Within the last decade, many of us have had to overcome the Great Recession, and hopefully, we can survive financially through the COIVD-19 pandemic. What really gets my blood boiling is that these events and many other situations are external factors that the average person has no control over. But, we were the ones facing unemployment, depleting savings accounts, and stress about the future or the economy.
If there is a bright side to this, it’s that in both situations, it’s highlighted the importance of taking back control over your finances so that you can live your best financial life — regardless of what else is going on around you. In order to achieve this, you first need to follow these 6 core money practices.
1. Spend less than you earn.
If there is only one core money practice, I would want you to walk away with it’s this one. After all, if you’re spending more money than coming in, how can you avoid debt or build wealth? What’s more, you’ll have less anxiety, more freedom, and financial security when you live beneath your mean.
Does this mean that you can’t enjoy the fruits of your labor? Of course not. Instead, “living beneath your income simply means that you’re spending less or equal than you’re making each month,” clarifies Deanna Ritchie in another Due article. “As a result, you aren’t putting yourself into debt by living off of plastic. And more importantly, this will help you create a more stable financial future.”
How can you realistically live beneath your means? The first step is to create a budget and stick to it. The reason? It will help you understand your income and expenses so that you’re prioritizing your expenses.
While the word “budget” itself may paralyze you in fear, it’s ultimately nothing more than subtracting your expenses from your income. If you have anything left over, then you’re on the right track. You can then put those extra funds into a savings account or to pay off any debt that you’ve accumulated.
Deanna recommends using the 50/30/20 budgeting rule that has been popularized by Senator Elizabeth Warren. In a nutshell, this means dividing your after-tax take-home income into either essential (50%), wants (30%), and savings (20%).
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In addition to a budget, you can prevent overspending by:
- Paying yourself first by automatically withdrawing a percentage of your paycheck directly to a savings or retirement account — preferably 10 to 20 percent.
- Being more responsible with your credit cards. If you can’t pay off the balance at the end of the month, don’t use your card.
- Eliminating frivolous spending by canceling unused memberships, subscriptions, comparison shopping, and knowing the difference between wants and needs.
- Don’t fall back into bad habits like keeping up with the Joneses, committing to new recurring bills like a new credit card, or not taking advantage of coupons and discounts.
- Boost your income through side hustles, passive incomes, and diversifying your investments.
2. Know and crush your debt.
While this varies depending on what demographic you belong to, approximately 80% of Americans carry some sort of debt. On average, this would be a personal debt of $90,460. Yeah, that’s tough to get ahead when debt is holding you back.
The thing is, not all debt is bad. For example, a student loan or mortgage is considered a “good” debt since it offers a decent return on investment. “Bad” debt, however, would be credit cards and high-interest loans since they can impact your credit score and offer little return for the investment.
“If you’re making a purchase that increases your debt, ask yourself how this purchase will benefit you – not just today, but long term,” recommends the Equifax team. “Is the debt you’ll incur going to provide you a lasting benefit, or is it something that will satisfy an immediate desire that you can’t afford?”
Moreover, you should do your homework and weigh the pros and cons of your purchase. If you determine that’s not worth it, then avoid the best at all costs.
Also, regardless of the type of debt, make sure that find ways to pay it off as soon as possible. Some ideas would be through consolidation, negotiating better rates, or adding a second income stream if you’re on a tight budget.
3. Set savings goals.
We all know subconsciously that we need to save money. But, humans are naturally terrible at savings mainly because it’s an abstract idea.
Rather, set a realistic goal, along with a timeframe, so that it becomes more tangible. More importantly, goals assist you in developing a plan and following it through effectively. Some examples would be:
- Short-term goals like building an emergency fund or going on a vacation. These should be planned out for the next one to three years.
- Long-term goals, which take more than four years to accomplish. These would be saving for a down payment on a piece of property or retirement.
When you do reach you, even those smaller ones, make sure that you celebrate and enjoy whatever you saved for. It will reinforce the habit and give you a psychological boost when needed.
4. Be the boss of your financial future.
Don’t take this the wrong way. But, there’s only one person who cares about your financial future. And, this individual is also the only one who has complete control of your finances.
Obviously, I’m talking about you. Now, if you share accounts with someone else, like a spouse or business partner, they also certainly have to be included. However, I think you get the jest here.
It’s your responsibility to have a plan for retirement, initiate an emergency fund, and discover ways to increase your wealth. Furthermore, you must take small steps like paying bills on time, checking your financial accounts regularly, and tracking your progress.
You also need to make sure that you’re protecting both your health and wealth. For example, if you’re self-employed and skimp on medical insurance, that could put you into serious medical debt if you need to visit the ER or have a medical procedure. So, make sure that you’re insurance policies are up-to-date.
Insurance will also protect your assets in case of events like burglary, fire, or if you’re no longer able to work. You should also store your money in high-interest savings accounts, money market funds, CDs, stocks, bonds, and mutual funds. Besides earning money, they’re often FDIC-insured and can protect you from both inflation and taxes.
And, don’t forget to keep on learning about finances. You don’t have to become an expert. However, reading books, visiting websites, listening to podcasts, and attending online or in-person events can help you avoid financial mistakes and ensure that you’ll conquer your financial goals,
5. Strengthen your money mindset.
“Money is a tool that can help open doors to a future that you get to design,” writes Lesley-Anne Scorgie, founder of the financial education company MeVest. “That’s why you need to make friends with it, and fast.”
“Shifting your money mindset to one of empowerment starts with believing that you deserve a better relationship with money, and are willing to work for it, too,” adds Scorgie. How can you get into that headspace? Kick things off by using the following proven techniques:
- Express gratitude daily for the money that you do have. It can help shift “our focus to what money can do for us.”
- Park the negative financial self-talk. An effective way to reduce skepticism on how we can improve our relationship with money.
- If applicable, have transparent conversations about your finances with your spouse to eliminate any financial stressors.
- “Adopt a small but meaningful daily money habit,” suggests Scorgie. For example, “transferring $5 to your emergency fund when you wake up each morning.” It may be small, but these can help “build positive momentum for the larger behavioral shifts.”
- Set realistic goals “for the month and year ahead .” It can help you stay on track and aid in financial planning.
“Sometimes getting mental health support is helpful when remapping our money mindset,” says Scorgie. “If you’re finding it hard to focus on the positive, or you’re simply being too hard on yourself for the current condition of your finances, reach out to a counselor.”
6. Learn from financial setbacks.
When it comes to money, it takes practice. As such, that means you will make mistakes and have setbacks along the way. But, that’s just a part of the journey.
While this can be frustrating and disheartening, use the experience as a learning opportunity in order to learn and grow.
For instance, maybe you didn’t have an emergency fund for when your car broke down. As a result, you had to use your credit card, which meant you had to put other plans on hold to pay off the balance. Hopefully, this helped you realize that unexpected expenses will always pop-up, so you need to have some sort of savings to fall back on to handle them.