuring out what you can do to make things better. Redefine success. It sure as heck isn't keeping up with the Smith-Joneses. Make success mean that you are taking concrete positive steps to improve your situation.
The reality is, however, that most of us are not taking all the basic steps we can or establishing the good financial habits we need. Wherever you are starting, there are almost certainly steps you can take to improve your situation. The exact steps you need to take depend on where you're starting and what means you have. There is no one-size-fits-all plan, no single set of goals for you to take on. It's up to you to make your own priorities.
But making the priorities is not enough. Think about times you made New Year’s resolutions. If the resolutions aren't followed by the necessary, concrete, repeated steps to make it happen, you're likely to make the same resolutions when the next year rolls around.
8 Financial Habits to Put in Place, or 11, Depending How You Count
Here are a list of financial habits you should put in place. Maybe you are already doing some. If so, great, If not, now is the time to get started.
- Keep a budget - It sounds like a pain in the behind to take the time and effort to track your spending and income. It isn’t. There are a number of budget apps that make it easy, and many are free. Use one and see how easy it is to categorize your spending, so you can see in black and white areas were you are overspending.
- Put money in savings - If I had $1 for each time I read that over 40% of Americans can’t afford to pay for a $400 emergency expense out of savings, I would pretty much have $400 saved up. Whether you use an automatic payroll transfer to a savings account; an app that takes each purchase you make and deposits the difference between the cost and the nearest dollar, or take your tax return and put in savings, choose a regimen and stick to it.
- Save early and save often - A riff on #2, start saving out of your first paycheck. Let the wonder of compound interest work for you.
- Check your credit regularly - There are a variety of ways to check your credit for free. EVERYONE is entitled to one free report from each bureau every 12 months, at www.annualcreditreport.com. Identity theft is common and you may not find out about it unless you pay attention. It is also worthwhile to check for errors, as a large percentage of reports have inaccurate information that can harm your score.
- Don’t throw money away - There are a variety of ways you can throw it away (other than wasteful spending covered in point #1). Here are just a few behaviors to avoid, and an easy habit you can put in place:
- Pay bills late- No excuse for paying a late fee, if you have the money to pay the bill. New Habit: Use an online bill-pay service to easily schedule payments and monitor your accounts.
- Pay heavy interest on purchases- If you are carrying credit cards and paying minimum payments, you are paying way more than the sticker price for your purchases. Even “bargains” end up being expensive this way. New Habit: Be honest about your ability to pay off any charge purchase and consider the real cost of your purchase before buying.
- Not file taxes when you owe money- Owing the IRS, the agency with the biggest with the biggest whipping stick and fastest and strongest fingers, can cause financial havoc. If you don’t file on time, the IRS penalty is steep, 5% per month, to a maximum of 25% of your tax bill. Not filing is a fast way to toss money out the window. New Habit: File on time, even if you can’t pay the taxman when the bill is due.
- Forget to comparison shop- For any big purchase, when you buy insurance, or when about to apply for an auto, personal, or mortgage loan, SHOP AROUND. Amazingly, when it comes to the biggest purchase most people make, buying a home, a CFPB survey found that 47% of people spoke only with one lender, costing themselves lots of money.
- Take free money- If your employer matches your 401(k) contributions, take advantage. If you know you are going to buy something, take a minute to see if the store you want to buy it at offers a coupon or discount. If using one credit card can get you 5% back, use it (assuming you are paying the balance in full).
- Avoid impulse shopping- When you see something you want, consider if that day is the only day that you have a chance to buy it. 99% of the time, it isn’t. Delay your purchase. Take a step back. Removing yourself from the immediate reinforcement loop of “want it, buy it” reduces the chances that you are going to spend hard-earned money wisely. When shopping online, before you hit the button to buy, put down your phone and back slowly away from it.
- Think about your purchases in terms of the labor cost- When my mom had a job as a teenager, she earned 60 cents an hour. Yes, that was a long time ago. When she was going to spend money, she would say to herself is that 10 cent Coke (Yes, that was a long time ago!) worth 10 minutes of work? Think about your pay, how hard you worked for it, and how much time goes into that expense. Being thoughtful this way may put the brakes on purchases, even for things you want.
Don't Bite Off More Than You Can Chew
If you look at the list above and see a whole number of areas where you need to establish new financial habits, don't be overwhelmed. Take things step by step. Pick the one or two that jump out at you as important and achievable. Don't underestimate the importance of putting a habit in place that is achievable for you, and set yourself up for success by thinking about the type of reinforcement that will make the habit stick. Hold yourself accountable by whatever means works for you. Do it together with a buddy. Make a social declaration. Make some of the actions automatic, once put in place.
Perhaps most important, learn from your mistakes. No one makes every right decision. If you make a bad choice, don't beat yourself up, but be honest with yourself what caused you to make the bad choice and be thoughtful, so you can recognize the same situation coming at you again and and avoid making the same bad choice. If you can make that a habit, there is nothing you can't do.