Transforming your personal finances can be done by taking massive action. But that’s not the only way that the average person can impact their personal finances. Simple habits that we’re all capable of developing can also transform finances over time. These habits have a small but significant impact, that really adds up in the long-term.
Think Before You Spend
We’ve talked before about how impulse spending costs the average American around $324,000 over a lifetime. Most of this can be avoided by simply thinking before you spend. Things to think about before making a purchase include:
- Do I really need this?
- Will it enhance my life?
- Is there a cheaper (or free) alternative?
- Do I already have something that is similar/fulfills the same purpose?
- Will the return on this investment justify the outlay?
- Have I shopped around for the best price?
- Can I borrow or rent this item?
The last question is a great one and can help you save money, avoid clutter, and live more sustainably. Consider options such as Fat Llama or BURO. They allow you to rent things you need from people in your local community (and lend your own stuff out for a little extra income). You can rent anything from sports equipment and camping gear to electronics and cameras.
Track Your Income
This may not be necessary if all your income comes from one source, but if you have multiple income streams, it’s vital. You need to know how much you have coming in, and where from. This allows you to know exactly how much you have to spend each month, and which income streams deserve more attention. Even if you think you only have one source of income, check that again. Do you have any investments at all? An interest generating bank account? A selling account on eBay or a similar site that you don’t use often? Listing your possible income streams as well as your actual ones can encourage you to consider a few extra income generating activities each month.
Track Your Spending
Tracking how much you spend, daily and weekly, is also vital. Many people who don’t have a proper budget simply have no idea how much they’re spending, or what they’re spending on. They often don’t know if they’re spending more than they’re earning either, which is why so many of us are drowning in credit card debt.
Credit cards aren’t all bad. In fact, used correctly, they can be a good way to track your spending. If almost everything goes on a credit card it’s very easy to see exactly how much you’ve spent and what on. If you can’t use credit cards responsibly though (which generally means paying them off every month, before any interest is due) track your spending by using an app or other system. Many people find actually writing down every cent they spend is helpful. It really focuses you on the real money going out of your accounts each day.
Reflect And Plan Monthly
I wrote recently about the Japanese household budget journal, the Kakeibo. This system encourages you to sit down each month, reflect on how you used your money over the last 4 weeks or so, and plan how to use it over the coming 4 weeks. You don’t have to use a specific system, but reflecting on your spending and saving habits, assessing what’s working and what’s not, and planning your spending and saving for the coming month, is a great idea.
If you know you can use your credit card responsibly, and you decide to make that your primary payment method (because you know you can and will pay it off before its due date), then the day you check your statement and pay your bill can be a good day for this reflection and planning exercise.
Talk To Your Partner
Getting on the same page as your life partner, when it comes to finances, can be life changing. Consider setting financial and lifestyle goals together and cheering each other on. No partner? You can skip this step, OR you can buddy up with a good friend and do something similar. Plan a dream trip you’ll take together and set the financial goals you need to hit to get there.
Look At ‘Final Costs’
We all take on debt from time to time. A mortgage. A car loan. Student debt. Looking at interest rates, repayment periods and all the terms and conditions of each loan can get complicated. Get into the habit of assessing and comparing ‘final costs’. That’s how much you’ll end up paying altogether by the time you pay off your loans. It’s not the only important figure, by any means, but it’s one important figure. What’s more, it’s one many people don’t consider at all, even though it represents the true cost of everything you buy. Looking at final costs can help focus your mind on what things are really worth to you. It can help you make more logical decisions and less emotional ones when it comes to personal finance.
Set Up Savings ‘Pots’
It can be hard to save for lots of things at once and tempting to borrow from one fund to pay another when times are hard. One way to keep track of things you’re saving for is to set up different saving ‘pots’, and automate transfers to them. Some bank accounts will let you have separate ‘pots’ or sections within your account which you can assign to ‘house deposit’, ‘wedding’, ‘vacation’ etc.
You can still borrow from one non-essential savings pot to fund something essential if necessary, of course. This system will actually make it easier to look at exactly what you have, what it’s currently allocated to, and whether you can safely reduce it. If you have a healthcare crisis that’s going to mean you probably shouldn’t travel this summer, you can safely raid the vacation fund, for example.
Most of these habits are fairly easy to develop. Work on them one at a time, to boost your long-term financial security.
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Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.