Many people strive to develop good habits in different areas of their lives. Fitness and diet are two good examples: Exercising regularly and eating healthy foods can help lead to a longer and healthier life.
The same holds true when it comes to finances. Developing good financial habits can lead to healthy personal finances. Here are 5 healthy personal financial habits to incorporate into your financial lifestyle:
- Pay yourself first. Also sometimes referred to as reverse budgeting, this is simply the habit of saving money on a regular basis. The best way to do this is to automate your savings by having a certain amount of money electronically transferred into a savings account on a regular basis, such as once a month or each pay period. The benefit of automated savings is that it takes the human element out since you don’t have to remember to transfer the money into savings yourself. Before long, you don’t even miss the money.
- Set savings goals. Once you’ve established the habit of saving on a regular basis, start to set goals for what you’re going to do with the money you’ve saved. One strategy is to set short-, medium- and long-term goals for your savings. For example, a short-term goal might be to save enough money to pay for your next vacation in cash instead of using a credit card. A medium-term goal might be to save enough money to buy your next car in cash instead of financing it. The most common long-term financial goals are saving for young children’s college educations and saving for retirement.
- Invest your money systematically. It’s sometimes said that investing isn’t about timing the market — it’s about time in the market. Instead of trying to jump in and out of the markets based on when you think they may be at a high or low point, it’s usually better to invest on a regular, systematic basis. This practice is often referred to as dollar cost averaging. The idea is to invest the same amount of money at regular intervals, such as monthly or each pay period. This reduces the risk of buying securities at or near a market peak. Instead, investment purchases are spread out evenly over time, which could result in purchasing more shares at lower prices and fewer shares at higher prices.
- Pay off your credit card balances each month. Some people make the mistake of only paying the minimum balance due on their credit cards each month. However, if the balance isn’t paid in full, interest begins to accrue. Over time, credit card interest charges can exceed the amount of the original purchases if the balance isn’t paid in full. By paying your balances in full each month, credit cards can become a powerful financial tool. They essentially represent an interest-free loan for up to 60 days. Many credit cards also offer rewards such as cash back, points or frequent flyer miles that can be redeemed for merchandise or travel.
- Build an emergency savings fund. Also sometimes referred to as a “rainy day” fund, this is an account that you can tap if you’re ever faced with an unexpected expense — like a home or car repair or medical bill — or if you lose your job and are unemployed for a period of time. Having an emergency fund can help you avoid going into debt when faced with major expenses like these. One rule of thumb is to save between three and six months’ worth of living expenses in an emergency fund. It’s usually smart to keep this money in an FDIC-insured savings or money market account. You probably won’t earn a high return on the funds, but you’ll have easy access to the money without penalty when you need to withdraw it. Do some research online to find the highest yielding account.
Give us a call if you have questions about these or any other successful financial habits.