Money habits are actions related to your personal finances developed over time with respect to your handling of money matters and economic well-being, performed regularly to the point where it becomes so repetitive that you do without thinking.
Creating the right money habit, however, is not a quick fix. It will take time, but eventually, they will become second nature, helping you achieve even your most ambitious goals.
To survive any bad economic time, the following espoused money habits will have to become second nature to anyone interested in building immunity against financial hardship.
Take full responsibility for your financial wellness
Avoid BCDJ. BCDJ stands for Blame, Complain, Defend and Justify. The first step to taking full responsibility for your finances in bad economic times is to avoid BCDJ. BCDJ are four of the biggest money drains. They put you at effect, not cause; victim, not victor. The starting point of achieving financial wellness is to stop the habit of blaming everyone and everything for your bad money habit and take full responsibility for a change.
You cannot alter anything you blame others for, so commit now to stop blaming politicians, your parents, your employer, the system, etc. and decide to take 100 percent responsibility for how things turn out. For example, if you believe that you are poor because of how the economy is set up, then there is no motivation to work harder because whatever you do, you cannot change the economy and therefore, you cannot change your situation.
Take full and final responsibility for everything that happens in your life you can personally control. And the things you cannot control – let them go!
If you can change the habit of blaming everyone and everything, you will escape complaining, defending, and justifying your bad habits. Just like finding someone to blame, complaining about your situation or circumstances puts you in the position of a victim who has no control over their life.
Plan Ahead. The next step for taking full responsibility is to learn how to plan and live on budget. Yes, budgets can be limiting. But they are also the cornerstone of financial responsibility no matter financial situation.
There are two kinds of people. Those who tell their money where to go and those who wonder where it went. Budgets are a way to tell your money where to go – such as paying bills, chipping away at debt or investing toward retirement – rather than spending freely, then wondering where all your money went at the end of the month.
Stick to budget. It can be difficult creating and sticking to a budget, but you have options. There are many kinds of budgets, from the cash-only budget to the envelope system. A cash-only budget involves using just cash for all your spending needs. The envelope system tracks exactly how much money you have in each budget category for the month by keeping your cash tucked away in envelopes.
At the end of the month, you can see how much cash is left by taking a quick peek in your envelope. If you are constantly going overboard in a certain category (say groceries) then take cash out for the amount you have budgeted for and stick it in an envelope. When you shop for that category, only use what is in your cash envelope. Once the money is gone, it’s gone—so this will force you to stop overspending and help you achieve your money goals faster.
Make a budget for everything. Budget for anything and everything you can think of. Set an amount to spend on food, fuel, bills, rent and how much you want to put into savings. The most important thing with a budget is that you must stick to it!
Going over what you have set should not happen, so when you set your budget, make sure it is enough to fulfil the requirements of what is needed. For example, if your food budget for the week is US$$100 but that means you won’t be able to eat for a day, that is not a realistic and achievable budget.
Control your impulses. Sometimes we can be walking through the mall and see an item of clothing on sale, or a shoe with a ‘for sale’ sign. Now, we all know how appealing this can be but if you give into your impulses and just buy it, you may be satisfied temporally but end up upset that you cannot put into saving as much as you planned.
Just say no or avoid shops and if it is something you think you really need, sit back and think about it for a day and see if your life really would be better with it, or can you do without?
Instead of working hard for money, let your money work harder for you
Hard work has no substitute to securing earned income. Hard work is the common denominator between the rich and the poor. It is an undisputed path to achieving financial wellness though not sufficient. Work hard for money but don’t stop there; let your money also work hard for you.
What does it mean to let your money work hard for you?
Your money works harder for you when it earns interest above inflation, working to increase its value when you invest it. If you decide to just leave it in a savings account, the rate of interest you earn on savings is less than the inflation rate. In the end, you are actually losing money. Move beyond savings and invest!
When your only source of income is work, then the amount of money you earn will be limited by the number of hours you work. Never forget, however, that wealth is measured in time, not in dollars (or any other currency depending on your country).
In other words, if your monthly expenses are US$1000 and you have US$6000 in savings, your wealth is approximately 6 months. This is because it is not how much you make that matters, but how much money you keep and how long that money works for you.
