“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver” – Ayn Rand –
Money touches most aspects of our lives. For many of us growing up, no one taught us how to manage our money. The sooner you adopt healthy money habits, the easier life gets. Poor financial habits have far-reaching consequences in your life. It can affect your relationships, your future, and even your health.
Know where it is going
Creating healthy financial habits starts with knowing where your money is going. Knowing exactly what’s coming in and what’s going out. That gym membership you canceled six months ago should not still be showing up as an expense on your bank statement.
Keep good records of your expenses, savings, and investments. Regularly review your credit card or bank statements to ensure there is no fraud. Complete this Copy of the cashflow snapshot.
● Debt repayment (loans, credit cards)
● Luxury items (expensive clothes, the latest technology, ‘toys’)
● Health & Fitness (gym membership, health supplements)
● Hobbies & interests (club memberships, music & film, specialized magazines, events)
● Socializing (eating and drinking out)
● Travel and holidays (weekend trips, overseas travel)
● Personal development (books, courses, coaching)
● Savings & investments (stocks, shares, property, savings)
● Charitable giving (regular donations, sponsorships)
● Rent / Mortgage
● Groceries and necessities.
Where is the bulk of your money going to?
What are the three areas on which you spend most of your money? And the percentage of your net income that goes to these? Are you surprised by this? Is there a pattern? Do you feel that you never have enough? Which areas do you feel trapped? Where would you prefer to see your money go?
Is your money managed in alignment with your goals and what you value? E.g. do you spend more on entertainment than you thought you did or wanted to? What portion of income do you save? Are you living from paycheck to paycheck?
Cut down on compulsive shopping. Are you an emotional spender, shopping when you are depressed or lonely? Before spending, ask yourself, “Does this get me closer to the life I want?”
Set a Budget and stick to it
Budgeting, much like dieting does not work with everyone. I have seen it work very effectively with some people and not with others.
Based on your credit card and bank statements over the last six months what portion of your income goes to necessities and what portion to compulsive shopping?
What expenses can you reduce or completely eliminate? Can you negotiate to have some of your fees reduced? Are you paying more in bank fees than you need to?
Is using public transport instead of driving to work an option for you? You would save a lot from not having to pay for gas and parking. Can you think of creative ways to save money?
Be Intentional about your money
Set some financial goals for yourself. 3, 5, and 10-year goals. A downpayment on a home? A healthy retirement fund? Saving for your child’s college education? A rainy day fund? Travel When do you want to achieve these goals?
How much will you need for each of these goals? Be as specific as possible. Do your research on this.
How much money are you willing to contribute each month toward these goals?
Life happens. None of us are immune to “curveballs” – such as divorce, death, disability and job loss. What are your contingency plans for these circumstances? How serious are you about achieving your goals?
Set aside a regular portion of your income and have it automatically transferred from your paycheck to your investment or savings account. You don’t miss what you don’t see and in no time you will get used to not seeing or using this money and therefore not spending it.
This table shows the future value of an investment at various rates of return over four different time periods.
The higher the rate of return and the longer the time period, the greater the effect of compounding on the future value of the investment.
The point is to start now. The most important financial habit is to start as soon as possible. If possible, start now!
Build an Emergency Fund
Life throws curveballs even to the best of us. You should have about 3 to 6 months’ income saved up to deal with emergencies like car repairs, job loss, or short term illness. This should be in a savings account and not in the stock market! You don’t want to have to need the money for an emergency and see it had lost 50% of its value.
Pay off Debt
What amount of debt are you carrying? How much of it is secured against assets like a house, investments, or a car?
And, what about your unsecured debt? These tend to be at a higher interest rate. And revolving debt – like a credit card or line of credit? These have no required time to be paid off completely and as a result, can be carried indefinitely.
Pay off your revolving debt, like credit cards and lines of credit each month. That way the interest is not accumulating. The power of compounding works both ways – for accumulating wealth as well as growing debt! If you are not in the habit of paying off your revolving credit facilities, the high interest on it ensures you end up paying a few times more than the initial cost of a purchase.
Getting out from under “bad” debt
- Target one card at a time – the one with the highest interest.
- Ask your creditors for lower interest rates & transfer your balance (cautiously).
- Make two payments each month instead of one.
- Stop using your credit card.
- Seek credit counseling.
- Consolidate debt into one with a lower interest.
- Buy what you need, not what you want because what you want is to be free of the burden of debt.
- Trim one expense each day.
- Go back to your values.
