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Growing up, I was pretty bad with money. Money just came in and out of my life without really staying for longer than a few minutes. The only purpose for money that I saw was to buy myself whatever I wanted, whenever I wanted.
My mom, who is the saver in my family, tried to instill good saving and spending habits but it took me a long time to see the wisdom in what she was trying to teach us. My first job was when I was sixteen as a sacker in a grocery store, helping people bag their groceries and take them to their car.
Every cent of the money I earned in that job went toward clothes, makeup, eating out and many other unmemorable expenses. As I got older and got more experience, I started working better-paying jobs but at the end of the day, I still did not have much to show for it. When I started working at the mall, I use to joke that there was no reason for the store I worked for to pay me since I just turned around and spent my entire paycheck on clothes and shoes at the store.
Saving money the smart way
It took me many years and some painful experiences before I finally saw the light and turned my finances around. Spending money was such an ingrained habit for me (and it still is) that I have to actually watch myself or before I know it, I would have spent $200 on new clothes online.
When your default mindset is spending money, you have to work hard to cultivate a saving mindset. Having lots of experience in that area, I think that it’s entirely possible and the benefits far outweigh the work you have to put into changing your outlook. Over time, I have come to realize that there are certain habits that will definitely make saving money and changing your money mindset a whole lot easier.
The money habits below are not necessarily easy. It may take you months or even years to truly change your mindset and make these your default habits but the effort is totally worth it. If you follow the advice below, it will change not just your finances but also your entire outlook on life.
You will experience a mental freedom from money worries that will allow you to dream big and take action. Knowing that you have the freedom that comes from having money as a safety net, you can have the confidence to pursue your dream career or create a better work/life balance.
Money habit 1: Never owe money
After paying off $158,000 in debt, there is nothing better than the feeling of being debt-free. Every piece of debt that you owe weighs you down and means that part of your paycheck is already promised to someone else before you even earn it. Not having any loans or other debt means freedom. The freedom to spend your money as you would like. The freedom from payments and late fees.
If you don’t follow any of the other advice in this post, this is the big one. Make up your mind that you will not owe money to anyone for anything. That means paying off all loans and credit cards as soon as possible and not getting in any new debt. If you have a big purchase coming up, save up money for it and buy with cash. If you can’t pay for it cash, you can’t afford it.
The only exception to this rule would be buying a house. In many cases, saving up to pay for a house in cash would take many years depending on the area of the country that you live in. But just because you take out a mortgage does not mean you should just keep the debt around for the full length of the loan term. Go ahead and make extra payments and pay off your house early.
In some cases, it may make sense to have a mortgage for tax purposes but in the majority of cases, the peace of mind associated with paying off the debt far outweighs any tax advantages. Until you pay off your house or your car, you don’t own them. If you lose your job tomorrow and can’t make the payments, you will lose your house as many people found out during the Great Recession. Paying off your debt is the only way to truly own the things that you buy.
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Money habit 2: No monthly payments
Avoid monthly payments if at all possible. Every monthly payment that you sign up for means that you have automatically spent your paycheck before it hits your bank account. If you have the option to pay a monthly payment vs own the item outright, always go for the option of owning it outright (unless it’s a house).
Payments also usually mean paying interest, which is something you should avoid at all costs. It’s much better to pay $10,000 cash for a car than to sign up for monthly payments on a $25,000 vehicle. If you have a big expense coming up, start putting money aside for it before you have to buy it. Plan ahead and save the money in a separate account so you don’t have to get a loan and sign up for monthly payments.
For any monthly payments that you have to pay like a cell phone bill, find the cheapest alternative that fits your need. For example, don’t sign a two-year contract with a cell phone carrier so you can get a discount on a cell phone or a monthly payment option. There are so many great pre-paid options out there such as Cricket, Republic Wireless, and Ting to name a few. Get a used phone and choose a pre-paid carrier that will allow you to pay month-to-month with no cancellation fee. Your wallet will thank you.
Money habit 3: Track your finances
The importance of tracking your finances cannot be overstated. This is not the same as having a budget although creating a budget is the next step and one that I would highly recommend. But on the most basic level, you should track your finances and know how much you make each month, how much you spend, what you owe and where all of your money goes.
The best way to track your finances, in my opinion, is by using a service such as Personal Capital. It’s helpful to see all of your accounts, your spending and your savings all in one place. You can also sort your spending by category and get a better idea of how much of your monthly income goes to things like housing, transportation, food, entertainment, etc.
If you don’t track your finances, you don’t know where your money is going. You are left scratching your head at the end of the month at the magic trick that caused all of the money to disappear from your bank account. Having a realistic view of where all of your money goes can really help you get a handle on your finance and make a long-term plan for where you would like to be in the next year.
Money habit 4: Pay yourself first
You have probably seen this advice before but you may be confused about what exactly that means or how to apply it. Do you write yourself a check? How do you have enough after you pay yourself first to pay the rest of your bills? What if you run out of money?
Those are all good questions to have and the simplest solution by far is knowing where your money goes each month and how much you spend in each category. If you are spending your entire paycheck or even more than you earn, something has to change quickly. Take stock of your finances and decide what you can cut back on so that you can save some money.
At its core, the advice to pay yourself first means saving money first and foremost. Look at the expenses that you are tracking because you are following the advice above and figure out what are your largest money outlays each month. What has to change for you to have some money left over at the end of the month? Do you need to move to a smaller or cheaper apartment? Get a roommate? Start cooking more so you can spend less on food? Start taking public transit instead of driving to save on car expenses?
Whatever it is, make a plan to save a certain amount of money a month. You can start off small and challenge yourself each month to save more and more until you are saving at least 20 – 25% of your paycheck. All the money you save represent freedom from debt and give you options. The more money you have stashed away, the less you will stress the next time life throws you a curve ball since you’ll know you are covered. It’s a peace of mind that is worth every penny you save.
Money habit 5: Max out your tax-advantaged accounts
Tax-advantaged accounts are basically like getting paid to save. This includes retirement accounts, flexible spending accounts, healthcare savings accounts, dependent care spending accounts, etc. Anytime you can defer paying taxes, you should make it a priority to put as much money as you can into that account.
Many companies also offer a match to incentivize employees to save money for retirement. They are basically paying their employees to save money for retirement and anyone who does not take advantage of it is basically giving up free money. While retirement accounts lock your money away until retirement, there are certain loopholes to help you get your money out before retirement age.
Other accounts such as flexible spending accounts and healthcare savings accounts let you use tax-advantaged funds to pay for things such as healthcare or dependent care. If you are already spending money on those things anyways, using a tax advantage account is like getting a discount (for example, getting a 25% discount if you are in the 25% tax bracket) for every dollar you spend. Why would you pass up a deal like that?
Taking the time to apply the five principles above will set up your finances on the path to success. Being financially secure will change your life and give you the breathing room to pursue your passions and your dreams.
It’s much easier to say yes to an opportunity that fits your heart’s desire but does not necessarily make sense from a financial perspective if you already have money in the bank to cover any unexpected expenses.
Make good financial habits the foundation of any decisions that you make about your life and your money and you will have an unexpected freedom and peace of mind.
What are some of the good habits that have helped you get a better handle on your finances?
Resources that I love:
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