When you work hard for money, you get job security (you show up to get paid) but when your money works hard for you, you get financial security (you earn money even when you don’t show up at work). Financial security comes with time, freedom and income.
Financial security does not depend on pay rises and job promotion. With or without them, your money works for you either in an investment instrument or a business venture. Alternatively, job security takes away your time and gives you earned income as long as you show up at work.
Your money works harder for you when you spend on assets and not liabilities. Liabilities are unavoidable in life, so you reduce them as much as possible or turn them into assets. Real assets are investments (paper or hard assets) that add to your income generation but do not require your active presence.
They include stocks, bonds, income-generating real estate, and intellectual property generating royalties. Think about each dollar as your employee that works 24 hours a day tirelessly to make you more money. The trade-off between today’s expenses and future income should be clear.
Don’t spend what you don’t have – avoid debt
When you are in debt, your money is not working for you; instead, it is being used to pay interest. It limits your selections and burdens your finances. You pay more than the original purchasing price when you have debt. Additionally, you must pay interest, which can significantly reduce your income.
Contrarily, when you pay off debt, you can use that money to fund the things that are important to you. You can use it for other financial objectives like saving for education, setting up a retirement account, going on vacation, or upgrading your living arrangements. You could launch a business. You can start investing in it to increase your wealth and generate more financial freedom.
It is hard to save or put money toward anything if you have a looming debt. Either credit cards, overdrafts or buy now pay later schemes charge you a percentage for using their money. All these debts will have minimum payments that you need to fulfil, failure to pay will increase the debt dramatically.
Know how much you owe. Make a list of your debts, including the creditor, total amount of the debt, monthly payment, interest rate, and due date. You can use your credit report to confirm the debts on your list. Having all the debts in front of you will allow you to see the bigger picture and stay aware of your complete debt picture. Debt reduction software can make this process easier.
Consolidate your debts. Consolidate your debt with your bank. If you cannot consolidate with your bank, try and concentrate on one debt at a time. Pay the minimum payments on everything and with whatever money you can spare, use to chip away at one debt until that has gone.
Once one is gone, the amount you can put toward the other will increase as you won’t be putting a minimum payment into the one that has been paid off. As you pay off your smaller debts, you’ll have more money available to pay off your larger debts. This momentum helps you focus your efforts and get out of debt more quickly.
Know your debt-to-income ratio. This is your personal Debt-to-GDP. Once you have a handle on your debt and your income, you can calculate your Debt-to-income ratio (DTI). This ratio tells you how much of your income is going toward debt payments. To find yours, divide your debt payments by your income, and multiply by 100. For example, US$1,200 of monthly debt divided by US$3,000 of monthly income is 0.4 x 100 = 40 percent. The lower this number is, the better, and tracking it can help you understand your finances more clearly.
Pay your bills on time each month. Late payments make it harder to pay off your debt since you will have to pay a late fee for every payment you miss. If you miss two payments in a row, your interest rate charges will increase.
If you use a calendaring system on your computer or smartphone, enter your payments there and set an alert to remind you several days before your payment is due.
If you miss a payment, do not wait until the next due date to send your payment, by then it could be reported as default and that could accrue additional charges. Instead, send your payment as soon as you remember that it was missed. The only good debt is debt that is paid off.
If you cannot avoid borrowing…
Use the lender that offers the lowest interest rate.
If you must take on debt, consider offers with low interest or no interest at all. Loans from friends and family usually have lower interest rates than those from loan sharks or financial institutions. But before you take it, ask yourself if it is absolutely necessary.
If you are already in debt …
Know who and what you owe:
Make a list of the people/banks you owe, the interest rates, and when payments are due. Then plan how you intend to repay them.
Pay off the debts with the highest interest first: Starting with high-interest rate loans will save you from compounded interest. But pay them off quickly so you can tackle the smaller ones too.
Consider other financing options in the future: If are already in debt, try not to take on other loans. Instead, consider either payment in instalments or investing toward your goal.
The writer is an award-winning financial advisory, trade and transformation consulting professional with almost two decades of enterprise leadership experience across EMEA.