By: Calvin Egan
March 31, 2020
What are “smart money” habits and why are they so important? These questions have an ongoing list of viable answers, making financial success seem like a secret formula or complicated process. But, the answer to the “what” question is actually quite simple while the answer to the “why” can be life-changing.
It is pretty easy to spot poor money management decisions. Some may look like going into debt to buy things that aren’t true needs but simple wants, spending more money than what is earned, and perhaps the lack of setting any financial goals. The more difficult task is identifying and understanding what “smart money” habits are and how to stick to them consistently going forward. Here are just a few habits that everyone should consider following, regardless of age! Why? Because your future financial independence depends on your current financial habits.
Get on a budget
First things first – get on a budget! This is a fundamental part of any successful financial plan. Without a functioning budget, there will be no clarity on where money is being spent, making it rather difficult to target areas that may need improvement. Finding a budget that works for you, whether it is an app such as Mint or a custom-built spreadsheet in excel, will give you peace of mind when it comes to managing your finances. Creating a budget is step one to developing smart money habits.
Spend less than you earn
With the budget in place, step two becomes profoundly simple! Spend less than you earn. If you have historically overspent, this may seem difficult at first. But after a few months of tracking your actual expenses and comparing them to your budgeted amounts, you will be able to clearly target areas in your budget that need improvement. Once these areas are targeted, make an effort to spend less in these categories!
Save for retirement
What happens when we spend less than we earn? We have more “leftover” money that can be utilized in productive ways. One area to put your extra money every month is toward retirement. Even if the amount you can afford to save each month seems insignificant, it will absolutely add up over time! For example, if you are 21 years old and save $2,000 a year until age 65 (44 years), you could have over $740,000 in a retirement account. The longer-term your perspective, the better your decision today!
Set savings goals
Lastly, have some fun and set those savings goals for yourself. Building a savings account is an important aspect to any financial plan. One of the first savings goals should be to build your emergency savings account up to about three to six months of living expenses. According to a report from CNBC, over 55 million Americans say that they don’t have anything in their emergency fund. Considering our current economic environment, this statistic is alarming. Having available funds in case of emergency adds an extra sense of security we all crave. You can also set some fun goals like saving for your dream vacation or buying a house. Stay dedicated and focused on the why behind your saving and you’ll hit your goals in no time.
What does this look like in today’s economy?
With the turbulence that we are all facing in the markets today, it is more important than ever to apply these smart money habits to your daily life. The truth is that we can never predict when we will experience tough times; but when your lifestyle is built on a solid foundation, the storms of this life will not defeat you. We are currently experiencing one of our most difficult seasons as a society during this COVID-19 pandemic. I cannot help but be reminded of Matthew 7: 24-25, “Therefore everyone who hears these words of mine and puts them into practice is like a wise man who built his house on the rock. The rain came down, the streams rose, and the winds blew and beat against that house; yet it did not fall, because it had its foundation on the rock” (NIV). This passage of scripture reminds us so clearly of the power of a solid foundation; and that no matter how great we may believe our financial plan is, we will not succeed without God as our foundation. This being said, applying these smart money habits to your life in addition to building your foundation on biblical truths will set you on a course toward financial independence.
If you need help with any of these steps or wish to discuss further, we would love to connect with you. Sign up for a virtual session with one of our experienced peer financial coaches at: “Book a session with a coach” or text “coaching” to 24515.