Building Good Money Habits: Master Your Personal Finances 101
Just like the power of compounding interest, the power of making your own money momentum will slowly and surely build to something empowering and substantial. Stringing together good money habits creates an interconnected web of wealth opportunities.
Starting these good habits early in our financial timeline will set us up for the long-term success we desire.
After changing my entire financial path in the last 3 years or so, I am starting to feel that momentum eek forward evermore. If you’re anything like I am, patience may not be a virtue. However, wealth building is a marathon, not a sprint. But just like a marathon there are mile markers, water stations and checkpoints along the way.
These are the opportunities for our small financial wins. The framework of systems and good money habits we can build to achieve those big picture goals are developed during this marathon.
The money good money habits we’re talking about today are the basic ideologies around:
- Cutting Down Expenses
- Building An Emergency Fund
- Paying Off Debt
- Investing For Retirement
- Increasing Your Income
The path will have many twists and turns along the way, but if we’re continually practicing good money habits and celebrating our small financial wins, that path is going to be prosperous.
The grass will be greener on the other side.
Cutting Down Expenses – Saving Money Habits
One of the first steps forward to taking back the reins on your personal finances is to do a spending audit. Not everyone believes in budgets but I personally feel that getting a thorough understanding of where your hard earned money is being spent is essential.
Thankfully great online platforms like Mint, Personal Capital and You Need A Budget make this process a whole lot easier. If you’re a classic pen to paper budgeter or do your best work through a Google Sheet or Excel, then that works too.
The key is to be studious and diligent with your spending habits. In order to build our money momentum we need to be saving and investing more, which is rooted in spending less.
Reducing Your Monthly Spending
There are some easy wins that most people can implement right away to cut back their monthly expenses.
These cost saving opportunities include:
- Negotiate a lower cell phone bill or Internet plan
- Cut your TV cable
- Stop eating out as often
- Be more tactical in your grocery shopping (see my post 13 Easy Ways To Save Money On Groceries)
- Limit your entertainment expenditures
- Get better with your utility usage at home
- Downgrade your vehicle
- Walk when it’s feasible instead of driving
- Cancel underused subscriptions you aren’t truly using enough or getting value from (magazines, Xbox Live, etc.)
Performing a spending audit and creating a budget changed my financial path forever. I identified so many bad money habits and righted the ship to create some positive momentum.
In mid-2016, I was able to find the below monthly savings of $200 by barely even changing my lifestyle:
- Groceries: $90
- Cable: $40
- Refinance Student Loans: $30
- No Weekday Beers Policy: $30
- Negotiated Cell Phone: $10
That’s $200 a month, $2,400 a year and $12,000 lump sum over 5 years. Invest those monthly savings with a return of 6%, they’re actually worth $13,897.16 in 5 years.
If we up the ante and make some bigger lifestyle changes, maybe we can identify another $200 of monthly savings, bringing us now to $400 monthly savings.
That $400 a month of additional savings would be worth close to $28,000 as a standalone investment.
Of course, a 5 year timeline is a bad example it doesn’t take into consideration market fluctuations, overall portfolio diversification, long-term index fund investing, etc. The point is to help showcase the money momentum that can start building with the good financial habits of cutting expenses and saving more
Increase your savings rate to unlock the other areas of your financial life.
Emergency Fund – The Safety Net Money Habit
The last thing we need is an unforeseen expense or one of life’s surprises to derail that momentum. An emergency fund is like your personal finance insurance, a bunker to fallback to when life tries to bully you.
It’s a weather the storm fund.
The good money habit if you didn’t have an emergency fund yet would be to start one today or layout the timelines and plan to do so. Even just depositing a $1,000 in a high-interest savings account is a great financial win to start.
- American High-Interest Savings Accounts: Check the comparison chart on Value Penguin.
- Canadian High-Interest Savings Accounts: Check the comparison chart on Rate Hub.
Some will advise a minimum of 3 months living expenses saved up. Others might suggest a minimum of 6 months. While others (often the very wealthy or already successful entrepreneurs) might suggest having no emergency fund.
The goal is to get that built up to a position YOU feel comfortable with. Whether that’s $3,000, $5,000 or $15,000.
If you’ve already got an emergency, why not do a review of your budget and forecast expenses to ensure it’s sufficient?
If your life goes totally smooth and no emergency ever hits, even if you just stuck $5,000 in 1.5% HISA, it would be worth approx. $7,800 in 30 years.
Not that $5,000 is a sufficient emergency fund for most people, you can 2x or 3x that figure. Case in point is you have your financial safety net and it can be accruing interest for you as it holds on standby.
Could you garner larger returns in the market over the time frame? Of course. But our emergency fund is meant to be readily available, liquid cash that can be accessed in short order.
