5 Important Money Habits You Need to Master ASAP
About 1 in 3 millennials surveyed by Bank of America and USA Today said their parents did not teach them good financial habits at home. Similarly, only 19 states in the U.S. require schools to offer personal finance courses, according to the Council for Economic Education.
With rising student loan debt, millennials are struggling to put money away for retirement – or at all. The key to taking control of your finances, however, is to start young. Here are five important money habits you need to master asap.
Understand your income
It’s important to know how much income you have coming in each month. Although you may have a general idea, writing it down and keeping track of your income is crucial in the debt repayment process.
The most important reason to know your income is so that you have a better understanding of how much you can afford to spend and save each month. The two biggest mistakes people make with their finances are that they don’t track their income and don’t track their expenses. You might be thinking ‘but I earn the same amount of money every single pay, why do I need to track it’? Tracking your income doesn’t just mean you know how much you earn, it means you’re actively monitoring your finances and actively tracking them.
Review Your Finances Often
When it comes to building better money habits, “what gets measured gets managed” is a reminder that the most effective way to control your money is to review your financial situation each day.
You can start doing this by finding a tool that you like, such as Mint that gives you a complete financial picture, then merge all your bank accounts into it. You should include your credit cards, your checking account, all of your investments, and your personal assets (such as your car or home).
Log into your account daily to look over your finances. This can help you make sure every recorded purchase is valid and you are not being charged for something that you did not buy.
Additionally, it will allow you to look at the overall picture of your spending habits to see if there is an area where you can reduce your spending, or even eliminate it completely. Knowing your spending habits will allow you to know how much money you will need in an emergency fund. Do you have enough money saved to allow you to get through six months without an income?
Be Frugal with Your Money
It’s okay to use your money to buy things that make you happy.
But, if you’re not saving enough after cutting your expenses, you need to take a different approach. I’m against adopting frugality for the sake of doing so.
But, being frugal isn’t binary– there are different levels to frugality. If you’re having trouble saving look for areas where you can cut more. For example, instead of paying for Netflix, watch free videos on Youtube.
Repeat this process until there are no more areas left. Cutting services and being more frugal than you’re accustomed is only temporary. Once you’re able to save more, you can go back to the services you love.
Stay Away From Debt
Debt is pretty much the opposite of wealth.
Think about it, with wealth, you earn interest on your money and increase your net worth. Whereas, whenever you incur debt, you increase your liabilities (which decreases your net worth), and you end up paying somebody else interest instead of earning it. Even on 0% interest debt, you are restricting your monthly cash flow, which hinders your ability to invest and save money. Not good.
In other words, if you want to build wealth, you need to get in the habit of saying ‘no’ to debt. And I’m not talking about some of the time. I’m talking all the time.
That means paying off your mortgage, buying your cars outright with cash, cutting up your credit cards and only using your debit card, and never taking out a loan of any kind.
When you eliminate all your financial liabilities (i.e. money you owe to somebody else), you will only ever spend your life adding to your net worth.
Regularly Contribute to Your Retirement Account
Retirement accounts build your savings using compound interest, which is the process of earning interest on interest. It’s how you see exponential growth in your savings. With compound interest, time is on your side.
That doesn’t mean that if you haven’t started saving for retirement now that you’re out of luck. Instead, it means you need to make a plan to start saving now.