The European Journal of Social Psychology published a study in 2009 that states that it can take anywhere between 18 to 254 days for a person to form a new habit. The study also stated that it could take 66 days for a habit to become automatic. This means that if you are able to follow a behavior or pattern for these many days consciously, you will be able to create a habit.
Good financial habits may take time to develop, but they can benefit you for life once they do. While the more prominent aspects of financial planning such as asset allocation, portfolio rebalancing, diversification, risk management, and more are often talked about, it is the finer details that may hold the key to overall financial health. When you start working at the ground level, you can begin your journey in the right direction. This can happen when you build good financial habits.
The brilliance about building habits is that they no longer seem like a chore. Once a pattern gets ingrained in your mind, you are able to follow through without any additional effort. So, the sooner you start building good financial management habits, the better and easier it can be for your financial security. You can also seek guidance from a professional financial advisor on which financial habits to develop and inculcate in your daily routine to improve your financial success.
Here are some good financial habits to develop in life as soon as you can so that you can reap multiple benefits forever:
1. Create a budget to keep a tab on your inflows and outflows:
The first step in every financial guide is often creating a budget. A budget acts as a roadmap for the times ahead. It offers you a clear path and direction of where you can head with your finances. It ensures that you do not overspend and lose sight of your financial standing. Moreover, it helps you pay back debt, save, and plan for the future while you enjoy life in the present. Creating a budget can be essential for all age and income groups. Right from students to CEOs, everyone can benefit from it.
When you create a budget, make sure you allot a percentage to savings, investments, and essential and non-essential expenses. Try to save at least 20% to 30% of your money. You can then divide this into emergency savings and investments for the future. The rest can be used for your essential and non-essential expenses. No matter what, do not exceed your budget and spend more than you planned. Some months may present more essential costs than you expect. For instance, you may need a sudden house repair, your car may break down, or you may end up spending more if you have guests visiting you. A slight diversion from your budget in some months of the year is normal, as long as you get back to your original plan. However, the general aim of creating a budget is to learn how to live within your means. In fact, it can benefit you more to aim to live below your means. If you earn $6,000 per month, and are able to cover all your needs with $4,000, you can save $2,000 every month. This can amount to $24,000 per year. However, if you do go beyond $6,000 and end up taking on debt through credit cards, you will owe more money in interest than you own and could find yourself in the never-ending loop of high-interest payments.
2. Increase your savings and investments at a consistent rate:
Good financial management habits like retirement planning from a young age is a critical step for everyone. When you start your career, you may be earning the lowest you ever do in your life. It is normal to contribute less to your future financial security during this time. However, the critical thing to focus on here is to consistently increase your savings and investment contributions with time. For instance, if you contribute 5% of your paycheck to a 401k account in your first job, you can increase it to 7% in your next appointment. The employer may match your contribution to a 401(k) up to a certain percentage. So, as you increase your contribution, the employer’s contribution will increase too. As of 2022, you can contribute up to $20,500 per annum in a 401(k) if you are younger than 50 and $27,000 if you are aged 50 or more. You can keep increasing your contributions until you have maximized your contributions up to the limit.
If your employer is not offering a 401(k), look at alternatives such as an Individual Retirement Account (IRA). In the case of an IRA, you can contribute up to $6,000 if you are under the age of 50 and $7,000 if you are 50 years old or more in 2022. Although there is no employer match here, it can still be a good retirement investment.
3. Avoid borrowing money for non-essential items:
Most things that you desire can be financed without the need for borrowing money. If you do need money, it means you cannot afford to buy the item, and it should hence, be excluded from your list. In the current times, it can be very easy to get lured by the sheer number of products and services in the market. Moreover, easy financing options like buy now and pay later apps, credit cards, and more can cloud your judgment at times. It can be very convenient to buy a product or service on a credit card or to opt for a loan. However, paying it back can drill a hole in your pocket. Besides, it can stall your future financial growth.
The money you pay as interest on debt can be invested for your future needs. It can grow with returns. So, try to limit your debt. Borrow money only if you have no other option and the item you are buying is essential. For instance, buying a house on loan is expected. Such a high amount can be hard to fulfill on your income. However, if you need to buy an electronic item, a luxury bag, shoes, or an artifact, you may benefit more by saving for it and then buying it.
The benefits of good financial habits learned at an early age cannot be stressed enough. Limiting your debt from a young age will ensure that you never get into the habit of borrowing money. This can also help you form a better relationship with your money.
4. Read financial books to acquire basic financial knowledge:
The world of finance is often misunderstood for being complex and hard to comprehend. While finance as a subject may seem a bit dry to some people, it is an essential topic and having substantial knowledge of it can offer you an edge. Finance is all about making your money work for you. The depths of it can be hard to understand. Trading, stock market investing, and more can require expert knowledge and experience. However, the basics are not all that hard. Contributing to a 401(k) account or an IRA, investing in mutual funds, exchange-traded funds, stocks, bonds, and more can be simple and straightforward. These days, there are several mobile apps that allow you to browse through options, understand their pros and cons, past returns, performance history, corporate decisions of the company, and more. You can simply go through these details and invest your money.
