We are all creatures of habits. Good habits are critical to success. Master these habits and you’ll be well on your way towards financial success. Yes, I know as we move into the New Year, the last thing you want is yet another goal or resolution. So don’t try and tackle all of these at once, but rather work on each one separately until you have it down, and then move on to the next one.
1- Track Your Spending
From apps to check registries, there are many ways to track your spending. It doesn’t really matter how you do it, as long as you make it a habit. Not only will tracking spending help you spot erroneous charges and fraud, it will make you more conscious of your spending habits. You may find out that you’re spending more than you thought on things that you don’t really value. Tracking spending also gives you a baseline for budgeting.
Once you have a good idea of where you’re spending your money, you can start budgeting. Make a plan for your money so you’re spending less than you earn. Yes, this may mean you need to make some hard choices and use some discipline to trim spending in current areas. However, spending less than you earn is the very cornerstone of financial success.
3- Ignore the Jones’ (and the Smiths, Williams and Lees)
There’s a prideful streak in us all that likes to compare ourselves to others. Practice turning this off! Don’t worry about what car your neighbor is driving, what vacation they went on last, or the size of their TV. Instead, learn contentment.
4- Seek Out Free or Low Cost Leisure Activities
Your free time is potentially your biggest money drain in your budget because your free time offers unlimited spending opportunities. Most of your bills are relatively fixed. Your free time, on the other hand, can easily cost you hundreds or thousands per hour if you let it.
Now, there’s nothing wrong with occasionally spending money on fun things. There’s just no need to default to expensive activities. Instead, be creative. Relax. Regularly do things that are free or inexpensive. Take walks, hit the library, go to the park. The Simple Dollar has a great list to get you started, but the options are limitless.
5- Look For Places to Eliminate or Reduce Recurring Expenses
When you initially start budgeting, the first place you look for savings is typically in everyday expenses. After all, although it might feel a little painful, eliminating a daily latte, or spending a little less on clothes is certainly doable. This is a good place to start. Eliminating recurring expense, however, does an even bigger favor to your budget. Eliminating these expenses lightens your budget month after month. Examples of these recurring expenses might be your cable bill, magazine subscriptions, car payments, credit card debt, or your mortgage.
6- Seek Out Opportunities to Increase Your Income and Earning Power
Reducing and being intentional abut expenses is crucial to budgeting. But there is only so much you can reduce your expenses by. The other side of the equation is your income, and this is equally important. Look for ways to increase your income. This may be by picking up extra side hustles, by switching to a higher paying job, by picking up extra skills that boost your income in your current job or in future jobs, or by developing passive income streams.
As you reduce your spending and increase your earnings, hopefully you are now spending much less than you earn. But what do you do with the rest? Although you may be tempted to spend your pile of cash, save it. And don’t let your savings be an afterthought- just something you stash away after all your income and expenses. Rather budget intentionally for it. Have goals. Give your savings a job. Keep stashes for emergencies, retirement, new vehicles, and other shorter term goals. And make it a habit to consistently increase your savings rate as your income grows.
If you make saving a habit, you’ll soon find yourself sitting on a decent pile of money. The last thing you want is for that money to sit idle. By investing your money, you can at least keep up with inflation and ideally significantly surpass inflation. Invest prudently, however. Keep your short term savings such as your emergency fund in conservative investments such as high yield savings accounts or short term bond funds. Your longer term savings, such as your retirement fund (assuming you are not close to retirement), on the other hand, can be kept primarily in higher yielding, riskier investments such as stocks.
9- Diversify Your Investments
When you invest your long term savings, one strategy to mitigate the risk while still achieving solid yields is by diversifying your investments. You could simply invest all your long term savings in the stock market. In the long run, you’ll earn some solid returns, but in the mean time you’ll have a wild ride. On the other hand, you could spread your investments out between conservative stocks, aggressive stocks, international stocks, short term bonds, long term bonds, risky bonds, REITs, etc. This way, the different investments cushion each other from price swings.
10- Re-balance Your Investments
To take full advantage of your diversified investments, you should regularly re-balance your portfolio. Have a target ratio of your different investments. Each time you re-balance you sell a portion of the investments that have done well and buy more of the investments that have done poorly to bring your portfolio back to your target ratio.
For example, you might aim to have a 70-30 ratio of stocks to bonds. But perhaps stocks have done well lately, so when the time comes to re-balance, your stocks now make up 80 percent of your portfolio, while bonds only make up 20 percent. You’d now sell stocks equal to 10% of your portfolio value and use the proceeds to buy more bonds. By doing this, you increase your chance of selling investments at their peak and buying them in their dips. The Mustard Seed Money blog has a great post further explaining the reasoning behind re-balancing.
11- Pay Your Credit Card Bill In Full
Your credit card can be a valuable tool, if you use it right. This means only spending within your budget, and then paying off the credit card in full every single month. Don’t skip a month. Ever. If you do, you start wading into debt spiral territory.
12- Check Your Credit Report
Thanks to recent laws, you are now entitled to one free annual credit report from each of the three credit bureaus. This is more valuable than you might realize. Your credit report is likely the first place you’ll spot identity theft. Each of the three reports will look very similar, so spread them out over the year. Every four months, request one of your three, allowing you to monitor your report throughout the year. The only legitimate site to request your credit reports is annualcreditreport.com.
13- Keep Learning
All these habits touch on some of the biggest financial pitfalls, but there are so many other frugal habits to implement! And once you feel you’ve mastered all these habits, look for other ways to improve you finances. Don’t take this to the extreme and drive yourself crazy pursing perfection, but always be open to new ideas. As a start, check out the list of Things Smart People Do to Save Money, a compilation of frugal tips from the personal finance blogosphere. Read other blogs, such as Mustard Seed Money and The Simple Dollar. Also read books like The One Page Financial Plan or The Index Card, always looking for ways to hone your finances a little more.
14- Remember that Life is about More than Money
As you practice all these habits, the last habit you should practice is keeping money in perspective. Yes, money is important. When you have money problems, they seem to permeate every other area of life. But don’t let money define you either. Don’t let money consume you. Recognize when you have enough, and be happy.
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- While I do strive to only write accurate information and dispense valuable advice, I am not a licensed financial adviser. All information is based solely on my personal experience and personal research and should be treated as such. Find out more.