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zen habits: 10 Habits to Develop for Financial Stability and Success

Wednesday, March 7, 2007

10 Habits to Develop for Financial Stability and Success

Every Wednesday is Financial Tips Day at Zen Habits.

Just like any goal, getting your finances stable and becoming financially successful requires the development of good financial habits. I've been researching this topic extensively in the last few years in my quest to eliminate debt, increase my savings and increase financial security for my family. I'll talk more about these habits individually, but wanted to list them in a summary (I know, but I'm a compulsive list-maker).

Here they are, in no particular order:

  1. Make savings automagical. This should be your top priority, especially if you don't have a solid emergency fund yet. Make it the first bill you pay each payday, by having a set amount automatically transferred from your checking account to your savings (try an online savings account). Don't even think about this transaction -- just make sure it happens, each and every payday.
  2. Control your impulse spending. The biggest problem for many of us. Impulse spending, on eating out and shopping and online purchases, is a big drain on our finances, the biggest budget breaker for many, and a sure way to be in dire financial straits. See Monitor Your Impulse Spending for more tips.
  3. Evaluate your expenses, and live frugally. If you've never tracked your expenses, try the One Month Challenge. Then evaluate how you're spending your money, and see what you can cut out or reduce. Decide if each expense is absolutely necessary, then eliminate the unnecessary. See How I Save Money for more. Also read 30 ways to save $1 a day.
  4. Invest in your future. If you're young, you probably don't think about retirement much. But it's important. Even if you think you can always plan for retirement later, do it now. The growth of your investments over time will be amazing if you start in your 20s. Start by increasing your 401(k) to the maximum of your company's match, if that's available to you. After that, the best bet is probably a Roth IRA. Do a little research, but whatever you do, start now!
  5. Keep your family secure. The first step is to save for an emergency fund, so that if anything happens, you've got the money. If you have a spouse and/or dependents, you should definitely get life insurance and make a will -- as soon as possible! Also research other insurance, such as homeowner's or renter's insurance.
  6. Eliminate and avoid debt. If you've got credit cards, personal loans, or other such debt, you need to start a debt elimination plan. List out your debts and arrange them in order from smallest balance at the top to largest at the bottom. Then focus on the debt at the top, putting as much as you can into it, even if it's just $40-50 extra (more would be better). When that amount is paid off, celebrate! Then take the total amount you were paying (say $70 minimum payment plus the $50 extra for a total of $120) and add that to the minimum payment of the next largest debt. Continue this process, with your extra amount snowballing as you go along, until you pay off all your debts. This could take several years, but it's a very rewarding process, and very necessary.
  7. Use the envelope system. This is a simple system to keep track of how much money you have for spending. Let's say you set aside three amounts in your budget each payday -- one for gas, one for groceries, one for eating out. Withdraw those amounts on payday, and put them in three separate envelopes. That way, you can easily track how much you have left for each of these expenses, and when you run out of money, you know it immediately. You don't overspend in these categories. If you regularly run out too fast, you may need to rethink your budget.
  8. Pay bills immediately, or automagically. One good habit is to pay bills as soon as they come in. Also, as much as possible, try to get your bills to be paid through automatic deduction. For those that can't, use your bank's online check system to make regular automatic payments. This way, all of your regular expenses in your budget are taken care of.
  9. Read about personal finances. The more you educate yourself, the better your finances will be.
  10. Look to grow your net worth. Do whatever you can to improve your net worth, either by reducing your debt, increasing your savings, or increasing your income, or all of the above. Look for new ways to make money, or to get paid more for what you do. Over the course of months, if you calculate your net worth each month, you'll see it grow. And that feels great.
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John Doe said...

Although I have seen this advice more than thrice, it is nice to see this tips again.

~Dawn said...

Sometimes it is!!

Thanks for the linkage.

Benno said...

Its like you read my mind.... I have just started (this is month 3) keeping detailed information on my spending habits. In response to that I have been taking steps to do all of the above. This week I set-up a seperate savings account to put away $20 a week for a emergency fund. I have also been finding ways to cut my spending so I can pay off the credit card debt that has been accumulating.

Leo said...

Great job, Benno! It sounds like you're off to a great start. The key is to keep your focus on your new financial habits for at least a month. If you feel your resolve waver, find something, anything, to motivate you. If you develop a sudden passion for something else, and begin to lose focus on your new habits, refocus yourself. Keep up the great work!

stayfly said...

I feel happy and proud that I am already doing most of these =)

Leo said...

@stayfly: Well, you don't have to brag! :)

Just kidding ... great job. It sounds like you've got things under control. Maybe you could share some of your own tips or habits.

David said...

Nice tips! I love the "envelope" budget, I do something similar except with checking accounts instead of envelopes (so I don't have to carry around cash). It's a great way to have a very simple budget system.

Should you really be paying off the smallest balances on your personal debt first? I would think that paying off the accounts with the highest interest rate first would be important, no matter what the balance is.

Leo said...

Hi David, thanks for the great comment. As for your question, you have an excellent point -- paying off the highest interest makes the most financial sense. But paying off the smallest amount first is a better psychological approach for most people, especially if they have problems reducing their debt.

Let's take a quick example: Let's say I have four debts. The highest interest is 16% with a $10,000 balance. The smallest balance is $500 with a 13% interest. With this example, I would recommend most people pay off the small balance first, even if the interest is lower. It might only take a couple months, or slightly more, to pay off that small balance. At the end of it, you have one less debt! And it's a great feeling that will motivate you to want to do more. This is consistent with the philosophy of this site -- start with small, easily achievable goals, and work off that success.

Tackling the bigger debt with higher interest is smarter financially, but psychologically it's more intimidating for people, especially as this could take 1-2 years to pay off. They would have to go for that many months before feeling that success, and in the meantime, they still have four debts on the books all that time.

In the end, the amount of interest you're paying isn't that big of a difference, but I recommend you go with whatever works best for you. Some people are good at paying off debt, so your method would work better. Others need that boost, so my method (which isn't my original idea) would help them succeed.

Thanks again for the excellent question!

ispf said...

[...] Next, Leo @ Zen Habits has started a series called Financial Tips Day which features every Wednesday. This blog is fairly new to me, and the more I read, the more I want to go back to it! Leo has some great solid tips for personal development and while I have highlighted the Finance Tips above since I focus mainly on financial issues, I read a lot of his life hacks too. And while you are there, don’t forget to check out his “My Story” link. [...]