It takes a lot of time and discipline to become money smart. It doesn’t happen overnight. Some people go through life never saving and living paycheck to paycheck. Learning how to be able to handle your money at an early age may not seem sexy, but it will certainly put you down the right path. But if you think you have enough time to become serious about your finances, think again. It is time to put the financial foolhardiness of your 20s behind you and become more frugal with your cash by mastering these top financial habits.
1. Actually Stick to a Budget
The overall point of budgeting is to know where your money goes in order to make sound decisions. Keep in mind that one dollar here and one dollar there adds up over time. It’s fine to spend money on shopping or fun trips, as long as these purchases fit into your budget and don’t detract from your saving goals. Knowing your spending habits will help you discover where you can cut expenses and how you can save more money in a retirement fund or money market account.
Here’s a complimentary tip to setting up and sticking to a budget: Document all spending. Make sure you write down where and how much you spend, and what that does to your budget. This may require you to keep your receipts and cross-check everything to your checking account. Over time, you’ll end up doing away with all the frivolous, spur-of-the-moment purchases and really be able to keep yourself in line.
2. Stop Spending Your Whole Paycheck
The wealthiest individuals in the world didn’t get where they are today by spending their entire paycheck every month. In fact, many self-made millionaires spend their income modestly, according to Thomas J. Stanley’s book The Millionaire Next Door. Stanley’s book found that the majority of self-made millionaires drove used cars and lived in average-priced housing. He also found that those who drove expensive cars and wore expensive clothing were actually drowning in debt. The reality was that their pricey lifestyles could not keep up with their paychecks.1
Start by living off of 90% of your income and save the other 10%. Having that money automatically deducted from your paycheck and put into a retirement savings account ensures you will not miss it. Gradually increase the amount you save while decreasing the amount from which you live. Ideally, learn to live off of 60% to 80% of your paycheck, while saving and investing the remaining 20% to 40%.
3. Get Real About Your Financial Goals
What are your financial goals? Really sit down and think about them. Envision by which age and how you’d like to achieve them. Write them out and figure out how to make them a reality. You are less likely to achieve any goal if you don’t write it down and create a concrete plan.
For example, if you want to vacation in Italy, then stop daydreaming about it and make a game plan. Do your research to discover how much the vacation will cost, then calculate how much money you will have to save per month. Your dream vacation can be a reality within a year or two if you take the right planning and saving steps.
The same is true for other lofty financial goals like paying off your debt or something more long-term like buying a home. You really need to be serious and have a plan if you’re going to get into real estate. After all, it’s one of the biggest investments you can ever make in your life and it comes at a huge cost with a lot of extra considerations. There are a lot of things you have to think about when it comes to your finances—down payment, financing and your mortgage, how much you can afford, interest payments, other expenses.
4. Figure Out Your Debt Situation
For those with student loans, mortgages, credit card debt, and auto loans, repaying debt has become another way of life. You may even view debt as normal. The truth is that you don’t need to live your whole life paying off debt. Assess how much debt you have outside of your mortgage and create a budget that helps you avoid gaining any more debt.
There are many methods to eliminate debt, but the snowball effect is popular for keeping individuals motivated. Write down all of your debts from smallest to greatest, regardless of the interest rate. Pay the minimum payment for all of your debts, except for the smallest one. For the smallest debt, throw as much money as you can at it each month. The goal is to get that small debt paid off within a few months and then move on to the next debt.
Paying off your debts will have a significant impact on your finances. You will have more breathing room in your budget, and you will have more money freed up for savings and financial goals.
One important point to note. Pay down your debt, but don’t get yourself back in over your head. It can be very tempting to see low balances on your credit cards and think it’s okay to go ahead and start spending again. That will only put you back in a rut. Control yourself and keep your credit card usage to a minimum. You may want to consider lowering your credit limits or canceling cards you may not necessarily need over time.
5. Establish a Strong Emergency Fund
An emergency fund is important to the health of your finances. If you don’t have an emergency fund, then you are going to be more likely to dip into savings or rely on credit cards to help you pay for unplanned car repairs and health expenses.
The first step is to build your emergency fund to $1,000. This is the minimum amount your account should have. By putting $50 from each paycheck in your emergency fund, you will hit the $1,000 emergency fund goal within 10 months. After that, set incremental goals for yourself depending on your monthly expenses. Some financial advisors recommend having the equivalent of three months living expenses in the fund, while others recommend six months.