Developing good money habits took me a long time, but I did it. I developed terrible money habits when I was starting, like being late on all my bills and carrying thousands of dollars in credit card debt. I had no savings and no clue where all my money went.
I finally got so sick of working myself to exhaustion and somehow not having a dollar to my name. I resolved to do something about it. I had to develop new habits and ditch the old behaviors. I got my finances on the right track eventually. You can, too. And it all starts with establishing better money habits.
Here are the best money habits to instill from the start or to get your finances turned around:
1. Track Your Spending
Tracking your expenses is vital to sound money management. Without tracking your spending, getting an accurate picture of your finances is impossible.
If you’re not currently tracking your expenses, track your spending every day for a month. The benefits of tracking your expenses include identifying lousy spending habits, wasteful spending, and areas where you could lower or eliminate expenses. It might even change the way you think about money.
2. Create a Budget and Stick To It
Budgeting gets a bad rap, but it’s not torture. The primary purpose of a budget is tracking your income and expenses, but it does far more than that. Your detailed budget will be your roadmap for getting where you want to go financially.
There are several ways to set up your budget. You can try envelope budgeting, the 50-30-20 rule, the half-payment method, or whatever budgeting system you’re comfortable with. Starting a budget is more critical than which technique you use.
Budgeting is the one financial habit anyone can adopt to improve their financial situation. Once you budget your money, you’ll know where all your money goes, always pay your bills on time, and spend money based on your priorities instead of your bad habits.
3. Build Saving Into Your Monthly Budget
Whether you make $40,000 a year, $15 an hour, or six figures, you need a plan for saving if you want your savings to grow. You can save money on any income as long as you plan for it. Budget for savings just as you would any other bill or financial obligation.
Ultimately, you want 3 to 6 months’ worth of expenses socked away in case anything unforeseen happens. If your income might be less predictable, consider having a larger cushion. An 8 to 12-month emergency fund might be more appropriate for freelancers, commission-based salespeople, and contractors.
Don’t fret if you don’t have a chunk of money equal to 6 months of expenses or more sitting around right now. You can build your emergency savings slowly. The important thing is getting started and putting money into savings consistently.
A 3- to 6-month emergency fund tucked away in a money market or savings account is an ideal example of financial responsibility. You don’t want an unexpected bill or health issue to derail your financial security.
4. Evaluate Your Budget Regularly
Budgeting is essential for your financial future. And making a budget is a big step toward financial stability. But it’s not something you do once and never revisit again. Your income, your expenses, and your goals change. The key to creating a budget you can stick to is to review it regularly and adjust as needed.
When you review your budget, you want to:
- Compare Actual Spending vs Your Planned Spending
- Look for Changes to Income and Expenses
- Find Money Leaks and Stop Unnecessary Spending
- Review Your Budget Against Your Goals
- Adjust Your Budget If Necessary
Set aside time at the end of every month to give yourself a financial health check by reviewing your budget. Use what you learn during your budget review to set the budget for the month ahead.
5. Set Financial Goals
When you have a goal, you have an endpoint. Starting with the end in mind and working backward often makes defining the steps and creating a plan for achieving your goal easier.
Any financial plan is better than no plan, but try setting SMART financial goals. SMART stands for Specific, Measurable, Attainable, Relevant, and Time-bound.
For example, don’t just say, “I want to save more money.” Try something like: “I want to establish a $5,000 emergency fund in the next 12 months.”
Now that your goal is specific and has a time limit, you can break it down into a realistic strategy. Saving $5,000 in 12 months works out to $417 a month. Review your budget and ask yourself some questions:
- How much money can I put toward my goal right now?
- Can I cut $417 out of my monthly budget?
- Can I earn an extra $5,000 in the next 12 months?
- How will I track my progress?
Based on your budget review and your answers, your action plan might look like this:
- Limit dining out to one restaurant meal a month
- Stay out of coffee shops
- Lower monthly entertainment spending by $50
- Cancel unwanted subscriptions for cable TV and gym membership
- Make April a no-spend month
- Trim $25 off the weekly grocery budget
- Stop impulse spending in grocery stores, convenience stores, and gas stations
- Ask for a raise at work
- Sign up to drive for DoorDash
- Open a new savings account for emergencies only
- Set up an automatic transfer from checking to the new account
- Review my bank statement every month for tracking
- Adjust as needed based on progress
All that’s left is sticking to the plan for the next 12 months. If you do that, you’ll sleep better knowing you have $5,000 saved in case of emergency.
Whether your goal is financial freedom, establishing a college savings plan for your kids, or saving for a down payment, starting from the end helps you see the big picture. Breaking your money goals into smaller steps makes your goal more manageable, enables you to know how you’re doing, and keeps you motivated.
6. Automate Your Finances
Almost every utility company, credit card company, and service provider offers some form of auto pay. Your bank almost certainly offers automatic bill pay as well. It’s easy to set up, so automate everything you can.
Set it up so that the transfers coincide with your paydays. That way, the money for bills, your rent or mortgage payment, and money for savings are all headed to their proper destinations before the money can be spent elsewhere.
