Are you looking to improve your financial situation but feel stuck in bad spending habits? It’s time to throw them out and start with good habits instead to make better financial decisions and achieve your goals.
Some common bad financial habits include carrying too much debt, impulse buying, or failing to invest for the future.
It’s ironic how stress and anxiety can lead you to more stress and anxiety (it works like a cycle).
Financial stress can be the beginning of bad money habits, as well as not really knowing how to manage your finances, which causes more stress, insecurity and more adversity.
This article will discuss different options you can apply today to break these bad habits and make responsible financial decisions.
First things first
Before we jump into how to break your bad money habits, the time value of money and compounding interest are crucial concepts to understand when it comes to financial planning.
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Your money today is worth more than your money in the future due to inflation.
Investing money can earn interest, which can earn even more interest- a concept called compounding interest.
The longer you have your money invested, the more it will grow. Investing your money now will lead to a financially stable future.
1. Set Financial Goals
The first step in breaking your bad financial habits is setting goals to keep you focused and motivated on what you want to achieve on your financial journey.
Start by listing what you want to do with your money- buy a house, pay off your student loan debt, save for retirement, etc.
Set SMART goals- that are Specific, Measurable, Achievable, Relevant, and Time-Bound.
Once you have your list of goals, prioritize them. Make sure you are taking actions to achieve them and keep track of your progress. To help you get motivated, tell people about your goals, this way, it will keep you accountable and motivated to achieve them.
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2. Keep a Budget
Budgets are an essential tool to help you save money. They allow you to track your spending and highlight where you can spend less on unnecessary things.
To start your budget, gather information on your income and expenses- payslips, credit card statements, bank statements, etc. and organize it monthly or weekly.
Categorize your expenses so you can see where you can cut back and spend less. If you need help determining how much you should spend on different areas of your life.
Follow the 50-30-20 rule- spend 50% of your salary on necessary expenses, 30% on leisure, and 20% towards savings.
Remember that it is only a guideline for your spending, so it doesn’t have to align perfectly into your spendings, but it is a good idea to work to come close to what the rule recommends.
You can and should make adjustments occasionally. Don't let minor setbacks like overspending in one month deter you from achieving your financial goals.
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3. Save Money
Whether you want to buy a house or pay off your credit card debt, you must save money. Making small sacrifices today can add up and help you achieve your goals in the future.
Remember, compounding interest takes time. Start saving early so your money has more time to grow.
One good saving strategy is to automate your savings. Set up a regularly recurring amount to deposit into your savings account each time you are paid. It will force you to save and not tempt you to spend it on something else.
Using a budget will get you started on saving money, although you may struggle at first, you will soon learn to save, check these ideas to start ASAP.
Another tip is to pick a savings account that best matches your goals. If retirement is your goal, consider contributing to a 401(k) plan or an IRA. If your goals are more immediate, a high-yield savings account may be better suited for you.
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4. Spend Smartly
How you spend your money can make or break your financial goals.
There’s a saying that goes:
"If you buy things you don't need, soon you will have to sell things you need”.
If you overspend on unnecessary things, you will have less money to put towards your savings.
Learning responsible spending habits can help improve your personal finances.
One responsible spending habit is finding cheaper alternatives to things you do daily.
Instead of eating at restaurants or ordering takeout, try cooking most meals at home.
Another good habit is to care for the things you already own for them to last longer, rather than constantly buying new things.
Suppose you need to make purchases, look into cheaper alternatives first, like buying a more affordable car over an expensive one, both of them will take you to your destination!
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Even taking small steps like spending less at the grocery store will help!
5. Avoiding Debt
Most people associate debt with a negative connotation, but having debt isn't always a bad thing! Debt can help you achieve your financial goals, like taking out a mortgage to buy your house, will grow your wealth and can even get you a second income if you put it for rent.
However, you must be cautious about taking on too much debt, as it can harm your financial future.
A healthy amount of debt is about 30% of your total income.
If you have way more debt than this, consider focusing on paying it off.
Credit card management
One area where many people find themselves in trouble is with credit card debt.
Credit cards can have astronomical interest rates, making paying them off difficult.
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Be cautious with how much money you spend with your credit card and make monthly payments covering your statement balance to avoid high-interest charges.
Check out this article for more information if you need help paying off your debt.
6. Invest
Building wealth is essential to your financial success. That’s why you always have to be investing your savings, passive income will help your money to multiply.
There are many different investment options- stocks, bonds, real estate, etc.
Knowing your investment profile will help you decide on your best suited options taking into consideration your risk tolerance.
Before investing in anything, research to ensure that the investment timeline aligns with your financial goals.
It is essential to be aware of not only the potential rewards but also the risk of any investment before making a decision.
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7. Increase your Income
Making more money can also help improve your personal finances. The more money you make, the more you can save.
If you already have a job, consider asking for a raise.
Alternatively, you can monetize your hobby into a side hustle and make money doing something you are passionate about.
Final thoughts
Breaking bad habits isn't easy. Following the tips we discussed above will help you make fewer financial mistakes and help you build good money management skills to achieve your goals.
