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Daily Capital

5 Ways to Improve Your Money Habits

When the end of the year approaches, people often start thinking about setting goals to improve their finances the following year.

In my family, we usually spend a significant amount of time reviewing the state of our finances during the last quarter of the year. That practice includes comparing how we are doing financially to the financial goals that we had set at the beginning of the year and looking for ways to continue improving how we manage our finances as a family.

If you’re looking to develop better money habits, here are five things you can do to get started.

1. Review your Expenses

If you sometimes wonder where your money went, this is a habit you want to start implementing. Keeping a close eye on how you spend your money leaves little room for leakage.

Taking the time to review your spending weekly or monthly helps you figure out the areas where you may be overspending.

I keep a close eye on my expenses by using Personal Capital’s free budgeting tool.

One question that I always ask myself is, are my expenses aligned with what I value?

Read More: Values-Based Spending: How I Budget for What Matters to Me

Over the years, I have identified areas where I was spending more money than I wanted to on things that weren’t that important to me.

As you look at your expenses, take a close look at expenses like food, entertainment, clothing. Ask yourself some questions:

  • Are you spending more money on these discretionary items than you would want to?
  • Does that spending get in the way of your ability to meet your financial goals?
  • Are you losing money on credit card interest fees?
  • Is there anything you can do to lower your monthly expenses?

Look at your recurring expenses like car insurance, phone, or cable bill, then consider shopping around and negotiating to lower the rates you’re currently paying.

It’s also a good idea to review any subscriptions and memberships that you may have but barely use. In recent years a lot of people have canceled cable. Still, with streaming subscription services like Netflix, Disney+, YouTube TV, Amazon Prime, Spotify, and many others, it’s easy to replace your cable bill with several smaller subscription fees that add up to close the small amount. If you take the time to look at all the subscription or membership services that you have, you will probably identify one or two that you can cancel and save money.

2. Set SMART Financial Goals and Get on a Budget

To improve your money habits, you need something to work towards. Take the time to ask yourself where you want to be as far as your finances are concerned, five, ten, 20+ years from now.

Whether it’s paying off debt, going on a trip, maxing out your retirement accounts, making a large purchase, or celebrating a milestone, take the time to think through what you want to do and write down SMART goals to help you get there.

You have probably heard of SMART goals in a professional setting, but SMART goals can also be helpful when it comes to your finances.

Smart goals must be specific, measurable, actionable, realistic, and time-bound. An example would be paying off $30,000 of debt in three years. Once you have written down SMART goals for yourself, you can start thinking about a plan to get there. In this instance, you would start with creating a budget based on your current income.

Once you have a budget, you can determine if you need to earn more money to reach your goal in three years.

Write down the goal and create a plan to get the process started; revisiting the plan often encourages you to maintain good habits to reach the goal.

Read More: How to Set Attainable Financial Resolutions

3. Automate your Savings and Investing

Now that you have created a budget to help you reach your goals, it’s time to make the process as easy as possible. The best way to avoid overspending is to automate the savings process. You can do this by automatically transferring the sum you need to continue saving and investing in order to reach your goal into a different account.

For example, if you have the goal off maxing out your Roth IRA account (a tax-advantaged retirement account that allows you to invest up to $6,000 in after-tax dollars per year as of 2021) and then letting the money grow tax-free until retirement, then you can break it down into a smaller monthly goal of $500. Then, to avoid being tempted to spend that $500, you can automate a transfer from your checking or savings account of $500 directly to your Roth IRA every month. Another option is to automate the investment that you pick in that Roth IRA account.

One thing I also enjoy about automating the process? It’s easier to spend my extra money guilt-free on things that aren’t necessary but bring me joy. Knowing that I can buy a dress that I like without worrying whether my financial goals will be met is a great feeling.

4. Plan for Large Expenses

There are two kinds of large expenses: the ones that happen every year, whether it’s for the holidays or birthdays that you can easily plan for, and the ones that are unexpected, such as a car breaking down.

It is easy to plan for recurring large expenses by setting up a sinking fund. If you look at your family’s holiday expenses, for instance, over the past year or couple of years, you can come up with a budget of how much you will need to set aside the following holiday season and stick to the budget. And then, instead of putting the money on a credit card or having a large expense around that time that you didn’t plan for, you can break that down into smaller amounts and save throughout the year.

You can also put the money in a different account and automate the process, so you don’t spend the money.

For large unexpected expenses such as a car breaking down, I like to have a miscellaneous line in my budget. At the end of the year, I typically look at the year’s expenses, whether car or household maintenance expenses, and I use that to create a baseline expense for the following year.

In addition to that, I like to have a miscellaneous budget line item that can help with an expense that you did not necessarily plan for without having to use up your emergency fund or, even worse, going into credit card debt. That is why it’s essential to look at your monthly expenses and review your annual expenses — especially larger expenses — to decide how to be better prepared the following year.

5. Track your Progress and Celebrate Wins Along the Way

It can be hard to stick to your financial goals. That’s why it is important to track your progress and celebrate the winds along the way.

If one of your goals is to pay off $30,000 of debt in three years, then decide how you will celebrate clearing out the first $5,000 or $10,000 of debt. This will help keep you motivated.

When you look at the bigger picture and where you want to be financially years from now, it’s key to track your net worth (what you owe minus what you own) to understand your financial picture. Personal Capital’s net worth tracking tool is free and can be a great companion on this journey.

I like to look at my net worth every day. Some people might find it extreme. But at least review it every month to make sure that you’re moving in the right direction. Adding to your net worth, and not subtracting from it, is a key step if you want to improve your financial habits. For example, if you see your net worth going down one month, you know that you need to make adjustments. If you don’t take the time to track your net worth, how will you know how you are progressing?

Bottom Line

There’s always room to improve your money habits. Being good with money doesn’t mean that you are never tempted to spend more money than you want. We all make financial mistakes.

But by having systems to help us invest as much as we want or save as much as we want, we are more likely to reach our financial goals and continue to improve our money habits.

Taming your money habits is only one part of your overall financial plan. You can take a few actions now to get yourself on the right track.

  1. Download 3 Essential Steps to Financial Freedom, an actionable guide for a better financial life with insights from fiduciary financial advisors. The guide is free.
  2. Sign up for the Personal Capital Dashboard. Millions of people use these free and secure professional-grade online financial tools. You can use them to track debt paydown, analyze your investments, and plan for long-term financial goals.
  3. Consider talking to a fiduciary financial advisor for more detailed guidance on achieving your financial goals.

Get Started with Personal Capital

 

Author is not a client of Personal Capital Advisors Corporation and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. Compensation not to exceed $500. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Anne-Lyse Wealth is the founder of Dream of Legacy, a platform dedicated to inspiring millennials to build wealth with purpose. She is a financial coach and a Certified Public Accountant. Anne-Lyse is the author of "Dream of Legacy, Raising Strong and Financially Secure Black Kids," and the host of The Dreamers Podcast. Her work has been featured in Business Insider, NextAdvisor, Time, and other publications. Anne-Lyse lives in Atlanta with her husband and three kids.
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