Your spending habits are just as important when building wealth and aiming for financial stability as earning more. It is about how efficiently you manage your money. Many of us face challenges in maintaining healthy financial habits, especially regarding discretionary spending and identifying necessary expenses.
The good news is that anyone can improve their financial health and work towards their financial goals with a thoughtful strategy and the right spending habits. The following guidelines provide a path to better financial management, offering advice on budget creation, distinguishing needs from wants, goal setting, and maintaining habits even when resistance is high.
These strategies are designed to help you manage your money more wisely and set you on a path to financial success.
Spending Habit Tips
1. Create a Budget
A budget is a financial plan that helps you manage your money. It involves detailing your income and expenses, typically a month, to help you decide how to allocate your funds. A budget is essential as it enables you to identify unnecessary expenses, save for the future, and ensure you’re not spending more than you’re earning.
There are various budgeting methods like the 50/30/20 rule, where 50% of your income goes to needs, 30% to wants, and 20% to savings and debt repayment. Utilise a method that suits your lifestyle and financial goals.
2. Needs vs Wants
Distinguishing between needs and wants is crucial for maintaining good spending habits. Needs include housing, food, healthcare, transportation, and basic clothing. Wants are nonessentials like entertainment, vacations, luxury items, and eating out.
To control spending, you should prioritise needs over wants. Whenever you’re tempted to make a discretionary purchase, ask yourself if it’s a want or a need. If it’s a want, consider if it aligns with your financial goals before purchasing.
3. Set Clear Financial Goals
Goal setting is a powerful motivator and a cornerstone of financial planning. Your goals could be short term (saving for a vacation), mid term (buying a house), or long term (retirement savings). Setting SMART (Specific, Measurable, Achievable, Relevant, Time-bound) goals makes your ambitions concrete and trackable, significantly boosting your motivation and likelihood of successfully sticking to good spending habits.
4. Establish an Emergency Fund
An emergency fund is a cash reserve for unexpected expenses such as job loss, medical emergencies, or car repairs. This fund prevents you from using credit cards or loans, which can lead to debt. Most financial experts recommend saving enough to cover 3-6 months’ living expenses. To build it, allocate a part of your income towards this fund every month until you reach your goal.
Once you have your emergency fund, stick to good spending habits. Before you reach for the funds, ensure it is an emergency. Perhaps define what is an emergency ahead of time.
5. Avoid Impulse Spending Habits
Emotions rather than needs often drive impulse purchases. They can quickly derail your financial goals and lead to buyer’s remorse. Implementing a cooling off period (waiting for a day or two) before making substantial purchases can help you make more thoughtful decisions.
Additionally, shopping with a list and sticking to it can prevent impulse buying.
6. Use Financial Tools
Technology can help simplify your financial management. Various apps and websites can help you track expenses, manage your investments, and even automate savings. These tools offer insights into your spending habits and alert you when you deviate from your budget, making it easier to stay on track.
They don’t need to be complicated. Keep them simple, making them easier to use and providing greater benefits.
7. Reward Yourself
Behavioural psychology suggests that rewards can strengthen good spending habits. When you reach a financial milestone, reward yourself with something you enjoy. This reward doesn’t have to be expensive. It could be a day at the park, a movie night, or your favourite meal.
This approach makes the journey towards financial success more enjoyable and sustainable.
Emergency Habit Tips
Below are some extra tips you can apply to spending habits and any other habits you wish to form and stick with for over a few days or weeks.
1. Prepare for Resistance
Recognise that it’s natural to resist changes, even beneficial ones. Resistance might manifest as procrastination, fear, or discomfort. When resistance arises, remind yourself why you adopted the habit and the benefits it will bring. Over time, as the habit becomes a routine, resistance will decrease.
2. Habit Stacking
This is a concept from the book Atomic Habits by James Clear. It involves pairing a new habit with an existing one, thereby using the existing habit as a trigger for the new one. For instance, if you habitually drink coffee in the morning, you could stack reviewing your budget onto it. This way, you’ll be reminded to review your budget every morning when you make coffee.
3. Visual Reminders
These are cues that trigger your habit. They can be as simple as a post-it note on your computer or a notification on your phone. These reminders keep your financial habits at the forefront of your mind.
4. Accountability Partner
This is someone who knows about your financial goals and helps keep you on track. They can be friends, family members, or financial advisors. Discussing your goals and progress with them can provide external motivation and help you stick to your habits.
5. Small Steps
Start with manageable steps to avoid feeling overwhelmed. For example, if you want to save $1200 a year, instead of focusing on the total amount, concentrate on saving $100 a month or $25 a week. Achieving these smaller milestones can boost your confidence and make your goal feel more attainable.
6. Consistent Routine
Consistency is key in habit formation. Incorporate your financial habits into your daily or weekly routine to make them a natural part of your life. Over time, these habits will become automatic, reducing the effort needed to maintain them.
In conclusion, attaining financial success is a journey that requires consistent discipline, clear goal setting, and strategic planning. The habit based strategies we’ve discussed provide a roadmap to manage your finances better, avoid unnecessary spending, and handle emergencies without incurring debt.
Remember, the key lies not in significant sweeping changes. Rather in small, consistent actions aligning with your financial goals. No matter how small, each decision can bring you closer to your financial objectives. By incorporating these principles into your everyday life, you can transform your financial habits and work towards building a more secure and prosperous future.
Image by Roman Synkevych