While it’s tempting for most people to believe that wealth is about being lucky, the reality is that it’s mostly about our smart and good money habits. No matter the income level, your finance conditions can improve if you follow the good money habits.
According to a study published in the European Journal of Social Psychology, it took an average of about 66 days for an average person to form deeply rooted habits. If we believe this research, then it means that many of us could change our money habits in less than three. However, like anything else, new habits require discipline and repetitive actions.
Money habits that can change your financial conditions
Here are some of the good money habits that can improve anyone’s financial conditions, explained under four broad categories:
1. Learn first – Many people want to be financially independent but very few are educating themselves on how to make and manage money. With a burning desire and planning, self-investment is the route to boost your career or earning potential. If you intend to study and start a legal advisory business, then start to learn about business management in addition to law.
- Learn how to sell, basic finance, negotiation, etc.
- Learn about personal finance financial management through blogs and books
- Attend seminars and training.
2. Try to learn something every day – If you walk into a successful person’s home, one of the first things you’ll see is a library of books to educate themselves. Try it with the others, and you will found big television screen, furniture and less of educational materials. Make it habit to read books, magazine, and educative TV programmes.
3. Teach your children about money – Teaching children about personal finance should be an important activity for every parent. Good money habits should be developed from an early age and fostered into young adulthood. The more financially savvy your children are, the better personal finance decisions they will make throughout their lives.
4. Network with the right people – You become like the people you associate yourself with, and that’s why winners are attracted to winners. Your associates can influence your spending behavior, what you read and many other life events.
Earn, Save and Invest
5. Set financial goals. This is where you create specific money goals you’d like to achieve in years to come. This could be to pay school fees, buy land or start a small business, etc. The good thing about this money habit is that it makes you focus.
The number one secret of most wealthy people is that they know what they want and follow the same practice in all their endeavours.
6. Diversify your sources of income: There are two key ways to increase your financial net worth; Save more money or control your expenses. Apart from getting a pay raise or winning a lottery, there are few other ways to get more money flowing to you. Through passive income. Passive income is the earning you generate without directly working for it, unlike salary. Here, instead of you working for money, your money works for you. An example of passive income includes property rental income, a small side business and interest on investments such as treasury bills and bonds.
7. Pay yourself first – This means each pay period before you are tempted to spend money, commit to putting some in a savings account. Most people save the leftovers after spending. That’s not how it works: You should save for your financial goals first, then pay the bills and then consider spending the leftover. Keep in mind that I am not suggesting you save D2,000 if could only afford D100. Start small and grow it as your earnings grow.
8. Make your savings Automatic. You can grow your savings by setting up an automatic transfer between your current and savings accounts. Remember, an action can be a habit if you practice it religiously. So visit your bank and instruct them to do a standing order for you.
9. Do not link ATM card to your savings account, if you truly meant it – Saving account with an ATM is just another transit account that pays interest. You deposit on a Monday and withdrawal part of it by Saturday. Sorry, but who is fooling who; the bank, the account owner or the ATM card.
A saving account with ATM card is similar to the situation of a farmer who pours rainwater into a barrel with small holes and still expect to use that water during the dry season.
I understand that some consumers opened a savings account to avoid bank fees which are generally not levied on current account. If that is the case, then open second savings account without ATM to it.
10. Track your income, savings, and investments. We spend most of our salaries before next payday and yet most people cannot account for it. If you don’t know the inflows and outflows of your bank account, chances are you would not how much to save. Learn how to prepare personal net worth statement.
11. Build up emergency savings for unexpected events – Without an emergency fund, you are more likely to depend on friends, family, and banks during an emergency situation. Your friends and family are usually broke and banks will charge excessive fees and interest.
12. Save the unexpected cash – One of the bad money habits is the fact that many people spend an unexpected money as soon it hit their account. In situations like an annual pay rise or bonus, some employee plan for spending as soon as their employer declare the bonus. You have to pretend that such money does not exist. Surprise money should be put into paying debts or increase savings balance.
Spend with Budget
13. Create a Personal budget – One of the fundamental concepts of personal expense control is through budgeting. A personal budget is a plan for using your money wisely. As human wants are unlimited compared to the resources, it is helpful to set priorities, financial goals and manage your money to meet them. Instead of thinking of your budget as a restriction on your life, try to think of it as a powerful tool — a plan for your money.
If you do not plan how to spend your money, you could spend on anything. Stand for something or fall for anything.
14. Cut your coats according to the available clothes, meaning live below your means. This is fundamental to wealth building strategy as you can never be financially independent if you spend more than your earnings.
15. Be a smart shopper – Always compares prices and quality before buying high valued items.
16. Track your spending habits – What is not measured, cannot be controlled.
17. Ditch the small but often daily expenses – Many of us throw away too much of our hard-earned money on little expenses without realizing the cumulative effect. For instance:
- Eating at a restaurant on a daily basis – This is not because my wife cooks very good food, but cooking at home can also be healthier for you. Even with a tight budget, you can make some simpler meals with less sugar or fried foods. Eating outside should not be a daily habit but rather a relationship bonding idea.
- Daily taxi to work – In the Gambia, we call it “town-trip”. If you cannot afford a personal car through savings, then why not pool with a friend or join a public transport. A daily taxi fare of D300 is equivalent of D6,600 per month or D80,000 per annum.
18. Avoid debts – Borrowing money now means spending your future cash flow. Debts can also create a false hope of financial independence.
19. Learn about credit and how to use it effectively. Understand the different options to borrow and use the right credit product. It is bad to borrow and default on the repayment. This will give you bad credit history.
20. Understand the cost of debt– Every consumer debt has four different cost, that is the principal, interest, fees, and stress. How do you feel when the banks debit your account for loan repayment?
21. If you still want to borrow money, then let it be for investment such as education, health, properties or start a business. It is not wise to borrow money for consumption purpose. Consumer debt repayments reduce your cash flow and make it difficult to meet the other goals in the future.
Hard work and good intentions are not enough to carry anyone through to financial success. We have to establish a definite goal backed with defined action plan and discipline. For most people, the action plan will include a change of bad money habits. So start to implement these good money habits.