Financial books are a great place to start learning about the intricacies of finance. There are several guides in simple language and layman terms that can help you grasp topics. The more you know, the more in-depth you can go. Once you have a basic understanding of things, being up to date with newspapers and financial journals can also be relatively more straightforward.
5. Control your impulse to shop:
A lot of experts recommend waiting for 72 hours before you buy a product you like. If you still need the item and find value in it after 72 hours, you can go ahead and buy it. Impulse shopping is the opposite of good financial habits. It can coerce you into buying things you have little to no utility for. Additionally, it can also interfere with your financial growth. Small purchases may not seem as much in the moment, but the urge to buy them in a repeated pattern can amount to a significant amount. Online shopping has further added fuel to the fire. A lot of people shop simply out of boredom. The easy accessibility of almost every consumer item can make you believe that you need to buy things. Peer pressure can also add up to the tussle. However, it is crucial to focus on your needs, not just your wants. A few indulgent purchases in a year may not harm you as much, but if you make a habit of impulse shopping, you will likely find it hard to eventually control your money. It will also come in the way of your other practices like reducing debt, not using credit cards, living below your means, etc.
6. Appreciate the value of things and use your purchases for their full potential life:
Your net worth or purchasing capacity has nothing to do with how long you can or should use a product. You may be able to afford to buy a new car or a new refrigerator, but you do not necessarily need to buy it. The latest Apple phone can cost over $1,000. If you change your phone every year, you will end up spending over $5,000 in a matter of 4 to 5 years. However, if you are able to use the same phone for five years, you can save all this money and invest it.
A lot of people buy new things and dispose of their old ones because of factors like social standing, peer pressure, and more. However, if you build good financial habits like using your products to their full potential and life, you can save money and, at the same time, contribute to protecting the environment. Climate change and global warming have added a lot of stress to the world. However, sustainability does not have to start with the government. It has to start with people. If you decide to use your electronic items for as long as they work and do not buy new ones, you will practice sustainability and save money.
7. Improve your credit score:
The credit score is a reflection of your financial standing. It tells lenders how efficient you are in paying back your loans. A higher credit score can help you get a low-interest rate loan and vice versa. Maintaining a high credit score or improving your score if it goes down can help you if and when you need a home loan or an education loan for a child. This ultimately enables you to save money.
On the other hand, if you have a low credit score, you will be stuck with a high-interest rate. In many cases, it may even be hard to get a loan. So, try to keep track of your credit score at all times. An urgent financial need may crop up anytime, and you may not have enough time to make amends when it does. Thus, staying prepared is the best thing you can do.
8. Give importance to your ideas and back yourself to succeed:
If you have a business idea that you have been meaning to turn into a proper venture but lack the confidence to do so, it may be an excellent time to take the leap. One of the benefits of good financial habits learned early is the confidence you get from taking charge of your finances. When your finances are in order, you are more certain of the decisions you make and are able to take chances. If you have a viable idea, you can turn it into a profit-making business in a few steps. The internet has made it easier than it ever was to start a company or turn a hobby into a business. It is also a lot easier to reach out for help in getting started. Further, connecting with your customer base, marketing, advertising, and more can be done for free on several apps.
9. Hire a financial advisor:
Building good financial management habits may seem challenging. At times, you may also not know where to begin. A professional can help here. Hiring a financial advisor can be one of the best things you do, especially if you lack understanding and knowledge of financial planning. These professionals can guide you properly and ensure you understand the pros and cons of how you handle your money. Moreover, having a professional’s perspective can never hurt.
Good financial habits can take years to build. They may even take time to show results, but consistency can be the most vital lesson to take here. As long as you are meticulous in your ways and do not give in to your old habits or patterns, you can successfully achieve your financial goals. It can be overwhelming to follow all of these financial habits at once. So, try to start small. Adopt the habits that organically align with your thoughts and ideas. Many of these habits are also interrelated. So, as long as you are able to build one, you can automatically form the other, too. Further, if you find anything challenging, you can always hire a professional financial advisor for better assistance.
Use the free advisor match service to find an advisor who can advise you on how to develop good financial habits such as creating a budget, saving and investing your money, reducing your debt, plan for retirement, and more, to ensure your future financial success. Based on your requirements, the service matches you with 1-3 advisors suited to meet your financial needs and goals.
For additional information on steps you can take to effectively grow and manage your finances for a financially secure future, visit Dash Investments or email me directly at firstname.lastname@example.org.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.
The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice. A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.