1. Establish a Healthy Relationship with Money: Take it at Face Value
These money habits underlie a key takeaway from my personal (and sometimes painful) experience: the need to establish a healthy relationship with money. I used to view money as a stranger and an evil necessity. I shied away from having to look at it in-depth because I feared what I might find.
When I had it, it was my friend. When the opposite was true, it was my enemy. I think a lot of us do this. We personify and reflect our emotion on things beyond their face value.
The truth is… money is a store of value, used in exchange for services and goods. You earn it in exchange for goods you owned or services performed.
Money is neither good nor evil. Do not fear it.
2. Understand Your Spending Habits
I had chronic lower chest pain last year. Weeks passed by and several office visits later, the doctor finally diagnosed the problem: I had too much acid in my stomach, causing an inflammation that affected the chest. Up to that point, frustration ran high. I just wanted to know what was wrong with me.
Knowing the underlying problem came as a huge relief because then we could put a plan together to address it.
I felt the same way with my expenses. I make a decent income but every month it seemed as though all the money I made disappeared. Months went by like this until I decided to finally investigate my spending habits.
The investigation revealed more than how much money I spent on food or gas or shopping, it revealed the triggers beneath the exorbitant spending. I spent when I was bored, stressed, or envious of others.
Upon this epiphany, I felt shackles breaking away. It was a liberating experience.
So, if you do nothing else this year, at least run a self-diagnosis and figure out not only what you spend your money on, but also why you spent it. Then, the path ahead will pave itself and the rest of the money habits will fall in naturally. To track spending, find any of the numerous spreadsheets or apps on the subject. Or you may use the version from this website by reading How to calculate when and WHERE to retire early.
3. Create an Achievable Financial Plan to Change your Money Habits
Figuring out how much you spend provides half the answer. The other half lies in understanding your saving habit as well. To save, do you throw money into a savings account and forget about it? Do you contribute the yearly allowable retirement savings in your traditional IRA and/or company matching savings plan? Do you make speculative investments or lean toward safer options like CDs and treasury bonds?
Fully understanding these points will help you craft a plan to improve your financial lifestyle, but don’t try to take a giant leap right away.
When I first started keeping track of my money habits, I realized how disconnected I was from reality. However, I did not make an immediate about-face because I had grown accustomed to that financial lifestyle. To ease into it, I identified areas (eating out and online shopping) I could cut back on and gave myself a modest goal of increasing my after-tax saving by 1% that first month.
I had no problem saving the extra money to hit that 1% increase in savings. Now, you might think that 1% is not much of an accomplishment, but it represented a stepping-stone – a result-based possibility that gave me confidence and excitement.
That 1% victory snowballed into an obsession to reduce spending further and increase savings as much as I could. Ultimately, it resulted in the best year of savings I ever had – read 2017 in Review and 2018 Look Ahead to see how much I saved last year.
My recommendation is to start small with goals you can achieve. Those small achievements will provide you the confidence you need to develop a more aggressive plan down the road.
4. Don’t Burn Yourself Out
Once you get a taste for managing your finances and adopting great money habits, the dizzying array of financial topics such as index funds, ETFs, annuity, etc. will inundate your mind. You can easily get lost in this world and lose sight of the ultimate goal.
The point of reigning in your finances is to give you peace of mind about your financial future, not cause you anxiety attacks from the sheer amount of information before you.
As you start to get more control of your financial situation, focus your learning on one topic at a time until you understand it fully. For your initial investments, put money in low-cost funds and ETFs that with broad market exposure (here is a list of the funds I currently own). As you get more confident in the investing landscape, you may branch out to do your own thing, but most experts, including Warren Buffett, highly recommend staying in low-cost funds and ETFs for a host of reasons.
5. Don’t Let Strict Money Habits Make you Forget to Live
While focusing on your financial lifestyle, you might become obsessed and forget to enjoy life in the process. While it is important to understand and deliberately manage your money, you should not cut yourself off from the world.
Do go out to dinner. Go see that new movie all your friends have been talking. Splurge occasionally and get yourself pampered with a massage. Go on vacation.
Ultimately, life is unpredictable. Being responsible with your money provides security for the future, but life happens in the now. Do not forget to live now while you plan for the future ahead.