Your financial health and potential for building wealth are dependent on your habits. Short of winning the lottery or receiving a massive inheritance, the best financial habits involve those little decisions you make every day and every week.
Developing these habits all at once is problematic. First, there is a steep learning curve. Second, not all strategies are equally effective at every age. The best approach is to gradually master your financial habits as you grow older. There are good money habits to build at every stage of your life.
In General: The Earlier, the Better
For the most part, the earlier you learn these financial habits, the better. If you’re able to develop habits ahead of your age, you’ll stand to benefit. There are three reasons for this:
- Habit acquisition. It’s easier to learn new things and build good habits when you’re young. If you establish good money practices early enough, it will be nearly impossible to break those habits.
- Mistake adjustment. If you employ a habit but make a mistake in its execution, it can destabilize your financial track. Making that mistake early gives you ample time to recover from that mistake and learn from it. That way, you never repeat it again.
- There’s also the power of compound interest to consider. Investing money early allows compound interest to grow that money exponentially over decades. It also prevents compound interest from working against you. A good example is in the case of debt.
In Your Teens
Your teenage years won’t come with much responsibility or many opportunities to make a significant income. Accordingly, there aren’t many financial habits you’ll need to focus on. These three are a good start:
- Saving money. Saving money is one of the best habits to learn early. In your teens, you’ll be tempted to spend every cent of your incoming paychecks. However, learning to squirrel away at least a portion of your earnings will always be beneficial.
- Tracking your spending. This is also the best time to start habitually tracking your spending. Instead of buying what you feel like, when you feel like it, write down how much you spend in each of several categories. Then, compare expenditures with income. This will provide you with the budgeting skills necessary to last a lifetime.
- Opening and using. You probably don’t “need” a credit card in your teens. However, it’s useful to have as an emergency option. Plus, it’s ideal for starting to build credit, which you’ll need in the future. Consider opening a savings, checking, and credit card account in your name. Then, focus on managing them responsibly.
In Your 20s
In your 20s, you’ll be out of school and ready to start your career so you need these financial habits:
- Checking your credit score. Checking your credit score is free. Therefore, it’s good to get in the habit of checking it regularly. Knowing your credit score is valuable for making big-ticket financial decisions. It can direct you to weaknesses in your credit report to work on improving them.
- Contributing to a 401(k) or similar program. If your company offers a 401(k) or a similar investment program with a company match, take advantage of it. Company matches are essentially free money.
- Mastering your student loans. The average college student graduates with $30,000 in debt. If you don’t start addressing it now, the power of compound interest will make that debt even harder to manage. You don’t have to pay your debt down right away. However, you should have a solid long-term plan in place.
- Minimizing your credit card balances. Have one or two credit cards you regularly use. But, it’s important to get in the habit of keeping those balances low. If you accumulate too much debt, it could take over your life.
- Living below your means. This is the best way to generate more savings over the long term. Since you’ll be spending far less than you make, you’ll naturally end up with more money to save or invest every month. Opt for less expensive housing and save money on fees and subscriptions.
- Setting short-term and long-term goals. Get in the habit of setting and following both short-term goals (like saving up for a home down payment) and long-term goals (like investing $5,000 a year). With good goal planning and execution, all your other financial efforts will become easier.
In Your 30s
Once you’re in your 30s, you’ll have established career momentum to do these:
- Establishing a comprehensive emergency fund. You should have an emergency fund in your 20s. However, by your 30s, that fund should be comprehensive. That means big enough to cover several months of expenses in case you lose your job or face some other catastrophe.
- Setting a course for retirement. This is when you’ll need to start thinking about your retirement goals. When do you want to retire? What accounts will you rely on to do it?
- Taking advantage of your credit. You’ve built and checked on your credit for the past decade or two. Now’s the time to start taking advantage of it. Buy a house you can afford or open new lines of credit to finance your business idea.
- Learning the value of insurance. Understand the value of insurance and take advantage of it for your financial interests. For example, you’ll want a good policy to cover your health, home, car, and other important assets. Plus, you may want to choose a different deductible or coverage policy that best suits your needs.
- Renting or buying (as appropriate). Know the advantages of renting versus buying in your area. There may not be a need to rush into buying a home or you may miss out on significant equity by renting. Every location is different.
- Navigating marriage and children. Consider the financial implications of marriage (if you’re planning to get married) and the expenses associated with raising children. Planning a family responsibly can mean the difference between affording a comfortable lifestyle and succumbing to debt.
- Planning for your children’s futures. If you’re planning to send your kids to college, start thinking about college savings (or a similar savings strategy for your children). For example, you may choose to open a 529 college savings plan and contribute regularly to it.
- Investing as a monthly expense. Think about investments and retirement savings as a monthly expense. These become necessary, regular expenditures for the sake of your future. Don’t let your other living or entertainment expenses distract you.
In Your 40s
In your 40s, you’ll have mastered the vast majority of important financial habits, but there are still a few to learn:
- Rebalancing your portfolio. Now, you should be in the habit of routinely rebalancing your portfolio. This includes adjusting your assets to favor the current market conditions or to help gradually reduce risk as you prepare for retirement. Slowly move toward a bond-heavy distribution of assets in your investment portfolio.
- Prepping for divorce. No matter how happy you are currently, there’s a significant possibility that your marriage will end in divorce. This event can be financially devastating to one or both parties. It’s imperative that you plan how to handle those expenses.
- Intelligently managing your assets. If you’ve had good financial habits for the past few decades, you should have significant assets to manage. These include properties, vehicles, and other investments. Make sure you’re managing them intelligently and improving their resale costs. Also, cite them properly on your taxes and sell them when appropriate.
- Splurging when appropriate. Retirement isn’t everything. By now, you should know the difference between a healthy splurge and reckless spending. However, don’t be afraid to pamper yourself every once in a while. Start doing more things that make you happy.
Beyond Your 40s
At this point in your life, your efforts should focus on maintaining the status quo and learning from your past mistakes. Additionally, it’s about concentrating your savings and investments on retirement prep. By the time you hit 50, all these financial habits should have prepared you for a stable future. There should be enough resources and experiences to help you achieve long-term goals.
Don’t regret your financial decisions. Take the time to learn and master these money habits as early as possible. And, be grateful for the discipline you exercised.