The first step in developing healthy habits for your financial future is to discover the difference between “needs” and “wants.” What you want may not be what you need. Too often, in your early years, you think you need the newest technological gadget or to run to the salon every month to get your nails done. If this is the case, you might not have life insurance because you don’t think you can afford it. Yet, you can afford the latest iPhone and are paying $100 a month for service, not realizing that you could obtain life insurance for about a tenth of your phone bill. Living in the “now” might be a priority when in your 20s, but if your values are out of alignment with your financial future, your decisions can become habits that are hard to break in your 40s. You must understand where your money is going and then determine how to earmark it to make the best use of it. Sticking to a spending plan and avoiding impulse buying is vital for developing a healthy savings plan.
Add up all of your expenses that you would consider a “need,” which includes your monthly savings amount, rent, car payment, cable and internet bill, food, etc. (By including your savings amount in your need category, you create an automatic savings plan.) Subtract that total from your income, and what is left over is your free cash flow.
The remaining money is the amount you have at your disposal for your “want” expenses. At the very least, make sure you are not spending more than that. At the end of the month, if you still have money left over, stick it in your savings or investment account. This removes the temptation to spend it and lets you start the next month fresh again. If you consistently have money left over, increase your savings amount.
Spend less than you earn. Creating a simple budget will show you how much money you are bringing in and help you realize your monthly spending. The bottom line is you cannot expect to have money left over for retirement if you are currently spending more than you take in. A lot of people think they know what they’re spending every month, but when they go through a process of saving their receipts and recording their expenses, they’re surprised at what they learn. For at least three months, keep track of all spending. Note necessary costs like groceries, as well as gifts, eating out and savings. Record everything. It’s important to know not only what you spend, but what you spend it on.
If you already have these good financial habits, that’s great. If not, the best time to start developing them is now. Everyone will have their own goals and needs, and, unfortunately, not all of those can be satisfied at the same time. You’ll have to prioritize your goals, but once you do, you can start building healthy habits that will allow you to reach them. Separating your needs from your wants, saving early and often, taking advantage of tax-favored retirement savings plans, and investing now can help you build a solid financial foundation and get you where you want to go.