Looking back on your younger years is often a mix of happy memories of your carefree youth and frustration with all the things you didn’t know when you were younger. It’s pretty easy to go through your early financial documents with a mixture of amazement and frustration at how poorly you managed your money in your earlier years.
Yes, managing money doesn’t have to be hard. It will likely take some time to develop your skills and learn from your mistakes, but this is how most people manage their finances over time. However, you don’t need to win the lottery or try to guess the market in order to start making progress towards your financial goals.
If I could go back in time to talk to my younger self about money habits, I wouldn’t look to give my 20-something self any lottery numbers or stock tips. Instead, I think there are six key money habits I wish I had started practicing sooner in order to get a handle on my financial situation.
For so long, the management of money was associated with long Sunday afternoons and the opening of complex spreadsheets – usually with a half-empty cup of cold coffee next to them. There were far too many occasions when the strain of trying to manage everything from month to month would last only for a few weeks, and then the whole exercise would be abandoned.
I used to get overwhelmed just by looking at a monthly budget! It seemed to have so many lines, and I didn’t even know where to start.
Switching to tools built around AI in finance was also a game-changer for me, as it cuts out so much of the previous hassle of tracking finances and means there’s far less room for error in the numbers behind future projections. It means we can get financial guidance whenever we think to ask for it, wherever we happen to be, and that gives the whole process of managing money a different feel: less of a chore, more of a supportive, ongoing conversation.
By reducing the work required to track your finances, you naturally can make better money decisions. Seeing your current financial situation in real time helps to alleviate end-of-month financial crises and keeps your short-term spending needs in check with your long-term financial goals.
One of the biggest mistakes people make is saving whatever is left over after they have spent the money they have to pay for things that they need to buy to survive in their current life, but after they have paid for all of the necessities of their current life, there is almost always very little money left over to save.
Spending expands. It always does.
The answer is to ensure that you pay yourself first. Create an automatic transfer of a percentage of your wage to your savings or investment account. In effect, you’ll have adapted your spending to the money that is left over after you have paid yourself first. It’s that simple. There’s no more negotiation over the remainder of your paycheck. Your emergency fund will start to grow in the background as if by magic.
Even bigger is the waste of money that occurs when people hold onto things long after they cease to provide value because of the financial cost of that item in the past. Sure, that gym membership cost a lot of money, but that money was spent. All of the money spent on subscription services that have stopped providing value is long gone. It is just a waste of space to hold on to things this long.
Why do we cling to things that no longer serve us in our lives, simply because we feel that we have already wasted money on them in the past? Could this be yet another example of the typical human desire to avoid admitting mistakes, however small they may be?
The sunk cost fallacy is one of the more straightforward fallacies in behavioral economics. The item that you spent money on in the past is a sunk cost, i.e., the money is spent and gone and will not be brought back by continuing to pay for it today. The upshot is that you can cut your losses on items of this nature and save yourself a lot of hassle by giving up on them now rather than continuing to pay for them in the hopes that some good will come of it.
So many people wait until they have saved a few thousand dollars to start investing in the stock market, assuming that it is for people who are already wealthy. I know this was an assumption that I held for years, delaying the start of my investment in the market and thus losing out on potential growth for years to come.
Time changes everything.
First, time in the market is more important than timing the market. So, no matter how much you read about how to pick the right stocks or time the market to increase your returns, it’s much more important to let your money compound over time. In other words, even the smallest amount of money that you can invest in your early twenties can grow substantially over the decades that follow, as long as you continue to invest. For example, even fifty dollars a month invested in your early twenties gets decades of compounding working in its favor. That head start is valuable, even if it won’t add up to as much, dollar for dollar, as the bigger amounts you’re able to save once you’re further into your career and earning more.
I like to think of all of our expenses as falling within one of three categories: the expenses we need to pay to maintain minimum aspects of ourselves and our homes; the expenses we pay to enjoy aspects of our lifestyle; and the money we put towards building our future. These three categories can help us think more thoughtfully about our spending, recognizing that our current “enjoyable” expenditures are building our future in many ways as well.
Between paying for your present and saving for your future, it is easy to think of these two goals as mutually exclusive. However, it is possible to make room for your ‘lifestyle choices’ and invest in your future at the same time.
This framework for spending allows you to have the comfort of knowing you are saving enough for your future while still allocating room for your current needs and wants. This, in turn, eliminates the feeling of guilt for the spending that you do choose to engage in.
Impulse purchases are designed by modern marketing to encourage instant gratification. These items can be easily purchased online with just one click of a button. The item arrives quickly, and soon you are dealing with the bill.
So how do you step out of that instant-gratification cycle of buying something and then realizing you weren’t really that happy with it?
We should implement a 48-hour rule on all new impulse purchases. This means that instead of buying on impulse, you wait 48 hours before deciding whether to buy it at all. This really helps in many situations, because most people realize that they didn’t really want to purchase something after 48 hours.
Building solid financial habits isn’t about a full-on sacrifice of your wants and creating an extremely austere existence in order to count pennies until you can have fun again. Instead, it’s really about creating an atmosphere of intention behind how you spend your money in order to build the life that you want.
Yes, the best time to begin to build good financial habits was many years ago. However, today is the second best time. Don’t let your lack of financial wisdom be a hindrance to your personal freedom. Learn from today’s guidance tools, work automatically to meet your goals, and intelligently manage your spending money to use your money to bring you greater joy and freedom rather than stress.
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