By Kristina Russo | American Express Credit Intel Freelance Contributor
4 Min Read | October 28, 2020 in Money
Tracking your expenses and creating and sticking to a household budget are basic techniques to improve your financial health.
Saving for the future is an important financial habit – and the sooner you start the better.
Prioritizing debt payments to save on interest charges is another good practice.
Even the most financially secure households can probably improve the way they handle their money. In fact, improving financial practices is an almost-universal American goal: 91% of adults surveyed earlier this year said that improving their money habits is a goal for 2020.1
Fortunately, many people can achieve meaningful improvement in their finances by making better choices in just a few fundamental areas. Let’s discuss some of the most effective ways you can replace bad financial habits with good ones that can improve your financial health.
Where does your money go? A crucial step toward improved money habits is getting your arms around where you spend your money now. A good way is to track all of your spending for three months so you can see exactly how much you spend on everyday items both big and small, like:
Diligently tracking all your expenses may surprise you. You’ll likely uncover areas for potential spending efficiencies, like subscriptions, memberships, or services you don’t use anymore. Or the popular example I came across in my research: expensive daily lattes.
There are many tools to help you track expenses, from apps to journals to online finance websites. Many let you download and analyze your spending data from credit cards, bank accounts, and digital payment services. Try to make sure you capture all the ways you make payments, including cash.
Developing a household budget is a fundamental healthy habit used by financially successful people. After tracking where your money currently goes, a budget helps you be more deliberate about where you want your money to go. Further, a budget helps you right-size your spending relative to your income so you can avoid joining the nearly 20% of Americans who spend more than they earn.2 A budget helps you identify necessary expenses – genuine needs – and differentiate them from those that are more discretionary – your wants. For more, read “How to Make a Monthly Budget, One Step at a Time.”
By sticking to your budget and continually reviewing the results, you’re likely to spot spending areas that can be fine-tuned to be more efficient and other areas where your budget might have been unrealistic. Small savings that come from fine-tuning can add up and make a difference, especially if you’re among the estimated 40% of Americans living paycheck-to-paycheck.3 Areas ripe for fine-tuning include:
1. Using coupons/discounts.
2. Negotiating bills when appropriate.
3. Switching to lower-cost vendors.
4. Conserving utilities.
5. Shopping through certain apps or online portals – read “Earning Rewards and Cash Back While Shopping Online.”
There are several online budgeting tools that can help, or you can keep it super simple by using a spreadsheet. The important thing is to start somewhere and evolve your budget over time.
I’ve observed that one of the healthiest financial habits is to set aside money for savings among your “necessary” expenses. Break the mindset that savings is only for funds “leftover” at the end of each month. Instead, set up automatic transfers from your paycheck to “pay yourself first.”
Automated savings can better position you to achieve your money goals, whether you’re establishing an emergency fund or saving for retirement, for which it’s important to start early so you can harness the power of compounding – see “What Is Compound Interest and How is It Calculated.” Automatic withdrawals give you an automated accountability partner and removes willpower from the equation.
As your savings grow, it’s also a good habit to periodically challenge yourself about whether you’re maximizing earnings on your accounts. Switching to savings accounts or investment vehicles with higher average percentage yields (APYs), such as high yield savings accounts, may get your money working harder for you.
Most Americans carry some form of debt, whether student loans, mortgages, car loans, credit card balances, or personal loans. But not all debt is created equal, so it’s a good habit to differentiate how you see your debt. Differences in interest rates, compounding schedules, and principal amounts can have a significant impact on your finances. To be clear, it’s not a bad habit to carry debt – many experts believe that borrowing money is very appropriate in certain scenarios. It’s a good practice to reduce the amount of interest cost you pay to use that debt.
Paying off debt that carries a higher interest cost first often makes more financial sense than prioritizing lower-cost debt or spreading your repayment efforts around equally. Often, credit card balances are the first place to prioritize repayment because credit card interest rates tend to be higher than other types of debt and it compounds daily.
Old habits may “die hard,” but replacing just a few bad financial habits may yield many benefits. Tracking your expenses, creating and sticking to a budget, prioritizing saving for the future, and paying down higher-interest debt first are all good money habits that can improve your overall financial health.
1 “Study: 53% of U.S. Adults Don’t Have Emergency Fund,” First National Bank of Omaha
2 National Financial Capability Study, FINRA Investor Financial Education
3 “Despite Improvement in their Financial Wellbeing, U.S. Workers Remain Worried,” Willis Towers Watson