Paying Off Debt – The No Interest Paid Money Habit
It’s often the most daunting and stressful challenge that we need to conquer in our journey to financial independence.
Paying off debt is a grind.
But it also provides major opportunities to build good money habits and to celebrate BIG financial wins. Make a commitment, set a timeline and get to work on ending that debt.
If you have debt, particularly high-interest consumer debt like I did, develop a payoff plan.
- You can use the Dave Ramsey Debt Snowball Plan
- Or perhaps the Debt Avalanche Plan
- I don’t have a name for my strategy – it’s basically the I’m Sick Of Being In F&#*ing Debt Plan, Kill It
The key is to build a plan that fits your budget and financial situation.
Build Momentum By Speeding Up Debt Repayment
Let’s say you have $30,000 in student loans with a 6% interest rate and you’re currently paying $500 a month as your repayment schedule. Maybe nothing changes and you just ride that out until the you $0 the balance.
That scenario puts paying off your debt in 73 months (6 years) and you’d have paid almost $5,700 in interest.
Now using our $400 in monthly savings from the example above by changing our lifestyle, what happens if you direct that additional money towards your student loans every month along with your current $500 payment?
We basically cut our repayment period in half to only 38 months and saved close to $1,300 in interest.
Now that deserves celebrating a financial win!
The web of connectivity between all our good money habits is what makes our momentum build. We saved more, we have the piece of mind with our emergency fund and we’ve expedited our debt repayment.
Investing For Retirement – Forward Thinking Money Habits
Most members of the personal finance community will tell you one of their biggest money regrets was not starting to save for retirement earlier.
Case in point, according to CNN Money, 66% of millennials have nothing saved for retirement.
Thanks to the wonders of compounding interest, the money momentum we can all make here is like a force of nature. Every dollar we save by cutting our monthly expenses and getting out of debt will pay dividends in the future.
The power of those good money habits really get unleashed once the commitment to save for retirement is made.
Maximizing your company’s match on your retirement account (if they offer this benefit) is the first item on the basic checklist. It’s the momentum 101 on the good money habit list.
Please take the full match!
Whether that’s 3% or 6%, it’s free money and should be absolutely essential on the first day you’re eligible. I honestly believe even if you’re in debt and trying to expedite that repayment, you should contribute up to your employer’s match. The 100% ROI is too good to pass up.
Index Fund Investing
The next step is contributing to (and hopefully maxing out) the accounts that are available to you and best fit your financial situation. The accounts for you will depend on a number of factors: your income level, your field of work, contribution limits, place of residence and so forth.
Luckily for us, there is a wealth of resources available to educate us on everything related to investing the smart way.
What’s the major makeup of most retirement investing plans? Low-cost index funds.
Of course, these are only on element of your asset allocation and not the end all and be all. There are numerous ways to build wealth and reach your financial goals, whether with index funds or not.
Index funds provide you broad market exposure, lower expense ratios and have outperformed actively managed mutual funds historically.
Index Fund Resources
Below are examples of some great reading and listening materials available that lay out best practices for effective, actionable plans on low-cost index fund investing (and general financial independence mindset).
The 5 books above are world-respected, industry stalwarts of the personal finance and early retirement community. Their advice, expertise and guidance will give you all the index fund and wealth building knowledge you need.
- The Simple Path To Wealth by JL Collins
- The Little Book On Common Sense Investing by John Bogle
- Millionaire Teacher by Andrew Hallman
- Your Money or Your Life by Vicki Robin & Joe Dominguez
- The Bogleheads’ Guide To Investing by Taylor Larimore, Mel Lindauer & Michael LeBoeuf
Here some great interviews with the wonderful JL Collins:
- Financial Independence Podcast: JL Collins – The Importance of F-You Money
- Financial Independence Podcast: JL Collins – The Simple Path To Wealth
- ChooseFI Podcast: JL Collins – The Stock Series (3-part series)
- See my post Top 75 Podcasts To Improve Your Life, Finances, Business, Health & More
Blogs, Articles & Posts
- JL Collins: Stock Series
- Modest Money: Top Finance Blogs List
- Vanguard Blog: The index fund: A monster of efficiency
- Vanguard Research Paper: The case for low cost index fund investing
- Vanguard: VTSAX Overview (Admiral Shares)
- Vanguard: VTSMX Overview (Investor Shares)
- Vanguard: VTI (ETF)
- Bogleheads: Getting Started
- Bogleheads: Investment Planning
- Bogleheads: Asking Portfolio Questions
- Physician On Fire: 20 Steps To Effective DIY Investing
- The Balance: Investing In index Funds For Beginners
Canadian Investing Blogs, Articles & Posts
- Couch Potato: Recommended Funds
- Couch Potato: Model Portfolios
- Boomer & Echo: 11 Model Portfolios To Simplify Your Investments
- Globe & Mail: Three Simple ETF Portfolios for DIY Investors
- Money Sense: The Most Popular Online Brokerage for DIY Investors
- Canadian Portfolio Manager: Model ETF Portfolios
Retirement Savings Plan Case Study
Let’s create a quick scenario here to compare the power of our good money habit of finding an additional $400 a month in savings from earlier.