No one gets rich by saving. You must invest a portion of all your income. Investing is different from merely saving. Savings is for short term goals like a rainy day fund. Investing is about buying investment vehicles that have the potential for a higher rate of growth than you would get from a savings account.
All investments fall under one of four asset classes: Equities/Stocks, Bonds/Fixed Income, Cash/Cash Equivalents, and Alternatives (like bitcoin, real estate, and art). The proportion of each you hold in an investment portfolio is dependent on three things.
Your Time Horizon
Your time horizon is how long you are willing to let your money remain invested before needing to use it.
If your goal is to save towards a holiday that you hope to take in two years, the kind of investment you need to save in for this short term goal is different from a goal that is more than twenty years away, like retirement. One of the biggest mistakes in investing is when people are invested in long term vehicles with money allocated for short term goals.
Conversely, short-term vehicles do a dismal job in helping you reach long term goals! If you are saving for retirement and still have many years to go before you actually retire, you should be looking at GROWTH investments.
Your Tolerance for ‘risk’ (volatility)
What is “risk”? When clients think of “risk” they think of losing their money. That would be their ultimate risk. From a financial planning perspective, risk has different meanings. For one, it is the degree of fluctuations (volatility) over a length of time on your money invested. Higher-risk investments have the potential to cause your principal to fluctuate more than low-risk investments.
Usually, when we refer to an investment with low or “no” risk it is one that is not invested in the market and does not cause your principal to fluctuate in value. Like everything else there are trade-offs. An investment with no risk has a very small return.
Then there is “inflation risk”. The risk you take for putting all your money into investments with no growth potential is an “inflation risk” – meaning that the returns you get from this will not keep up with the long-term effects of inflation “eating into your returns”. What a million dollars could buy twenty years ago is a far cry from what a million dollars would get you today. The real value of your investment over time will be worth much less due to the effects of inflation. Generally speaking, an investment with more volatility (risk) has greater potential for gains above the inflation rate.
If you are new to the world of investing and just dipping your toes, try to reduce the portion of your investments in volatile stocks. Educate yourself on financial matters before taking the plunge in the deep end.
While most of us like money, many people lack interest in understanding the mechanics behind money. It does pay to understand the basics. Like the different asset classes available.
Work with an advisor
Wherever you are, if you don’t have an advisor, look for one. If you have one and have not seen him for a while, call him and make an appointment to see that you are getting closer to achieving your goals. Choosing an advisor that you can trust is a huge part of a successful financial plan. Get to know your advisor and the firm. That starts the minute you walk into your advisor’s office. Listen to your gut.
Before working with an advisor do some background checks. If you are going to see a Certified Financial Planner, then his or her name should be listed with the Financial Planning Standards Council (FPSC). You can look this up on the internet. There is no shortage of stories of clients whose trust has been betrayed by their advisors and no shortage of stories of clients not having any recourse for this betrayal of trust.
While most advisors adhere to a very high standard of ethics, even with an ever-increasing set of rules put in place to ensure greater and greater transparency in the financial world, there are no guarantees that the advisor sitting across from you has your best interest at heart.
More than an accountability partner to keep you on track, a good advisor is also proactive. She can keep you abreast of any changes in rules relevant to your finances.
What to look for in an advisor:
- What are her qualifications?
- And how long has her firm been in the business?
- How is she compensated? Commission vs. Salary?
- Are the investments insured? By Whom?
- Based on your risk tolerance how far should you be willing to see your investments drop in value?
- How often is the portfolio reviewed?
- Does the advisor have a fiduciary duty in ensuring she is looking out for your best interest?
- What’s the advisor’s philosophy?
- Get full disclosure of all the costs and fees charged for advice and/or investments purchased.
- Have your advisor explain your statements to you.
No matter where you are in life right now, it’s never too late to change your financial habits. And make them more aligned to what you value and what you want most out of life. The best time to start is now. What one thing can you change right now to improve your financial health?
This post contains affiliate links. For more information, see my disclosure here.
Budgeting and managing debt, you may want to look at the complete debt relief.
Estate planning, you can read my article on Dying Without a Will.
Managing your debt, you may want to look at Dissolve Your Debt.
As a financial advisor for over twenty years, Jennifer has helped families achieve their long terms goals and develop a consciousness for wealth. Through one on one coaching, webinars, online courses, and public speaking, Jennifer empowers individuals and businesses manifest the outcomes they desire. For a consultation, please email her at email@example.com.
She has written numerous books on money: Women and Money: 7 Principles Every Woman Needs to Know to Be Financially Prepared in Any Economy and Growing Up With Money: Raising Financially Resilient Kids in an Age of Uncertainty.