5 Healthy Financial Habits

People who struggle financially often think it’s a math or intelligence problem. But, you don’t have to be able to do calculus in your head to be good with money. Instead, it’s all about having the right financial habits – and following them consistently.

So, what are the most important money habits to adopt? Read below to learn which five financial behaviors are the most crucial and how they can positively impact your finances – more than you might expect.

Begin Monthly Budgeting

They say that you can’t manage what you don’t measure. That’s never more true than it is with money. You have to know exactly how much you’re spending, saving and investing so you can know where you’re going.

You should start a monthly budget that tracks how much you’re earning and spending. Most consumers divide their spending into various categories, which can be as broad or specific as you want. For example, you could lump all utility expenses in one category or label them separately (water, gas and electric, etc.).

Create a budget that is based on your existing spending habits and then decide if you want to allocate more money to another goal or category. For example, if you’re saving for a down payment on a home, you can make that a line item in your budget so you know how much you’re putting aside every month.

Check in with your budget to track if you’re spending more than you allotted. If you are, see what expenses can be reduced or eliminated. Focus on big-ticket items first, like housing or transportation. 

Build an Emergency Fund

No matter how careful or responsible you are, sometimes things just happen. You get into a car accident, your cat eats a sock and needs emergency surgery or you lose your job. When those things happen, you’ll be glad you had an emergency fund. 

An emergency fund is an amount of money used to cover unforeseen expenses or things you can’t predict. While some things – like your car needing an oil change – can be planned for, others can’t. Ideally, your emergency fund should have between three and six months worth of expenses. Note: that does not mean three to six months of income, unless you’re living paycheck to paycheck. 

If you have an emergency fund set up, you won’t have to rely on credit cards, payday loans or title loans when something comes up. This will save you money because you won’t have to pay unnecessary interest. 

Strive to Live Below Your Means

No matter what your income is, the most important habit you can develop is spending less than you earn. 

If you spend more than you earn, then you will always be running up a balance on a credit card or dipping into your savings. However, if you can spend less, then you’ll have enough money to reach your goals. Plus, if something happens – like a job loss – you’ll be more prepared.

Be Strategic about Debt Repayment

If you have significant debt, you need a calculated strategy to tackle your balance. Start by making a list of all your debts and write down the following details:

  • Interest rate
  • Total balance
  • Minimum payment
  • Number of payments remaining

Decide whether you want to use the snowball or avalanche method. The snowball method involves paying off the lowest balance first, no matter the interest rate. While this method may seem counterproductive, some research shows that it may motivate people to stick with their debt payoff plan. Once you have paid off the smallest balance, use the amount you were paying on it and add it to the next smallest loan or credit card balance. Rinse and repeat until you’re debt free. 

The avalanche method says you should pay off your balance with the highest interest rate first, no matter the total balance. Using this strategy will help you save the most on total interest.

Choose the method that appeals to you the most.

Regularly Review and Adjust

Just like exercising or eating healthy, managing financial habits can be a lifelong struggle. You may always have a desire to splurge on something outside your budget or to put off saving for a later time. Take time every month to review your habits and see what – if anything – you need to change. 

You should also regularly check your credit report, which you can find at www.AnnualCreditReport.com. Your credit report is one of the most fundamental aspects of your financial picture. You can check it for free once a week, but once a month should be sufficient. Look for any mistakes or red flags and proactively address them.

Remember, as you get older, your personal and financial needs and goals will likely change. That’s OK. You’ll still need the same financial habits to get you where you want to be – no matter where that destination is.

Like working out, building financial habits can take time, so don’t be discouraged if it takes a while to build up those money muscles. In the meantime, use our educational resources to stay on track.