- Starting Investment: $10,000
- Monthly Contribution: $1,000
- Market Returns: 7.0%
- Timeline: 30 years
In this scenario, we’d net out with $1,301,136 at the end of our 30 year timeline.
Now let’s apply that additional $400 a month in savings we identified earlier to see the results.
- Starting Investment: $10,000
- Monthly Contribution: $1,000
- Additional Monthly Contribution: $400
- Market Returns: 7.0%
- Timeline: 30 years
That additional $400 a month has helped us generate $1,789,124. The total contribution difference is $144,000 over 30 years but the interest earned is almost $345,000 more.
Good money habits building momentum at their finest!
In our wealth accumulation stages of life, the more money we can get into the market…the better.
Increasing Your Income – The Money Habits Of Maximizing Earnings
The financial lever that can help put your money momentum on the fast track is of course increasing your income.
If we’ve built good money habits for budgeting, saving and investing, the ability to increase your income will expedite the timelines of reaching your financial goals.
During my climb of the corporate ladder in Brand Marketing, I’ve been able to increase my salary over 80% in the last 3 years.
That salary increase in connection with my heightened savings rate have created a system of good money habits that allowed me to kill consumer debt, fast track my student loan repayment and push my retirement savings rate. All while continuing to invest for retirement at a heightened rate of savings.
Grow Your Career Earnings
Even if you’re pursuing financial independence and early retirement, taking a vested effort in your career is a big enabler of making your own money momentum. Being comfortable asking for a raise or looking for new opportunities is a money building habit that we should all develop.
ESI Money has spoken about this topic multiple times, his post How To Manage Your Career To Make Millions More is an amazing read for any career-vested individual.
The Coles notes of ESI Money’s 7 Steps To Maximize Your Career are:
- Perform as well as possible at your job
- Be likeable or ‘more likeable’
- Network within and outside your organization and industry
- Be more ‘attractive’ (in the vein of dressing well and taking care of yourself)
- Continue learning and developing skills
- Manage yourself with systems for goals, company dynamics and find a mentor
- Market yourself
Check out ESI on these podcasts episodes where he talks about not only his blogging and financial wins but his corporate career success and tips:
His advice reigns true in the sense of our making your own money momentum framework. Building good career habits and continually looking to drive your income and successes further will make all your money goals a feasible reality.
Outside of maximizing the income from your career, the ability to monetize a side hustle is a good money habit we can all take advantage of.
The majority of us have free time open in the morning, evenings and weekends. This free time provides us the opportunity to build even more money momentum. We all have skills, expertise and a work ethic that open up additional avenues to earn income.
Check these resources for some side hustle ideas:
- 35 Rewarding Side Hustles (Almost) Anyone Can Do
- How To Make $1,000 Quick: 9+ Ways To Earn Cash Fast
- The Side Hustle Show by Nick Loper
- The Side Hustle School Podcast by Chris Guillebeau
Whether it’s online or with your hands, there are so many opportunities available. The good money habit of driving and building additional income streams, is a major financial win. Getting out of debt and building towards retirement gets fast tracked when you can maximize your incoming dollars.
Side hustles are money momentum builders
Conclusion: Building Good Money Habits: Master Your Personal Finances 101
The biggest breakthrough I had with money was realizing it was all under my control. I’d previously held a negative attitude towards finances, which was rooted in my inept understanding of it and the bad habits I had.
A shift in thinking after saying enough was enough quickly made me realize that individually I had the ability to control my spending, saving, earning potential and investing. There were no outside forces holding me back or hindering the ability to reach my financial goals.
I still have a million miles to go but the good money habits I am continually looking to improve have put me on the right path to pursue financial independence. You might be further along in your journey than I am or perhaps just starting out.
“Habit is habit and not to be flung out the window by any man but coaxed downstairs a step at a time” – Mark Twain.
In the vein of Mark Twain, let’s coax our good money habits down the stairs and build our money momentum into an unstoppable force. Let the web of connectivity between your good money habits continue to expand their power and reach by never stopping your hunger to build knowledge.
What are the most impactful good money habits you’ve built?
What have been the biggest breakthroughs or successes you’ve had to get your money momentum rolling?
Let me know in the comments below.
Here are some my posts with resources, tips and strategies to take control of your money and life:
- 15 Smart Money Moves You Can (Easily) Make This Month
- 35+ Rewarding Side Hustles Anyone Can Do To Earn More Money