Financially successful people have a number of good money habits in common. Learning and adopting these rules about spending, saving and investing is a foolproof way to keep your finances stable and avoid going broke.
Good money habits can be grouped into a few simple categories: controlling your spending and saving, avoiding excessive debt, and investing in your future.
Controlling your spending and saving
Pay your bills immediately and pay them automatically, if possible. A good habit is to pay bills as soon as they come in. Try to get your bills paid via automatic deduction. If you can’t, use your bank’s online system to make regular automatic payments. This way, you know you’ve taken care of all of your regular expenses in your budget.
Many find the envelope system useful to keep track of how much money you have for spending. For example, 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. And if you regularly run out too fast, you may need to rethink your budget or the way you’re spending.
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. Track and evaluate your expenses, and 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.
Make savings automatic as well. 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 — online savings accounts make this easy. Don’t even think about this transaction — just make sure it happens, each and every payday.
Creating an emergency fund to cover several months’ worth of living expenses can help you manage the unexpected crises and misfortunes we all face. This savings fund will then be available for other uses like job transitions, starting your own business, or training for new skills to increase your professional potential.
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Avoiding excessive debt
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 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, until it’s paid off. Then take the total amount you were paying 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.
Credit card debt is the priority because it’s more expensive than virtually all other types, including student loans. The interest rates on a graduate’s Stafford Loan runs about 6.8 percent while credit cards run double and triple that amount. Pay down credit accounts and aim at maintaining a maximum 30 percent credit utilization ratio. In other words, keep your card balances at 30 percent of the total credit limit. If your total credit line is $10,000, owe no more than $3,000 (and spread the same ratio over multiple accounts).
Investing in your future
If you’re young, you probably don’t think about retirement much. Even though you may be years away from retirement, your greatest help in building toward that happy event is to make time and compound interest, your allies. The compounding of earnings in a retirement account creates an exponential increase in your retirement savings. 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, your best bet is probably a Roth IRA, but the better investment vehicle available to you is your employer’s 401(k) savings plan. If it’s offered, you must take full advantage. Contribute as much as the non-taxable limits allow, but certainly enough to qualify for the company’s matching funds.
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In the most common 401(k) plans, employers will kick-in $.50 for every $1 you contribute, up to six percent of your income. These employer-match contributions are free money. Taxes on the combined contributions and their earnings are deferred until they are withdrawn, presumably after retirement when you will need less income and enjoy a lower tax bracket.
Also be sure to fund to the max the health savings account (HSA) provided at work. You and an employer between you can fully fund an HSA account and the money compounds, tax free. HSAs can also yield cash for emergencies. Tax-free HSA withdrawals can be made retroactively. If you have dependents, you should definitely get life insurance and make a will. Also research other insurance, such as homeowner’s or renter’s insurance.
Finally, educate yourself about personal finances. Look to grow your net worth. Do whatever you can to improve your net worth, either by reducing your debt, increasing your savings, increasing your income, or all of the above. Look for new ways to make money, or to get paid more for what you do.
Making good money habits your own is the best way to avoid going broke and become financially successful.
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