Once you automate your rent or monthly mortgage payment and whatever bills you have, set up automatic transfers to a savings or investment account. When you have automatic transfers to savings set up, you make savings a priority, not an afterthought.
You can further automate your finances and pay yourself first by participating in your employer’s retirement savings plan if one is available. When you do, you funnel money into the company retirement plan via payroll deduction. That means the money comes from your paycheck, so you never miss it. If they match your contribution dollar for dollar, it’s free money. Take advantage of employer matching by contributing enough for the maximum match.
Automating your finances ensures you pay your bills on time and put money aside for a rainy day. Automation also prevents you from spending money you don’t have by ensuring your money goes where it’s supposed to go first. Automatic bill pay, recurring transfers, and 401k plans are simple ways to start with automation.
7. Sign Up for Alerts From Your Bank
While you’re setting up online bill pay and automatic transfers on your bank’s website, sign up for alerts. If you’ve ever made a large purchase with your debit card, you might’ve received a text, email, or phone call from your bank to ensure the purchase was legit. You might not realize that you can set up alerts for more than just security concerns.
For example, you can set up a low-balance alert for your debit card and a high-balance alert for your credit card. You’ll know immediately when to cool it with the spending. This can also help you spot other discrepancies, like a large increase in a utility or service bill. This is a great safeguard for keeping your budget on track.
You can also create alerts for deposits, transfers, and other transactions. If overspending is an issue, set up an alert to ping you every time your debit card gets used. Getting an alert every time you spend money might help you eliminate those lousy money habits like emotional spending or impulse purchases.
8. Avoid Debt
Nothing puts your financial stability in jeopardy more than debt. Some people believe student loan debt and mortgages are good debt, while credit card debt and car leases are bad debt. The fact is, your financial stability and financial security can be threatened if you owe money. It doesn’t matter whether the debt is “good” or “bad” when you’re over your head and can’t afford your payments.
If you’re carrying heavy debt, avoiding more debts and prioritizing getting out of debt are two of the best things you can do to better your financial life. Getting those student loan and credit card balances down to zero will free up cash to put toward your goals. You should also see a credit score increase as your timely payments decrease your balances and credit utilization ratio.
You can aggressively pay down your debt once your emergency fund is set up. You can use the debt snowball technique or the debt avalanche method to get out of debt as quickly as possible.
With both methods, you focus on paying off one debt at a time, but how you prioritize the debt varies by method. Either debt payment plan can work for you. If you find quick wins motivating, go with the snowball. If paying less interest over time matters more, do the avalanche.
9. Use Cash More
Opening your wallet and handing cash to someone is a much different experience compared to sticking your card in a slot. Handing over hundreds of dollars in cash for an impulse purchase is almost painful. Spending hundreds on a whim by swiping your card is too easy.
Tracking your spending is also much simpler when you use cash regularly. If you leave your house with fifty bucks, you know exactly how much you spend when your wallet is empty. If you leave the house with just your debit card and swipe it all over town for living expenses and impulse purchases, it’s hard to know how much you spent.
You can spend plenty of money with a debit or credit card before you realize you’re overspending. Defaulting to cash instead of cards can help you stay on budget, spend less money overall, and make you more aware of how you spend money.
10. Increase Your Income
Getting a raise from your employer might be the fastest path to boosting your income. You can at least ask if you can prove you’ve made an impact and put together a persuasive case. If a raise isn’t possible for whatever reason, there are other ways to earn more money.
You could get a second job and work part-time during your off-hours. The additional money can help you control your monthly expenses, get out of debt, save more money for retirement, and more. As long as it doesn’t get in the way of your primary income source, ruin your health, or prevent you from ever seeing your family, the extra money from a part-time job can help you reach your goals faster.
You could also participate in the gig economy and add another income stream with a side hustle you do in your spare time. Unlike part-time jobs, side gigs offer more flexibility and freedom, but there’s usually ramp-up time, and the pay is highly variable. For example, if you freelance, drive for DoorDash, or try making money on Poshmark, you might have good days, bad days, and days where you make nothing.
Earning additional income can help you aggressively save money and solve money problems, regardless of your current income level. You don’t have to choose between reducing expenses or increasing income. You can do both.
11. Educate Yourself About Personal Finance
Few schools teach kids about money. Most of us learn about money as we go along. Fortunately, many options exist for learning more about money and bettering your money management skills.
To further your financial education, grab a couple of books on money. Read personal finance blogs, like our little frugal living blog, or listen to money-related podcasts. You could even take an online class, like the free Kahn Academy Personal Finance Class.
If you want to establish better money habits, never stop learning. I worked at a money management firm for a few years, geek out over anything related to personal finance, and I’m still learning new things. The more you learn, the more you can put into practice.
Will You Commit to Establishing Good Money Habits?
If you’re frustrated and sick of having no money, work on building good money habits and getting rid of one bad money habit at a time. Build better habits. You’ll make sound financial decisions automatically.
It will take time. Your discipline and decision-making skills will be tested. But you can build effective money habits if you work at it.
Why not get started today?
