So much of our life is based on habit. We do many things without thinking, and our actions can have long-term effects on the quality of our lives. This is especially apparent when you think about the financial decisions people make day in and day out.
Stopping at Starbucks isn't going to break your budget, but stopping there day after day just might. If you buy a $4 latte, for example, and you stop by every work day, you will spend $80 in a month. Of course, everyone likes to complain about the latte factor, but it applies to other financial decisions as well.
What if you're in the habit of paying for everything with credit card whether or not you have the money to pay off the card at the end of the month? Even if you just carry a $1,000 balance on your credit card, you likely are paying $100 to $190 in interest a year, depending on your interest rate. Over the course of 10 years, that is $1,000 to $1,900 just gone.
If you know that you have some careless money habits, now is the time to replace those bad habits with better financial habits. The good news is that you don't have to take drastic action. Even small, smart financial decisions can have a positive impact on your financial life.
Consider making these changes:
Keep Track Of How You Spend Your Money
Financial advisors always recommend that people track ALL of their spending for one month to see where the money is going. Because this can be such a pain, I resisted doing so for a long time. Finally, in January 2013, I tracked everything we spent, and I made some surprising discoveries such as we are spending too much for groceries and we have a lot of unexpected expenses throughout the month. To remedy these problems, I'm trying to shop from our pantry more before going to the grocery store, and we are setting aside a large portion of our budget to miscellaneous expenses.
Recording your expenses is essential to learning where your money is going. I simply wrote it down on a piece of paper every day, but you could also use your smart phone to keep track.
Build An Emergency Fund
Things happen. Your muffler needs to be replaced, or you need to patch a hole in your roof after a big storm. Make sure you have the money set aside for unexpected events.
If your situation feels desperate, there are simple things you can do to slowly build up your emergency fund:
- -Have 1% of your paycheck direct deposited to your savings account. If you take home $2,000 every two weeks, have 1% or $20 taken out of your paycheck and automatically deposited in your emergency fund. You'll be paid 26 times, and at the end of a year, you'll have $520. After 5 years, your emergency fund will be $2,600 assuming you never have to use it and that you only set $20 aside every two weeks.
- Save your change. I save about $20 to $30 in change a month because I largely pay for my purchases in cash. Over a year, this adds up to $240 to $360. Keeping my change and putting it in a jar is an easy way to save. Combine this with a 1% automatic deposit, and your emergency fund grows to over $700 a year or more.
Pay Upfront For Your Needs Rather Than Borrowing
Most Americans don't practice this principle. When we want something, we whip out the credit card and buy it. If you instead decide you will only pay cash for a purchase, your spending habits will be transformed.
If you need to buy new winter boots but you really don't have the $60 to $100 to spare to buy them new, you may have to find another way to get them. Either you have to find extra work to generate the money, or you have to find a cheaper way to get them such as buying a pair from Craigslist.
If you consciously decide that you'll only pay for things that you have the money for, life will be radically different, in a good way. As Dave Ramsey says, “A car just drives differently when it is paid for.” Yes, it's possible to save for all of your needs, from a computer to a car.
Simple steps you take now can radically change your financial life forever. Getting out of debt is an important step to changing your financial path, but so is learning to save, understanding where you spend your money and deciding to only buy things you can afford.