If you are not great at taking charge of your finances, rest assured, you are not alone.
Research shows that 70% believe themselves to be financially insecure, while 75% think that more money would create more happiness. We may all like to have more money, and consequently solve all our issues but, in reality, you might not necessarily need to earn more.
It may just be a case of learning to manage your finances better. And with all the apps now available on smartphones and tablets, including mobile banking, there really is no excuse for not developing good financial habits.
Examples of Bad Financial Habits
If you have no idea how much you are worth at any given point in time, then its time for a serious shake-up in how you think about your finances.
However, if you are not convinced that you need to relook at your finance management methods, take a look at this list of bad financial habits:
- Constantly dipping into your savings
- Spending a lot on payday
- Not knowing how much is in your bank account
- Not checking the outgoings in your account
- Impulse buying
- Only paying the minimum on your credit card each month
- Peer shopping (buying something because your neighbour has)
- Retail therapy
- Relying on the lottery for your big break
- Living beyond your means
- Hiding the letters from financial institutions
- Using pay-day loans
- Signing up for interest-free loans
- Lack of financial planning
- Think – if only I had more money everything would be fine!
If any of these bad habits resonate with you, it’s definitely time to start changing your habits for the good and introduce some financial restraint to your life.
- Borrow Only When You Have to
Short term loans and credit cards have made it easy to borrow money, but remember that loans are not free money. They come with interest and the whole amount has to be paid off at some point.
Borrowing money should not necessarily be viewed as something you to avoid at all costs. In fact, at the right time and executed in the right way it can be very beneficial.
For example, for most people, it is impossible to buy property or invest in real estate without borrowing money. And sometimes businesses need a cash injection to scale their current operation or tide them through leaner periods.
However, if you are borrowing money for luxury items or impulse purchases, you really need to think again. If you can’t afford a non-necessity item without a loan, then don’t buy it.
If you really want to buy that amazing sit-down mower that you just can’t do without, no problem. Save for it in advance and when you eventually have enough to buy it outright, the reward will be sweeter because you know you own it and not the financing company.
It’s not uncommon for “Christmas” to be purchased on a credit card which is then paid off over the following months, plus interest.
Instead of borrowing, consider saving in advance. Christmas coming should not be a surprise; it happens with annual regularity.
In January calculate how much Christmas costs, divide that figure by ten and save that amount each month in a special Christmas account. By November you should have enough money to cover all Christmas purchases but without having to pay the interest incurred by a credit card.
- Study Personal Finance
Call me a geek, but personal finance books are not as dry and boring as you might think. When you can apply what you learn to your own circumstances they can offer fascinating and invaluable insights.
If you want to get better at golf, you employ an expert teacher to help you. Think of personal finance books as your own private tutor aimed at helping you become financially secure. So if you haven’t yet delved into ‘Rich Dad, Poor Dad’ by Robert Kiyosaki, now might be an appropriate time to make this your go-to bedtime reading.
If you like your learning served up in story form, then ‘The Richest Man in Babylon’ by George S. Clason is the one for you.
Other classics to include on your reading list are ‘The Automatic Millionaire’ by David Bach and ‘The Total Money Makeover’ by Dave Ramsey.
Also, don’t overlook the Money Saving Expert Martin Lewis – not only is the website full of advice but Martin has written several informative and down-to-earth books, including ‘The Money Diet’ and ‘Thrifty Ways for Modern Days’.
- Keep A Spending Journal
When you are trying to lose weight, you’re encouraged to write down everything you eat. The same goes for when you are trying to save the other type of pounds.
Record everything you spend on a daily basis, including the daily newspaper and the latte on the way to work. Include the dates and jot down details of the purchase, as this will make it easier to work out how much you are spending on different categories.
Initially, try not to spend any differently than you normally do, as you want a true record of your spending habits. If your routine is the same each week, one week might be enough to give you a good idea of what your outgoings are, but if you can stick at it for a month your results will be even more realistic.
Make sure you use a system that is easy for you, whether this is a notebook you have on you at all times or a spreadsheet or an app on your phone.
You’ll be shocked by your spending habits. And just how much you’re spending without realising it. However, it’s important to see this exercise as a positive that will help you manage your money better.
When you have a clear picture of your spending habits, you can then make judgment calls about which aspects you could control better. Consider some of the more luxury items on your list and decide whether you would prefer these items in your life or would you prefer to be saving the money towards something more important such as your retirement savings?
- Set A Budget and Stick To It
Setting a monthly budget is easy – sticking to it can be challenging. However, in order to achieve financial success, it is crucial you learn to be more prudent in your spending.
If you have tracked how your money is currently being spent and compared that against your income, you should have a good idea of whether you are overspending.
If you are, setting a budget is even more important. Your financial goal should be to keep your spending to less than 90% of your income to allow you to place the rest in a savings account for future purchases or as an emergency fund. Use this as your initial budget, but the more you are able to save without feeling financially challenged on a day-to-day basis, the better.
If you are currently spending 100% of your income each month, turn to your spending tracker and see where you could save 10% on unnecessary items.
Do you really need both Sky and Netflix subscriptions?
Could you shave £50 off your monthly clothes bill? There are many ways you can make small financial compromises each month without feeling deprived.
- Live Within Your Means
Now you have a clear idea of how much you currently spend and how much you could save by cutting out unnecessary items so you can stick to your budget, living within your means should be the last stage of the equation that naturally falls into place.
Living within your means requires real clarity on your financial situation while having an eye on the bigger picture.
How would it feel to have the extra cash to pay off your mortgage early or go on that once-in-a-lifetime family holiday?
Would it be worth sacrificing a brand new car every three years and instead consider buying second hand?
When you commit to living within your means, it’s not just about the big buys. It’s about considering your day-to-day financial habits and making small changes that can make a big difference. Even managing your credit cards better so you don’t pay interest each month can add up to a substantial saving.
Most of it, it’s about being aware of your financial situation. If you are not sure how to manage your money, it’s worth discussing it with a financial advisor, who can help you understand your investments and outgoings and make suggestions on how to capitalise on them better.
Developing better financial habits may seem like hard work, but before you bury your head in the sand in denial, consider the positive payoff that comes with the extra effort.
At last, you will be in charge of your finances, instead of your finances controlling you.